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                                    EXHIBIT 10.5

                            PAULSON CAPITAL CORPORATION
                               1999 STOCK OPTION PLAN

       1.     PURPOSE.  The purpose of this 1999 Stock Option Plan (the "Plan")
is to enable Paulson Capital Corporation (the "Company") to attract and retain
the services of selected employees, officers, and directors of the Company and
of any subsidiary thereof, and to provide added incentive to such persons by
increasing their ownership interests in the Company.

       2.     SHARES SUBJECT TO THE PLAN.  Subject to adjustment as provided
below and in paragraph 7, the shares to be offered under the Plan shall consist
of Common Stock of the Company, and the total number of shares of Common Stock
that may be issued under the Plan shall not exceed 500,000 shares.  The shares
issued under the Plan may be authorized and unissued shares or reacquired
shares.  If an option granted under the Plan expires, terminates or is canceled,
the unissued shares subject to such option shall again be available under the
Plan.

       3.     EFFECTIVE DATE AND DURATION OF PLAN.

       (a)    EFFECTIVE DATE.  The Plan shall become effective when adopted by
the Board of Directors; provided, however, that prior to shareholder approval of
the Plan, any awards shall be subject to and conditioned on approval of the Plan
by a majority of the votes cast at a shareholders' meeting at which a quorum is
present.  Options may be granted under the Plan at any time after the effective
date and before termination of the Plan.

       (b)    DURATION.  The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions on
such shares have lapsed.  The Board of Directors may suspend or terminate the
Plan at any time except with respect to options then outstanding under the Plan.

       4.     ADMINISTRATION.  The Plan shall be administered by a committee of
the Board of Directors of the Company (the "Committee"), which shall determine
and designate from time to time the persons to whom awards shall be made and the
amount and other terms and conditions of the awards.  Subject to the provisions
of the Plan, the Committee may from time to time adopt and amend rules and
regulations relating to administration of the Plan, advance the lapse of any
waiting period, accelerate any exercise date, waive or modify any restriction
applicable to shares (except those restrictions imposed by law) and make all
other determinations in the judgment of the Committee necessary or desirable for
the administration of the Plan.  The interpretation and construction of the
provisions of the Plan and related agreements by the Committee shall be final
and conclusive.  The Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any related agreement in the
manner and to the extent it shall deem expedient to carry the Plan into effect,
and it shall be the sole and final judge of such expediency.  No director shall
vote on any action by the Committee or the Board of Directors of the Company
with respect to any matter relating to an award held by such director.

       5.     TYPES OF AWARDS; ELIGIBILITY.  The Committee may, from time to
time, grant (i) Incentive Stock Options, as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), as provided in Sections
6(a) and 6(b); and (ii) options other than Incentive Stock Options ("Non-
Statutory Stock Options"), as provided in Sections 6(a) and 6(c). Options may be
awarded pursuant to this Plan only to employees, officers, and directors of the
Company or any subsidiary thereof;  provided, however, that only employees of
the Company shall be eligible to receive Incentive Stock Options under the Plan.
The Committee shall select the individuals to whom awards shall be made and
shall specify the action taken with respect to each individual to whom an award
is made.  At the discretion

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of the Committee, a director may be given an election to surrender an award
in exchange for the grant of a new award. Notwithstanding anything to the
contrary herein, and in addition to any other applicable limitation, no
single employee may be granted more than 75,000 options under this plan.

       6.     OPTION GRANTS.

       (a)    TERMS OF GRANT.  The Committee may grant options under the Plan.
With respect to each option grant, the Committee shall determine the number of
shares subject to the option, the option price, the period of the option, the
time or times at which the option may be exercised, and whether the option is an
Incentive Stock Option or a Non-Statutory Stock Option.  At the time of the
grant of an option or at any time thereafter, the Committee may provide that an
optionee who exercised an option with Common Stock of the Company shall
automatically receive a new option to purchase additional shares equal to the
number of shares surrendered and may specify the terms and conditions of such
new options.

       (b)    INCENTIVE STOCK OPTIONS.  Incentive Stock Options shall be subject
to the following additional terms and conditions:

       (i)    LIMITATION ON AMOUNT OF GRANTS.  No employee may be granted
       Incentive Stock Options under the Plan if the aggregate fair market
       value, on the date of grant, of the Common Stock with respect to which
       Incentive Stock Options are exercisable for the first time by that
       employee during any calendar year under the Plan and under all incentive
       stock option plans (within the meaning of Section 422 of the Code) of the
       Company or any parent or subsidiary of the Company exceeds $100,000.

       (ii)   LIMITATIONS ON GRANTS TO 10 PERCENT SHAREHOLDERS.  An Incentive
       Stock Option may be granted under the Plan to an employee possessing more
       than ten percent of the total combined voting power of all classes of
       stock of the Company or of any parent or subsidiary of the Company only
       if the option price is at least 110 percent of the fair market value of
       the Common Stock subject to the option on the date it is granted and the
       option by its terms is not exercisable after the expiration of five years
       from the date it is granted.

       (iii)  DURATION OF OPTIONS.  Subject to Sections 6(b)(ii) and 6(d),
       Incentive Stock Options granted under the Plan shall continue in effect
       for the period fixed by the Committee, except that no Incentive Stock
       Option shall be exercisable after the expiration of ten years from the
       date it is granted.

       (iv)   OPTION PRICE.  The option price per share shall be determined by
       the Committee at the time of grant.  Except as provided in Section
       6(b)(ii), the option price shall not be less than 100 percent of the fair
       market value of the Common Stock covered by the Incentive Stock Option at
       the date the option is granted.  The Committee shall make a good faith
       determination of the fair market value.  If the Common Stock of the
       Company is not publicly traded on the date the option is granted, the
       Committee may consider any valuation methods it deems appropriate and
       may, but is not required to, obtain one or more independent appraisals of
       the Company.  If the Common Stock of the Company is publicly traded on
       the date the option is granted, the fair market value shall be deemed to
       be the closing price of the Common Stock as reported in The Wall Street
       Journal on the day preceding the date the option is granted, or, if there
       has been no sale on that date, on the last preceding date on which a sale
       occurred or such other value of the Common Stock as shall be specified by
       the Committee.

       (v)    LIMITATION ON TIME OF GRANT.  No Incentive Stock Option shall be
       granted on or after the tenth anniversary of the date of the last action
       by the Committee approving an increase in the

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       number of shares available for issuance under the Plan, which action was
       subsequently approved within 12 months by the shareholders.

       (vi)   CONVERSION OF INCENTIVE STOCK OPTIONS.  The Committee may at any
       time without the consent of the optionee convert an Incentive Stock
       Option to a Non-Statutory Stock Option.

       (c)    NON-STATUTORY STOCK OPTIONS.  Non-Statutory Stock Options shall be
subject to the following terms and conditions in addition to those set forth in
Section 6(a) above:

       (i)    OPTION PRICE.  The option price for Non-Statutory Stock Options
       shall be determined by the Committee at the time of grant and may be any
       amount determined by the Committee.

       (ii)   DURATION OF OPTIONS.  Non-Statutory Stock Options granted under
       the Plan shall continue in effect for the period fixed by the Committee.

       (d)    EXERCISE OF OPTIONS.  Except as provided in paragraph 6(f) or as
determined by the Committee, no option granted under the Plan may be exercised
unless at the time of such exercise the optionee is employed by or in the
service of the Company or a subsidiary thereof and shall have been so employed
or provided such service continuously since the date such option was granted.
Absence on leave or on account of illness or disability under rules established
by the Committee shall not, however, be deemed an interruption of continuous
service for this purpose.  Unless otherwise determined by the Committee, vesting
of options shall not continue during an absence on leave (including an extended
illness) or on account of disability.  Except as provided in paragraphs 6(f) and
7, options granted under the Plan may be exercised from time to time over the
period stated in each option in such amounts and at such times as shall be
prescribed by the Committee, provided that options shall not be exercised for
fractional shares.  Unless otherwise determined by the Committee, if the
optionee does not exercise an option in any one year with respect to the full
number of shares to which the optionee is entitled in that year, the optionee's
rights shall be cumulative and the optionee may purchase those shares in any
subsequent year during the term of the option.

       (e)    NONTRANSFERABILITY.  Except as provided below, each stock option
granted under the Plan by its terms shall be nonassignable and nontransferable
by the optionee, either voluntarily or by operation of law, and each option by
its terms shall be exercisable during the optionee's lifetime only by the
optionee.  A stock option may be transferred by will or by the laws of descent
and distribution of the state or country of the optionee's domicile at the time
of death.  The Committee may, in its discretion, authorize all or a portion of
an option to be on terms which permit transfer by the optionee to (A) the
spouse, children or grandchildren of the optionee, including stepchildren and
adopted children ("Immediate Family Members"), (B) a trust or trusts for the
exclusive benefit of Immediate Family Members, or (C) a partnership or limited
liability company in which Immediate Family Members are the only partners or
members, provided that (X) there may be no consideration for any transfer, (Y)
the stock option agreement pursuant to which the options are granted or an
amendment thereto must expressly provide for transferability in a manner
consistent with this paragraph, and (Z) subsequent transfers of transferred
options shall be prohibited except by will or by the laws of descent and
distribution.  Following any transfer, options shall continue to be subject to
the same terms and conditions as were applicable immediately prior to transfer,
provided that for purposes of paragraphs 6(g) and 7 the term "optionee" shall be
deemed to refer to the transferee.  The continued service requirement of
paragraph 6(d) and the events of termination of service of paragraph 6(f) shall
continue to be applied with respect to the original optionee, and following the
termination of employment or service of the original optionee the options shall
be exercisable by the transferee only to the extent, and for the periods
specified, and all other references to employment or service, termination of
employment or service, life or death of the optionee shall continue to be
applied with respect to the original optionee.

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       (f)    TERMINATION OF SERVICE.

       (i)    GENERAL RULE.  Unless otherwise determined by the Committee, in
       the event the employment or service of the optionee with the Company or a
       subsidiary thereof terminates for any reason other than because of
       physical disability or death as provided in subparagraphs 6(f)(ii) and
       (iii) the option may be exercised at any time prior to the expiration
       date of the option or the expiration of 30 days after the date of such
       termination, whichever is the shorter period, but only if and to the
       extent the optionee was entitled to exercise the option at the date of
       such termination.

       (ii)   TERMINATION BECAUSE OF TOTAL DISABILITY.  Unless otherwise
       determined by the Committee, in the event of the termination of
       employment or service because of total disability, the option may be
       exercised at any time prior to the expiration date of the option or the
       expiration of 12 months after the date of such termination, whichever is
       the shorter period, but only if and to the extent the optionee was
       entitled to exercise the option at the date of such termination.  The
       term "total disability" means a mental or physical impairment which is
       expected to result in death or which has lasted or is expected to last
       for a continuous period of 12 months or more and which causes the
       optionee to be unable, in the opinion of the Company and two independent
       physicians, to perform his or her duties as an employee, director or
       officer of the Company and to be engaged in any substantial gainful
       activity.  Total disability shall be deemed to have occurred on the first
       day after the Company and the two independent physicians have furnished
       their opinion of total disability to the Company.

       (iii)  TERMINATION BECAUSE OF DEATH.  Unless otherwise determined by the
       Committee, in the event of the death of an optionee while employed by or
       providing service to the Company or a subsidiary, the option may be
       exercised at any time prior to the expiration date of the option or the
       expiration of 12 months after the date of such death, whichever is the
       shorter period, but only if and to the extent the optionee was entitled
       to exercise the option at the date of such termination and only by the
       person or persons to whom such optionee's rights under the option shall
       pass by the optionee's will or by the laws of descent and distribution of
       the state or country of domicile at the time of death.

       (iv)   AMENDMENT OF EXERCISE PERIOD APPLICABLE TO TERMINATION.  The
       Committee, at the time of grant or at any time thereafter, may extend the
       30-day and 12-month exercise periods specified above any length of time
       not later than the original expiration date of the option, and may
       increase the portion of an option that is exercisable, subject to such
       terms and conditions as the Committee may determine.

       (v)    FAILURE TO EXERCISE OPTION.  To the extent that the option of any
       deceased optionee or of any optionee whose employment or service
       terminates is not exercised within the applicable period, all further
       rights to purchase shares pursuant to such option shall cease and
       terminate.

       (g)    PURCHASE OF SHARES.

       (i)    Unless the Committee determines otherwise, shares may be acquired
       pursuant to an option granted under the Plan only upon receipt by the
       Company of notice in writing from the optionee of the optionee's
       intention to exercise, specifying the number of shares as to which the
       optionee desires to exercise the option,  the date on which the optionee
       desires to complete the transaction, and, if required in order to comply
       with the Securities Act of 1933, as amended, containing a representation
       that it is the optionee's present intention to acquire the shares for
       investment and not with a view to distribution.

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       (ii)   Unless the Committee determines otherwise, on or before the date
       specified for completion of the purchase of shares pursuant to an option,
       the optionee must have paid the Company the full purchase price of such
       shares in cash (including, with the consent of the Committee, cash that
       may be the proceeds of a loan from the Company) or, with the consent of
       the Committee, in whole or in part, in Common Stock of the Company valued
       at fair market value, restricted stock, performance units or other
       contingent awards denominated in either stock or cash, deferred
       compensation credits, promissory notes and other forms of consideration.
       The Committee shall make a good faith determination of the fair market
       value of Common Stock provided in payment of the purchase price.  If the
       Common Stock of the Company is not publicly traded on the date the option
       is exercised, the Committee may consider any valuation methods it deems
       appropriate and may, but is not required to, obtain one or more
       independent appraisals of the Company.  No shares shall be issued until
       full payment therefor has been made.  With the consent of the Committee,
       an optionee may request the Company to apply automatically the shares to
       be received upon the exercise of a portion of a stock option (even though
       stock certificates have not yet been issued) to satisfy the purchase
       price for additional portions of the option.

       (iii)  Each optionee who has exercised an option shall immediately upon
       notification of the amount due, if any, pay to the Company in cash
       amounts necessary to satisfy any applicable federal, state and local tax
       withholding requirements.  If additional withholding is or becomes
       required beyond any amount deposited before delivery of the certificates,
       the optionee shall pay such amount to the Company on demand.  If the
       optionee fails to pay the amount demanded, the Company may withhold that
       amount from other amounts payable by the Company to the optionee,
       including salary, subject to applicable law.  With the consent of the
       Committee an optionee may satisfy this obligation, in whole or in part,
       by having the Company withhold from the shares to be issued upon the
       exercise that number of shares that would satisfy the withholding amount
       due or by delivering to the Company Common Stock to satisfy the
       withholding amount.

       (iv)   Upon the exercise of an option, the number of shares reserved for
       issuance under the Plan shall be reduced by the number of shares issued
       upon exercise of the option.

       7.     CHANGES IN CAPITAL STRUCTURE.  If the outstanding Common Stock of
the Company is hereafter increased or decreased or changed into or exchanged for
a different number or kind of shares or other securities of the Company or of
another corporation by reason of any reorganization, merger, consolidation, plan
of exchange, recapitalization, reclassification, stock split-up, combination of
shares or dividend payable in shares, appropriate adjustment shall be made by
the Committee in the number and kind of shares available for awards under the
Plan.  In addition, the Committee shall make appropriate adjustment in the
number and kind of shares as to which outstanding options then unexercised,
shall be exercisable, so that the optionee's proportionate interest before and
after the occurrence of the event is maintained.  Notwithstanding the foregoing,
the Committee shall have no obligation to effect any adjustment that would or
might result in the issuance of fractional shares, and any fractional shares
resulting from any adjustment may be disregarded or provided for in any manner
determined by the Committee.  Any such adjustments made by the Committee shall
be conclusive.  In the event of dissolution of the Company or a merger,
consolidation or plan of exchange affecting the Company, in lieu of providing
for options or in lieu of having the options continue unchanged, the Committee
may, in its sole discretion, provide a 30-day period prior to such event during
which optionees shall have the right to exercise options in whole or in part
without any limitation on exercisability and upon the expiration of which 30-day
period all unexercised options shall immediately terminate.

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       8.     AMENDMENT OF PLAN.  The Board of Directors may at any time, and
from time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason.  Except as provided in paragraph 6(d), however, no change in an
award already granted shall be made without the written consent of the holder of
such award.

       9.     APPROVALS.  The obligations of the Company under the Plan are
subject to the approval of state and federal authorities or agencies with
jurisdiction in the matter.  The Company will use its best efforts to take steps
required by state or federal law or applicable regulations, including rules and
regulations of the Securities and Exchange Commission and any stock exchange on
which the Company's shares may then be listed, in connection with the grants
under the Plan.  The foregoing notwithstanding, the Company shall not be
obligated to issue or deliver Common Stock under the Plan if such issuance or
delivery would violate applicable state or federal securities laws.

       10.    EMPLOYMENT AND SERVICE RIGHTS. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in any
way with the right of the Company or any subsidiary by whom such employee is
employed to terminate such employee's employment at any time, for any reason,
with or without cause, or to decrease such employee's compensation or benefits,
or (ii) confer upon any person engaged by the Company any right to be retained
or employed by the Company or to the continuation, extension, renewal, or
modification of any compensation, contract, or arrangement with or by the
Company.

       11.    RIGHTS AS A SHAREHOLDER.  The recipient of any award under the
Plan shall have no rights as a shareholder with respect to any Common Stock
until the date of issue to the recipient of a stock certificate for such shares.
Except as otherwise expressly provided in the Plan, no adjustment shall be made
for dividends or other rights for which the record date occurs prior to the date
such stock certificate is issued.





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