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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON D.C. 20549

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FORM 10-QSB/A

(Amendment No. 1)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarter ended June 30, 2001

Commission file number: 0-18188

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

|Oregon(State of incorporation)                                              |  | 93-0589534(I.R.S. Employer Identification)
|--------------------------------------------------------------------------- |  | ------------------------------------------
|811 S.W. Naito Parkway
Portland, OR(Address of principal
executive offices) |  | 97204(Zip Code)                           

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 1, 2001:

Common
stock, no par value3,206,866 shares

Transitional
Small Business Disclosure Format    Yes / /    No /x/

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PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

|                                              |  | 6/30/01 |            | 12/31/00
|--------------------------------------------- |  | ------- | ---------- | --------
|
|ASSETS                                        |  |         |            |         
|CURRENT ASSETS                                |  |         |            |         
|Cash and cash equivalents                     |  | $       | 128,603    |         
|Receivable from clearing organization         |  |         | 6,789,642  |         
|Notes and other receivables                   |  |         | 786,528    |         
|Trading securities, at market value           |  |         | 2,435,867  |         
|Investment securities, at market value        |  |         | 18,330,977 |         
|Underwriter warrants, at estimated fair value |  |         | 5,455,000  |         
|Prepaid and deferred expenses                 |  |         | 228,124    |         
|Deferred income taxes                         |  |         | 686,000    |         
|                                              |  |         |            |         
|Total current assets                          |  |         | 34,840,741 |         
|                                              |  |         |            |         
|NOTE RECEIVABLE                               |  |         | 107,229    |         
|                                              |  |         |            |         
|FURNITURE AND EQUIPMENT, net                  |  |         | 426,401    |         
|                                              |  |         |            |         
|INVESTMENT IN REAL ESTATE                     |  |         | 169,900    |         
|                                              |  |         |            |         
|                                              |  | $       | 35,544,271 |         
|                                              |  |         |            |         

The
accompanying notes are an integral part of these statements.

2

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

|                                                                                                                         |  | 6/30/01 |            | 12/31/00
|------------------------------------------------------------------------------------------------------------------------ |  | ------- | ---------- | --------
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                     |  |         |            |         
|CURRENT LIABILITIES                                                                                                      |  |         |            |         
|Accounts payable and accrued liabilities                                                                                 |  | $       | 245,445    |         
|Payable to clearing organization                                                                                         |  |         | 1,593,459  |         
|Compensation, employee benefits and payroll taxes                                                                        |  |         | 1,658,124  |         
|Securities sold, not yet purchased, at market value                                                                      |  |         | 133,293    |         
|Income taxes payable                                                                                                     |  |         | 289,562    |         
|                                                                                                                         |  |         |            |         
|Total current liabilities                                                                                                |  |         | 3,919,883  |         
|                                                                                                                         |  |         |            |         
|Deferred income taxes                                                                                                    |  |         | 39,100     |         
|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, 3,217,866 and 3,367,366, respectively |  |         | 1,045,626  |         
|Retained earnings                                                                                                        |  |         | 30,539,662 |         
|                                                                                                                         |  |         |            |         
|Total shareholders' equity                                                                                               |  |         | 31,585,288 |         
|                                                                                                                         |  |         |            |         
|                                                                                                                         |  | $       | 35,544,271 |         
|                                                                                                                         |  |         |            |         

The
accompanying notes are an integral part of these statements.

3

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PAULSON CAPITAL CORP. AND SUBSIDIARY  CONSOLIDATED STATEMENTS OF OPERATIONS  for the three and six month periods ended  June 30, 2001 and June 30, 2000 (unaudited) (restated)  (continued)

|                                       |  | Three months ended |            | Six months ended
|-------------------------------------- |  | ------------------ | ---------- | ----------------
|
|
|Revenues                               |  |                    |            |                 
|Commissions                            |  | $                  | 2,023,916  |                 
|Corporate finance                      |  |                    | 1,456,576  |                 
|Investment income                      |  |                    | 9,940,071  |                 
|Trading income                         |  |                    | 633,178    |                 
|Interest and dividends                 |  |                    | 7,629      |                 
|Other                                  |  |                    | 352        |                 
|                                       |  |                    |            |                 
|                                       |  |                    | 14,061,722 |                 
|                                       |  |                    |            |                 
|Expenses                               |  |                    |            |                 
|Commissions and salaries               |  |                    | 3,130,003  |                 
|Underwriting expenses                  |  |                    | 161,274    |                 
|Rent, telephone and quotation services |  |                    | 254,862    |                 
|Interest expense                       |  |                    | 40,796     |                 
|Professional fees                      |  |                    | 49,935     |                 
|Bad debt expense                       |  |                    | 30,000     |                 
|Travel and entertainment               |  |                    | 82,707     |                 
|Settlements                            |  |                    | 5,950      |                 
|Other                                  |  |                    | 722,824    |                 
|                                       |  |                    |            |                 
|                                       |  |                    | 4,478,351  |                 
|                                       |  |                    |            |                 
|Earnings (loss) before income taxes    |  |                    | 9,583,371  |                 

The
accompanying notes are an integral part of these statements

4

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PAULSON CAPITAL CORP. AND SUBSIDIARY  CONSOLIDATED STATEMENTS OF OPERATIONS  for the three and six month periods ended  June 30, 2001 and June 30, 2000 (unaudited) (restated)  (Continued)

|                                                       |          | Three months ended |           | Six months ended
|------------------------------------------------------ | -------- | ------------------ | --------- | ----------------
|
|
|Provision for income taxes                             |          |                    |           |                 
|                                                       | Current  |                    |           | 326,730         
|                                                       | Deferred |                    |           | 3,467,000       
|                                                       |          |                    |           |                 
|Net Earnings (Loss)                                    |          | $                  | 5,789,641 |                 
|                                                       |          |                    |           |                 
|Earnings (loss) per share, basic and diluted           |          | $                  | 1.77      |                 
|                                                       |          |                    |           |                 
|Weighted average number of shares outstanding, basic   |          |                    | 3,268,066 |                 
|Weighted average number of shares outstanding, diluted |          |                    | N/A       |                 

The
accompanying notes are an integral part of these statements

5

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PAULSON CAPITAL CORP. AND SUBSIDIARY  CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY  For the three year period ended December 31, 2000  and the six months ended June 30, 2001 (unaudited) (restated)

|                                                                 |  | Common Stock |   |   |          
|---------------------------------------------------------------- |  | ------------ | - | - | ---------
|
|
|Balance at December 31, 1997, as restated                        |  | 3,970,536    |   | $ | 794,416  
|Issuance of common stock in lieu of directors' cash compensation |  | 4,283        |   |   | 16,500   
|Redemption of common stock                                       |  | (177,967     | ) |   | (35,593  
|Net loss for the year, as restated                               |  |             |   |   |         
|                                                                 |  |              |   |   |          
|Balance at December 31, 1998, as restated                        |  | 3,796,852    |   |   | 775,323  
|Issuance of common stock in lieu of directors' cash compensation |  | 1,783        |   |   | 8,500    
|Redemption of common stock                                       |  | (257,400     | ) |   | (51,480  
|Net earnings for the year, as restated                           |  |             |   |   |         
|                                                                 |  |              |   |   |          
|Balance at December 31, 1999, as restated                        |  | 3,541,235    |   |   | 732,343  
|Stock option grants                                              |  |             |   |   | 317,750  
|Stock options exercised                                          |  | 16,000       |   |   | 71,000   
|Redemption of common stock                                       |  | (189,869     | ) |   | (41,082  
|Net earnings for the year, as restated                           |  |             |   |   |         
|                                                                 |  |              |   |   |          
|Balance at December 31, 2000, as restated                        |  | 3,367,366    |   |   | 1,080,011
|Redemption of common stock                                       |  | (149,500     | ) |   | (34,385  
|Net earnings for year to date, as restated                       |  |             |   |   |         
|                                                                 |  |              |   |   |          
|Balance at June 30, 2001, as restated                            |  | 3,217,866    |   | $ | 1,045,626
|                                                                 |  |              |   |   |          

The
accompanying notes are an integral part of these statements

6

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PAULSON CAPITAL CORP. AND SUBSIDIARY  CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (restated)  for the six month periods ended June 30, 2001 and June 30, 2000

|                                                 |                                                                                                     | 6/30/01                                                         |                                          | 6/30/00     |           
|------------------------------------------------ | --------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ---------------------------------------- | ----------- | ----------
|
|Increase (Decrease) in Cash and Cash Equivalents |                                                                                                     |                                                                 |                                          |             |           
|Cash flows from operating activities             |                                                                                                     |                                                                 |                                          |             |           
|                                                 | Net earnings (loss)                                                                                 |                                                                 | $                                        | 5,174,543   |           
|                                                 | Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities |                                                                 |                                          |             |           
|                                                 |                                                                                                     | Unrealized (appreciation) depreciation on investment securities |                                          |             | (7,040,027
|                                                 |                                                                                                     | Realized gain on investment securities                          |                                          |             | (3,173,752
|                                                 |                                                                                                     | Depreciation and amortization                                   |                                          |             | 100,191   
|                                                 |                                                                                                     | Deferred income taxes                                           |                                          |             | 3,576,000 
|                                                 |                                                                                                     | Stock option grant                                              |                                          |             |          
|                                                 |                                                                                                     | Change in assets and liabilities                                |                                          |             |           
|                                                 |                                                                                                     |                                                                 | Receivables                              |             |           
|                                                 |                                                                                                     |                                                                 | Trading securities                       |             |           
|                                                 |                                                                                                     |                                                                 | Prepaid and deferred expenses            |             |           
|                                                 |                                                                                                     |                                                                 | Accounts payable and accrued liabilities |             |           
|                                                 |                                                                                                     |                                                                 | Securities sold, not yet purchased       |             |           
|                                                 |                                                                                                     |                                                                 | Income taxes payable                     |             |           
|                                                 |                                                                                                     |                                                                 |                                          |             |           
|                                                 | Net cash provided by (used in) operating activities                                                 |                                                                 |                                          | (1,377,637  | )         
|                                                 |                                                                                                     |                                                                 |                                          |             |           
|Cash flows from investing activities             |                                                                                                     |                                                                 |                                          |             |           
|                                                 | Purchases of investment securities                                                                  |                                                                 |                                          | (19,118,044 | )         
|                                                 | Proceeds from sale of investment securities                                                         |                                                                 |                                          | 21,310,980  |           
|                                                 | Additions to furniture and equipment                                                                |                                                                 |                                          | (16,920     | )         
|                                                 | Proceeds from sale of furniture and equipment                                                       |                                                                 |                                          |            |           
|                                                 |                                                                                                     |                                                                 |                                          |             |           
|                                                 |                                                                                                     | Net cash provided by (used in) investing activities             |                                          | $           | 2,176,016 
|                                                 |                                                                                                     |                                                                 |                                          |             |           

The
accompanying notes are an integral part of these statements

7

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)CONTINUED

|                                                 |                                         | 6/30/01                                             |                                                      | 6/30/00   |         
|------------------------------------------------ | --------------------------------------- | --------------------------------------------------- | ---------------------------------------------------- | --------- | --------
|Cash flows from financing activities             |                                         |                                                     |                                                      |           |         
|                                                 | Proceeds from exercise of stock options |                                                     |                                                      |          |         
|                                                 | Payments to retire common stock         |                                                     |                                                      | (774,085  | )       
|                                                 |                                         |                                                     |                                                      |           |         
|                                                 |                                         | Net cash provided by (used in) financing activities |                                                      |           | (774,085
|                                                 |                                         |                                                     |                                                      |           |         
|                                                 |                                         |                                                     | NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |           |         
|Cash and cash equivalents at beginning of period |                                         |                                                     | 104,309                                              |           |         
|                                                 |                                         |                                                     |                                                      |           |         
|Cash and cash equivalents at June 30             |                                         | $                                                   | 128,603                                              |           | $       
|                                                 |                                         |                                                     |                                                      |           |         
|Cash paid during the three months for            |                                         |                                                     |                                                      |           |         
|                                                 | Interest                                |                                                     | $                                                    | 40,796    |         
|                                                 |                                         |                                                     |                                                      |           |         
|                                                 | Income taxes                            |                                                     | $                                                    | 2,596,650 |         
|                                                 |                                         |                                                     |                                                      |           |         

The
accompanying notes are an integral part of these statements

8

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)

The
accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for interim financial statements in Item 310(b) of
Regulation S-B and, therefore, do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of
management, the interim financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to state fairly the information shown therein. The nature of the
Company's business is such that the results of any interim period are not necessarily indicative of results for a full fiscal year.

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

During
the fourth quarter of 2001, we changed our method of accounting for underwriter warrants. Previously we carried these securities at their estimated fair value, based solely on
intrinsic value, once the restriction periods has lapsed. Upon reconsideration, it was determined that it is appropriate under generally accepted accounting principles to carry these securities at
their estimated fair value, using the Black-Scholes Option Pricing Model, as soon as the securities are received. Accordingly, the financial statements for previous periods have been restated to
correct these errors in previously issued financial statements that were not in compliance with existing accounting principles generally accepted in the United States. The effect of this restatement
for the three and six month periods ended June 30, 2001 and 2000 was to increase corporate finance revenue by $844,274, $2,061,374, $785,000 and $1,901,000, increase (decrease) investment income by
$1,624,726, $691,626, $(4,953,730) and $(1,064,000), increase (decrease) earnings before income taxes by $2,469,000, $2,753,000, $(4,168,730) and $837,000, increase (decrease) income tax expense by
$947,000, $1,056,000, $(1,599,000) and $322,000, increase (decrease)
net earnings by $1,522,000, $1,697,000, $(2,569,730) and $515,000, and increase (decrease) earnings per share by $0.46, $0.51, $(0.73) and $0.15.

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

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

9

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

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

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

10

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

Three Months Ended June 30, 2001 vs. Three Months Ended June 30, 2000



Substantially all of our business consists of the securities brokerage and investment banking activities of our wholly owned subsidiary, Paulson Investment
Company, Inc., or PIC. PIC has operations in four principal categories, all of them in the financial services industry. These categories are:



Because
we operate in the financial services industry, our revenues and earnings are substantially affected by conditions in financial markets generally. In our securities brokerage
and corporate finance businesses, the amount of our revenues depends substantially on levels of market activity requiring the services we provide. For example, our investment banking activity, which
consists primarily of acting as managing or participating underwriter of initial and follow-on public offerings for smaller companies, depends on the market for new equity offerings, which
has historically experienced substantial cyclical fluctuation. Although we attempt to match operating costs with activity levels, many of our expenses
are either fixed or difficult to change on short notice. Accordingly, fluctuations in brokerage and investment banking revenues tend to result in sharper fluctuations, on a percentage basis, in net
income or loss.

Our
investment income or loss and, to a lesser extent, our trading income or loss is affected by changes in market valuation of securities generally and, in particular, by changes in
valuation of the equity securities of microcap companies in which our investments and trading activities tend to be concentrated. Equity markets in general, and microcap equity markets in particular,
have always experienced significant volatility and this volatility has in recent years been extreme. The results of this volatility on the value of our investment portfolio and securities held in
connection with our trading and investment activities include large quarterly fluctuations in income or loss from these operations and substantial increases or decreases in our net worth as our
securities holdings are marked to market.

A
substantial portion of our investment banking business consists of acting as managing underwriter of initial and follow-on public offerings for microcap companies. As a
part of our underwriter compensation for this activity, we typically receive warrants exercisable to purchase securities identical to those that we offer and sell to the public. The warrants are not
exercisable for the first year after the offering in which they are earned and are thereafter exercisable for four years, after which they expire. The exercise price is typically 120% of the price at
which we initially sold the securities to the public. Accordingly, unless there is at least a 20% increase in the price of these securities at some time more than one and less than five years after
the offering, the warrants will remain "under water" and will ultimately expire unexercised.

Under
Statement of Financial Accounting Standards No. 133, as amended by SFAS 137 and 138, we are required to estimate the value of all derivative securities that we
hold at the date of any financial statements and to include that value, and changes in such value, in those financial statements. The warrants described above are derivative securities for the purpose
of SFAS 133. Accordingly, the aggregate estimated value of our warrants as of the date of any balance sheet is recorded as an asset

11

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on that balance sheet. When a new warrant is earned as a result of our investment banking activity, its estimated value is included in corporate finance revenue for the period in which it is earned.
In subsequent periods, any change in estimated value is recorded as investment income or loss for the period. If, and when, a warrant is exercised the book value is adjusted to reflect the value of
the securities purchased, net of the exercise price, and the adjustment amount is recorded as income or loss for the relevant period. If the warrant expires unexercised, the book value is adjusted to
zero and the decrease is recorded as a loss in the relevant period.

In
order to comply with SFAS 133, we have changed our method of estimating the value of our underwriter warrants from the "intrinsic value' method to the Black-Scholes Option
Pricing Model. We have restated our financial results for the six months ending June 30, 2001 using this new model. The model requires us to use historical price data combined with various
assumptions and judgments to
develop the inputs for the model. In particular, we have calculated a volatility factor for each company's warrants that is based on its own stock price movements as well as an index: as our warrants
get closer to their expiration date their volatility factor is almost entirely based on historical prices. We cannot assure you that we will ultimately be able to exercise any of our warrants in a way
that will realize the value that we attribute to them in our financial statements based on this model.

As
a result of the factors described above, our revenues and earnings are subject to substantial fluctuation from period to period based on circumstances many of which are beyond our
control. An increase in financial market activity generally, and/or an increase in equity valuations generally, will normally result in increases in revenue, earnings and net worth as our activity
levels and the value of our investment portfolio increase. Conversely, a general market retrenchment will typically lead to decreased revenue, earnings and net worth as a result both of decreased
activity and the need to adjust high investment portfolio values to lower levels. Accordingly, results for any historical period are not necessarily indicative of similar results for any future
period.



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

12

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Summary of Changes in Major Categories  of Revenues and Expenses

|                           |  | Quarter Ended June 30
2001 vs. 2000 |            | Six Months Ended June 30
2001 vs. 2000 |      
|-------------------------- |  | ----------------------------------- | ---------- | -------------------------------------- | -----
|Revenues:                  |  |                                     |            |                                        |      
|Sales Commissions          |  | $                                   | (1,669,730 | )                                      | (45.2
|Corporate Finance          |  |                                     | (872,969   | )                                      | (37.5
|Investment Income          |  |                                     | 20,246,644 |                                        | N/A  
|Trading Income             |  |                                     | 48,811     |                                        | 8.4  
|Other                      |  |                                     | (12,692    | )                                      | (61.4
|                           |  |                                     |            |                                        |      
|Total                      |  | $                                   | 17,740,064 |                                        | N/A  
|Expenses:                  |  |                                     |            |                                        |      
|Commissions and Salaries   |  | $                                   | (1,251     | )                                      | (0.0 
|Underwriting Expenses      |  |                                     | (216,992   | )                                      | (57.4
|Rent, Telephone and Quotes |  |                                     | 43,999     |                                        | 20.9 
|Other                      |  |                                     | 190,164    |                                        | 25.6 
|                           |  |                                     |            |                                        |      
|Total                      |  | $                                   | 15,920     |                                        | 0.4  
|Pretax Income              |  | $                                   | 17,724,144 |                                        | N/A  

Total
revenues for the second quarter of 2001 increased $17,740,064 from the second quarter of 2000 to $14,061,722. As shown in the table above, sales commissions fell $1,669,730, or
45.2% percent, from $3,693,646 in the second quarter of 2000 to $2,023,916 in the comparable 2001 period. This decrease resulted primarily from the less favorable price movements and trading levels in
the very small capitalization issues (the primary focus of PIC's investment banking and trading businesses) in the 2001 quarter compared to 2000, despite generally better market conditions in the 2001
period. The Nasdaq Industrial Average fell 12.31 percent in the second quarter of 2000 but rose 23.28 percent in the second quarter of 2001. Corporate finance revenue fell $872,969 in
the second quarter of 2001 compared to the second quarter of 2000, to $1,456,576 from $2,329,545. One transaction for $10.4 million was completed in the second quarter of 2001; two transactions
were completed in the 2000 quarter, raising approximately $38 million for the issuers. Corporate finance revenue is directly related to the amount of money raised in completed transactions.
Investment income increased from a loss of $10,306,573 in the second quarter of 2000 to a gain of $9,940,071 in the second quarter of 2001. $2,469,000 of investment income in the 2001 period was an
increase in the estimated fair value of underwriter warrants and $7,471,071 from investment securities unrelated to underwriter warrants. Investment income in 2000 included $8,647,530 of gain from the
sale of a previously exercised underwriter warrant, a loss in value of $5,762,998 from underwriter warrants that had not yet been exercised, and $13,191,105 of net loss in investment securities
unrelated to underwriter warrants. No underwriter warrants were exercised in either the 2000 or 2001 quarters. Trading income rose $48,811, or 8.4 percent, to $633,178 in the second quarter of
2001 from $584,367 in the comparable 2000 period. This increase was primarily due to increased prices, volume and trading profits in one security. Other Income declined $12,692, from $20,673 in the
second quarter of 2000 to $7,981 in the 2001 quarter, due primarily to a decline in interest and dividend income.

Total
expenses increased $15,920 in the second quarter of 2001 from the comparable 2000 period, an increase of 0.4 percent, from $4,462,431 to $4,478,351. Commissions and
salaries fell $1,251, from $3,131,254 in the 2000 period to $3,130,003 in 2001. This slight decrease, a much smaller decline than sales commission revenue, was primarily due to bonus and compensation
arrangements related to

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investment and trading profits. Underwriting expenses fell $216,992, or 57.4 percent, from $378,266 in the 2000 quarter to $161,274 in the second quarter of 2001. Two transactions were
completed in the 2000 period, while one transaction was completed in 2001. Rent, telephone and quote expenses increased from $210,863 in the 2000 period to $254,862 in 2001, an increase of
20.9 percent, primarily due to expenses related to improvements in quotation systems in the 2001 quarter. The aggregate of all other expenses rose 25.6 percent, from $742,048 in the
second quarter of 2000 to $932,212 in the second quarter of 2001, primarily due to increased accrual for PIC's profit sharing.

The
Company had a pretax profit of $9,583,371 in the second quarter of 2001 compared to a pretax loss of $8,140,773 in the comparable 2000 period, primarily due to the increase in
investment income offsetting declines in sales commission and corporate finance revenues. Significant fluctuations can occur in PIC's revenues and operating results from one period to another.

The
Company also accrued $3,793,730 in income taxes for the second quarter of 2001, compared to an estimated tax benefit for income taxes in the second quarter of 2000 of $3,187,000.

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 early 2000 and 1999 was combined with a general increase in the liquidity of the markets for these securities. The decline in prices for the OTC
securities traded by PIC to date in 2001 and late 2000 was combined with a general decrease in the liquidity of the markets for these securities. PIC's investment account and trading inventory
accounts are stated at fair market value, which is at or below quoted market price.

PIC
borrows money from its clearing firm in the ordinary course of its business, pursuant to an understanding under which the clearing firm agrees to finance PIC's trading accounts.
As of June 30, 2001, no net loans were outstanding pursuant to this arrangement. PIC and the Company are generally able to meet their compensation and other obligations out of current liquid
assets.

Another
source of capital to PIC and the Company has been the underwriter warrants issued to PIC in connection with its corporate finance activities and the sale of the underlying
securities. These underwriter warrants are not exercisable for the first year after the offerings in which they are earned and are thereafter exercisable for four years, after which they expire. The
exercise price is typically 120% of the price at which we initially sold the securities to the public. Accordingly, unless there is at
least a 20% increase in the price of these securities at some time more than one and less than five years after the offering, the warrants will remain "under water" and will ultimately expire
unexercised. 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, 2001, PIC owned 25 underwriter warrants (from 23 issuers), of
which 21 were currently exercisable; three had an exercise price below the current market price of the securities receivable upon exercise. 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. The prices of the securities underlying the

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underwriter warrants are very volatile, and substantial fluctuations in the Company's estimate of their value can be expected in the future.

In
the six months ended June 30, 2001, $1,377,637 of net cash was used in operating activities of the Company. The major adjustments to reconcile this result to the Company's
net earnings of $5,174,543 include unrealized appreciation on investment securities of $7,040,027, a decrease in income taxes payable of $3,606,438, a realized gain on investment securities of
$3,173,752 and an increase in trading securities of $1,129,878 more than offsetting a decrease in receivables of $2,545,760, a decrease in deferred income taxes of $3,576,000, an increase in accounts
payable and accrued liabilities of $1,436,305 and a decrease in prepaid and deferred expenses of $637,862. In the period, $2,176,016 of net cash was provided by the Company's investing activities, the
result of $21,310,980 in proceeds from the sale of investment securities more than offsetting the purchase of $19,118,044 of investment securities and $16,920 of additions to furniture and equipment.
$774,085 in cash was used in financing activities by the Company in the six months, the result of payments to retire common stock. See "Financial StatementsConsolidated Statements of Cash
Flows."

As
a securities broker-dealer, the Company's wholly owned subsidiary, PIC, is required by SEC regulations to meet certain liquidity and capital standards. At June 30, 2001, the
Company had no material commitments for capital expenditures.

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

Inflation

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

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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 12, 2001. The six Company directors (Chester L.F. Paulson, Jacqueline M. Paulson, Glen Davis, Shannon P. Pratt, Paul Shoen and John
Westergaard) were elected for additional one year terms. For each director 3,138,253 shares were voted for and 4,000 shares abstained.

Item 5.
Other Information.

None

Item 6.
Exhibits and Reports on Form 8-K

ExhibitsNone

No
Reports on Form 8-K were filed during the quarter ended June 30, 2001.

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SIGNATURES

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

|                        |  | PAULSON CAPITAL CORP.
|----------------------- |  | ---------------------
|Date: December 13, 2001 |  | By:                  

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EXHIBIT INDEX

None

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