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**UNITED        STATES**

**SECURITIES        AND EXCHANGE COMMISSION**

**WASHINGTON,        D.C. 20549**

**FORM        10-QSB**

** [X]**
**QUARTERLY        REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF        THE SECURITIES EXCHANGE ACT OF 1934**

**For        the Quarterly Period Ended March 31, 2006**

**OR**

**[        ]**
**TRANSITION        REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF        THE SECURITIES EXCHANGE ACT OF 1934**

**For        the Transition Period from**
**to**

**Commission        file number 0-23181**

**PAULA        FINANCIAL**

| **Delaware**(State                  or other jurisdiction ofincorporation                  or organization) |   | **95-4640638**(IRS                  EmployerIdentification                  No.) |
|-------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|

**PAULA        FINANCIAL**

**87        East Green Street, Suite 206**

**Pasadena,        CA 91105**

**(626)        844-7100**

**APPLICABLE        ONLY TO CORPORATE ISSUERS**

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| PART                  I.  | FINANCIAL                  INFORMATION                                                                                                                                                 |   |
|---------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                      |                                                                                                                                                                                   |   |
| Item                  1.  | Financial                  Statements                                                                                                                                                  | Page   |
|                      |                                                                                                                                                                                   |   |
|                      | Condensed                  consolidated balance sheets as of March                  31, 2006 (unaudited) and December 31, 2005                                                         | 2      |
|                      |                                                                                                                                                                                   |   |
|                      | Condensed                  consolidated statements of income and comprehensive                  income for the three months ended March 31, 2006 and 2005                  (unaudited) | 3      |
|                      |                                                                                                                                                                                   |   |
|                      | Condensed                  consolidated statements of cash flows for the three                  months ended March 31, 2006 and 2005 (unaudited)                                       | 4      |
|                      |                                                                                                                                                                                   |   |
|                      | Notes                  to condensed consolidated financial statements for                  the three months ended March 31, 2006 (unaudited)                                           | 5      |
|                      |                                                                                                                                                                                   |   |
| Item                  2.  | Management’s                  Discussion and Analysis or Plan of                  Operations                                                                                     | 8      |
|                      |                                                                                                                                                                                   |   |
| Item                  3.  | Controls                  and procedures                                                                                                                                               | 10     |
|                      |                                                                                                                                                                                   |   |
| PART                  II. | OTHER                  INFORMATION                                                                                                                                                     |   |
|                      |                                                                                                                                                                                   |   |
| Item                  2.  | Unregistered                  Sale of Equity Securities and Use of                  Proceeds                                                                                           | 11     |
|                      |                                                                                                                                                                                   |   |
| Item                  6.  | Exhibits                  and Reports on Form 8-K                                                                                                                                      | 11     |
|                      |                                                                                                                                                                                   |   |
| SIGNATURE                 | 12                                                                                                                                                                                     |

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**PART        I.**
**FINANCIAL        INFORMATION**

**Item        1.**
**Financial        Statements**

**PAULA        FINANCIAL AND SUBSIDIARIES**

**Condensed        Consolidated Balance Sheets**

|                                                                                                                                            |   | March                  31, |   | December                  31, |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|--------|-------------------------------|--------|
| ***Assets***                                                                                                                                    |   | 2006                       |   | 2005                          |   |
|                                                                                                                                            |   | (Unaudited)                |   | (*)                           |   |
| *Current                  Assets:*                                                                                                              |   |                       |   |                          |   |   |   |
| Cash                  (restricted: 2006, $442; 2005, $928)                                                                                      |   | $                          | 3,904  |                          | $      | 3,492 |   |
| Investments                                                                                                                                     |   |                       |   |                          |   |   |   |
| Common                  stock, at market (cost: 2006 $1,086; 2005 $1,077)                                                                       |   |                       | 1,053  |                          |   | 971 |   |
| Preferred                  stock, at market (cost: 2006 $203; 2005 $203)                                                                        |   |                       | 207    |                          |   | 205 |   |
| Fixed                  maturities, held-to-maturity (market: 2006 and 2005 $50)                                                                 |   |                       | 50     |                          |   | 50 |   |
| Accounts                  receivable, net of allowance for uncollectible accounts (2006 and                  2005,                  $80)        |   |                       | 3,973  |                          |   | 4,236 |   |
| Commissions                  receivable                                                                                                         |   |                       | 2,445  |                          |   | 1,986 |   |
| Other                  receivables                                                                                                              |   |                       | 91     |                          |   | 60 |   |
| Deferred                  income taxes                                                                                                          |   |                       | 1,030  |                          |   | 1,010 |   |
| Other                  assets                                                                                                                   |   |                       | 186    |                          |   | 154 |   |
|                                                                                                                                            |   |                       | 12,939 |                          |   | 12,164 |   |
| *Non-Current                  Assets:*                                                                                                          |   |                       |   |                          |   |   |   |
| Property                  and equipment, net                                                                                                    |   |                       | 505    |                          |   | 536 |   |
| Investment                  in related party, at cost                                                                                           |   |                       | 703    |                          |   | 703 |   |
| Goodwill,                  net                                                                                                                  |   |                       | 2,124  |                          |   | 2,124 |   |
| Other                  intangible assets, net                                                                                                   |   |                       | 1,401  |                          |   | 1,582 |   |
| Deferred                  income taxes                                                                                                          |   |                       | 3,141  |                          |   | 3,586 |   |
| Other                  assets                                                                                                                   |   |                       | 172    |                          |   | 191 |   |
|                                                                                                                                            |   | $                          | 20,985 |                          | $      | 20,886 |   |
| ***Liabilities                  and Stockholders’ Equity***                                                                               |   |                       |   |                          |   |   |   |
| *Current                  Liabilities:*                                                                                                         |   |                       |   |                          |   |   |   |
| Due                  to underwriters and assureds                                                                                               |   | $                          | 5,043  |                          | $      | 5,782 |   |
| Accounts                  payable and accrued expenses                                                                                          |   |                       | 750    |                          |   | 583 |   |
| Capital                  lease                                                                                                                  |   |                       | 40     |                          |   | 41 |   |
| Employment                  related accruals                                                                                                    |   |                       | 1,115  |                          |   | 886 |   |
| Acquisition                  related accruals                                                                                                   |   |                       | 796    |                          |   | 987 |   |
| Income                  taxes payable                                                                                                           |   |                       | 125    |                          |   | 62 |   |
| Notes                  payable to bank                                                                                                          |   |                       | 776    |                          |   | 876 |   |
|                                                                                                                                            |   |                       | 8,645  |                          |   | 9,217 |   |
| *Non-Current                  Liabilities:*                                                                                                     |   |                       |   |                          |   |   |   |
| Capital                  lease                                                                                                                  |   |                       | 185    |                          |   | 178 |   |
| Deferred                  compensation                                                                                                          |   |                       | 61     |                          |   | - |   |
| Acquisition                  related accruals                                                                                                   |   |                       | 366    |                          |   | 427 |   |
|                                                                                                                                            |   | $                          | 9,257  |                          | $      | 9,822 |   |
| *Stockholders’                  Equity:*                                                                                                  |   |                       |   |                          |   |   |   |
| Preferred                  stock, $0.01 par value. (Authorized 4,058,823 shares, none issued                  and                  outstanding) |   | $                          | -      |                          | $      | - |   |
| Common                  stock, $0.01 par value (Authorized 15,000,000 shares, issued 7,455,879                  shares in 2006 and 2005)        |   |                       | 75     |                          |   | 75 |   |
| Additional                  paid-in-capital                                                                                                     |   |                       | 14,353 |                          |   | 14,353 |   |
| Accumulated                  earnings, after January 1, 2003                                                                                    |   |                       | 3,626  |                          |   | 2,922 |   |
| Accumulated                  other comprehensive loss                                                                                           |   |                       | (19    | )                             |   | (69 | ) |
| Employee                  loans for stock purchase                                                                                              |   |                       | (23    | )                             |   | (23 | ) |
| Treasury                  stock, at cost (1,097,142 and 1,052,034 shares in 2006 and 2005,                  respectively)                       |   |                       | (6,284 | )                             |   | (6,194 | ) |
|                                                                                                                                            |   | $                          | 11,728 |                          | $      | 11,064 |   |
|                                                                                                                                            |   | $                          | 20,985 |                          | $      | 20,886 |   |
| *                  Derived from audited financial statements.                                                                                   |   |                       |   |                          |   |   |   |
|                                                                                                                                            |   |                       |   |                          |   |   |   |
| See                  notes to condensed consolidated financial statements.                                                                      |   |                       |   |                          |   |   |   |

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**PAULA        FINANCIAL AND SUBSIDIARIES**

**Condensed        Consolidated Statements of Income and Comprehensive        Income**

|                                                                                  |   | **Three                  Months Ended** |      |
|---------------------------------------------------------------------------------------|--------|-----------------------------------------|-----------|
|                                                                                  |   | **March                  31,**          |      |
|                                                                                  |   | **2006**                                |      | **2005** |   |
|                                                                                  |   | (Unaudited)                             |      |
| ***Income:***                                                                         |   |                                    |      |   |   |   |   |
| Commissions                  and placement fees                                       |   | $                                       | 3,781     |   | $ | 3,454 |   |
| Profit                  sharing                                                       |   |                                    | 1,525     |   |   | 1,991 |   |
| Investment                  income                                                    |   |                                    | 52        |   |   | 3 |   |
| Service                  fees                                                         |   |                                    | 111       |   |   | 161 |   |
| TPA                  fees                                                             |   |                                    | -         |   |   | 30 |   |
| Other                  income                                                         |   |                                    | 1         |   |   | 12 |   |
|                                                                                  |   |                                    | 5,470     |   |   | 5,651 |   |
|                                                                                  |   |                                    |      |   |   |   |   |
| ***Operating                  Expenses:***                                            |   |                                    |      |   |   |   |   |
| Salaries                  and related expenses                                        |   |                                    | 2,515     |   |   | 2,978 |   |
| Interest                  expense                                                     |   |                                    | 18        |   |   | 20 |   |
| Amortization                  expense                                                 |   |                                    | 181       |   |   | 146 |   |
| Other                  expenses                                                       |   |                                    | 1,407     |   |   | 1,387 |   |
|                                                                                  |   |                                    | 4,121     |   |   | 4,531 |   |
|                                                                                  |   |                                    |      |   |   |   |   |
| Income                  from operations before income taxes                           |   |                                    | 1,349     |   |   | 1,120 |   |
| Income                  tax expense                                                   |   |                                    | 548       |   |   | 459 |   |
| ***Net                  income***                                                     |   | $                                       | 801       |   | $ | 661 |   |
|                                                                                  |   |                                    |      |   |   |   |   |
| *Other                  comprehensive loss, net of tax:*                              |   |                                    |      |   |   |   |   |
| Unrealized                  holding gains arising during period (tax impact 2006 $26) |   |                                    | 50        |   |   | - |   |
|                                                                                  |   |                                    |      |   |   |   |   |
| *Comprehensive                  income*                                               |   | $                                       | 851       |   | $ | 661 |   |
|                                                                                  |   |                                    |      |   |   |   |   |
| Earnings                  per share                                                   |   | $                                       | 0.12      |   | $ | 0.10 |   |
| Weighted                  average shares outstanding                                  |   |                                    | 6,504,893 |   |   | 6,592,750 |   |
|                                                                                  |   |                                    |      |   |   |   |   |
| Earnings                  per share - assuming dilution                               |   | $                                       | 0.12      |   | $ | 0.10 |   |
| Weighted                  average shares outstanding - assuming dilution              |   |                                    | 6,713,539 |   |   | 6,830,852 |   |
|                                                                                  |   |                                    |      |   |   |   |   |
| Dividends                  declared per common share                                  |   | $                                       | 0.015     |   | $ | 0.015 |   |
|                                                                                  |   |                                    |      |   |   |   |   |

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**PAULA        FINANCIAL AND SUBSIDIARIES**

**Condensed        Consolidated Statements of Cash        Flows**

|                                                                                                                  |   | **Three                  Months Ended****March                  31,** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|
|                                                                                                                  |   | **2006**                                                              |   | **2005** |   |
|                                                                                                                  |   | (Unaudited)                                                           |   |
| ***Cash                  flows from operating activities:***                                                          |   |                                                                  |   |   |   |   |   |
| Net                  income                                                                                           |   | $                                                                     | 801    |   | $ | 661 |   |
|                                                                                                                  |   |                                                                  |   |   |   |   |   |
| *Adjustments                  to reconcile net income to net cash provided by operating                  activities:* |   |                                                                  |   |   |   |   |   |
| Depreciation                                                                                                          |   |                                                                  | 49     |   |   | 37 |   |
| Amortization                                                                                                          |   |                                                                  | 181    |   |   | 146 |   |
| Changes                  in operating assets and liabilities:                                                         |   |                                                                  |   |   |   |   |   |
| (Increase)                  decrease in receivables                                                                   |   |                                                                  | (227   | ) |   | 291 |   |
| Decrease                  in deferred income taxes                                                                    |   |                                                                  | 399    |   |   | 328 |   |
| Increase                  (decrease) in accounts payable and accrued expenses                                         |   |                                                                  | (213   | ) |   | 340 |   |
| Other,                  net                                                                                           |   |                                                                  | (11    | ) |   | (44 | ) |
| ***Net                  cash provided by operating activities***                                                      |   |                                                                  | 979    |   |   | 1,759 |   |
|                                                                                                                  |   |                                                                  |   |   |   |   |   |
| ***Cash                  flows from investing activities:***                                                          |   |                                                                  |   |   |   |   |   |
| Purchase                  of property and equipment                                                                   |   |                                                                  | (18    | ) |   | (51 | ) |
| Purchase                  of investments                                                                              |   |                                                                  | (9     | ) |   | - |   |
| Purchase                  of book of business                                                                         |   |                                                                  | (252   | ) |   | (214 | ) |
| ***Net                  cash used in investing activities***                                                          |   |                                                                  | (279   | ) |   | (265 | ) |
|                                                                                                                  |   |                                                                  |   |   |   |   |   |
| ***Cash                  flows from financing activities:***                                                          |   |                                                                  |   |   |   |   |   |
| Payments                  on line of credit                                                                           |   |                                                                  | (100   | ) |   | (100 | ) |
| Dividends                  paid                                                                                       |   |                                                                  | (98    | ) |   | (95 | ) |
| Repurchase                  of common stock                                                                           |   |                                                                  | (90    | ) |   | - |   |
| ***Net                  cash used in financing activities***                                                          |   |                                                                  | (288   | ) |   | (195 | ) |
|                                                                                                                  |   |                                                                  |   |   |   |   |   |
| ***Net                  increase in cash and invested cash***                                                         |   |                                                                  | 412    |   |   | 1,299 |   |
| Cash                  and invested cash at beginning of period                                                        |   |                                                                  | 3,492  |   |   | 3,241 |   |
| ***Cash                  and invested cash at end of period***                                                        |   | $                                                                     | 3,904  |   | $ | 4,540 |   |
|                                                                                                                  |   |                                                                  |   |   |   |   |   |
| ***Supplemental                  disclosure of non-cash investing and financing                  activities:***       |   |                                                                  |   |   |   |   |   |
| Furniture                  and equipment acquired under a capital lease                                               |   |                                                                  | -      |   | $ | 277 |   |

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**PAULA        FINANCIAL AND SUBSIDIARIES**

**Notes        to Condensed Consolidated Financial        Statements**

**For        the Three Months Ended March 31, 2006 (Unaudited)**

**Note        A - Basis of Presentation**

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**Note        B - Deferred Income Taxes**

|                                             |   | **March                  31** |    | **December                  31** |   |
|--------------------------------------------------|--------|-------------------------------|---------|----------------------------------|--------|
|                                             |   | **2006**                      |    | **2005**                         |   |
|                                             |   | **(unaudited)**               |    |                             |   |
| Deferred                  tax assets:            |   |                          |    |                             |   |   |   |
| Net                  operating loss carryforward |   | $                             | 23,747  |                             | $      | 24,246 |   |
| Net                  capital loss carryforward   |   |                          | 431     |                             |   | 431 |   |
| Goodwill                  and other intangibles  |   |                          | 581     |                             |   | 572 |   |
| Other                                            |   |                          | 812     |                             |   | 747 |   |
| Gross                  deferred tax assets       |   |                          | 25,571  |                             |   | 25,996 |   |
| Less                  valuation allowance        |   |                          | (21,400 | )                                |   | (21,400 | ) |
| Deferred                  tax assets             |   | $                             | 4,171   |                             | $      | 4,596 |   |
| Gross                  deferred tax liabilities  |   | $                             | -       |                             | $      | - |   |
| Net                  deferred tax asset          |   | $                             | 4,171   |                             | $      | 4,596 |   |

**Note        C - Accounting for Stock-Based Compensation**

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**Note        D - Other Matters**

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**Item        2.**
**Management’s        Discussion and Analysis or Plan of        Operations**

**Overview**

**Results        of Operations for the Three Months Ended March 31, 2006 Compared to the Three        Months Ended March 31, 2005:**

***Commission        and placement fee income.***

***Profit        sharing income.***

***Investment        income.***

***TPA        fees.***

***Salaries        and related expenses.***

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***Amortization        expense.***

***Income        taxes on operations.***

***Net        income.***

**Liquidity        and Capital Resources:**

**Off-Balance        Sheet Arrangements**

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**Forward-Looking        Statements**

**Item        3. Controls and Procedures**

**Disclosure        Controls and Procedures**

**Changes        in Internal Control over Financial Reporting**

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**PART        II. OTHER INFORMATION**

**Item        2. Unregistered Sales of Equity Securities and Use of        Proceeds**

**SMALL        BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES**

| Period                                                          |   |   | (a)                  Total Numbers of Shares Purchased |   |   | (b)                  Average Price Paid per Share |   |   | (c)                  Total Number of Shares Purchased as Part of Publicly Announced                  Plans or                  Programs |   |   | (d)                  Maximum Number of Shares that May Yet be Purchased Under the Plans                  or                  Programs* |   |
|-----------------------------------------------------------------|--------|--------|--------------------------------------------------------|--------|--------|---------------------------------------------------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|--------|
| Month                  #11/1/2006                  to 1/31/2006 |   |   | 16,908                                                 |   | $      | 2.02                                              |   |   | 1,074,234                                                                                                                               |   |   | 1,925,766                                                                                                                              |   |
| Month                  #22/1/2006                  to 2/282006  |   |   | 6,000                                                  |   | $      | 2.01                                              |   |   | 1,091,142                                                                                                                               |   |   | 1,908,858                                                                                                                              |   |
| Month                  #33/1/2006                  to 3/31/2006 |   |   | 22,200                                                 |   | $      | 1.95                                              |   |   | 1,097,142                                                                                                                               |   |   | 1,902,858                                                                                                                              |   |
| Total                                                           |   |   | 45,108                                                 |   | $      | 1.98                                              |   |   |                                                                                                                                    |   |   |                                                                                                                                   |   |

**Item        6. Exhibits and Reports on Form        8-K:**

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SIGNATURES

|  Date:                  May 11, 2006 |  PAULA                  FINANCIAL                              |
|-------------------------------------------|---------------------------------------------------------------------|
|                                      |                                                                |
|                                      |  By:                  /s/                  Deborah S. Maddocks |
|                                      | Vice                  President - Finance                           |

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