<Page>

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON D.C. 20549
                                   ----------
                Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

For the fiscal year ended                       Commission file number: 0-18188
   December 31, 1999
                                  FORM 10-KSB/A
                                (Amendment No. 2)

                              PAULSON CAPITAL CORP.
                              ---------------------
            Name of small business issuer as specified in its charter

          OREGON                                            93-0589534
          ------                                            ----------
(State or other jurisdiction of                         (I.R.S. Employer
  incorporation or organization)                         Identification No.)


811 S.W. Naito Parkway, Suite 200
      Portland, OR                                         97204
------------------------                                   -----
 (Address of principal                                   (Zip Code)
  executive offices)

Issuer's telephone number, including area code: (503) 243-6000
                                                --------------
Securities registered pursuant to Section 12(b) of the Act:

                                      None
                                      ----
Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock, no par value
                           --------------------------
                                 Title of class



Check whether the issuer (1) filed all reports required to be filed by Section
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
     ---     ---

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part II of this Form 10-KSB
or any amendment to this Form 10-KSB.
                                     -----------------

<Page>


ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

<Table>
<Caption>


 (a) FINANCIAL STATEMENTS                                                                                  PAGE

<S>                                                                                                      <C>

Report of Independent Certified Public Accountants                                                         F-1

Consolidated Balance Sheets as of December 31, 1999 and 1998                                               F-2

Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997                 F-3

Consolidated Statement of Shareholders' Equity for the years ended December 31, 1999, 1998                 F-4
and 1997

Consolidated Statements of Cash Flows for the years ended December 31, 1999,                               F-5
     1998 and 1997

Notes to Consolidated Financial Statements                                                                 F-7

Supplementary Schedule of Warrants Owned                                                                   F-19

Schedule II - Valuation and Qualifying Account                                                             F-20

</Table>

<Page>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Shareholders
Paulson Capital Corp.

We have audited the accompanying consolidated balance sheets of Paulson Capital
Corp. (an Oregon corporation) and Subsidiary as of December 31, 1999 and 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Paulson Capital
Corp. and Subsidiary as of December 31, 1999 and 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.

As discussed in Note N of Notes to Consolidated Financial Statements, the 1998
and 1997 financial statements have been restated.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying
Supplementary Schedule of Warrants Owned as of December 31, 1999 is presented
for purposes of additional analysis and is not a required part of the basic
consolidated financial statements. Such information has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, is fairly stated, in all material respects, in
relation to the basic consolidated financial statements taken as a whole.

We have also audited Schedule II for each of the three years in the period ended
December 31, 1999. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.



/s/ Grant Thornton LLP

Portland, Oregon

January 26, 2000, except for Notes E and N,
  as to which the date is April 5, 2000





                                     F-1

<Page>



                                 Paulson Capital Corp. and Subsidiary


                                     CONSOLIDATED BALANCE SHEETS


                                           December 31,


<Table>
<Caption>

                                                                                        1999                  1998
                                                                                   --------------        --------------
                                                                                                           (restated)
<S>                                                                                <C>                   <C>
                               ASSETS

CURRENT ASSETS
   Cash and cash equivalents                                                       $       48,210        $      100,345
   Receivable from broker-dealers and clearing organizations                            7,336,562             1,430,586
   Notes and other receivables                                                            671,514               439,967
   Trading securities                                                                   2,238,798             2,119,737
   Investment securities                                                               14,200,767             9,697,387
   Underwriter warrants                                                                10,490,000             2,488,000
   Refundable income taxes                                                                      -               168,059
   Prepaid and deferred expenses                                                          669,599               578,556
   Deferred income taxes                                                                        -                53,373
                                                                                   --------------        --------------

               Total current assets                                                    35,655,450            17,076,010
                                                                                   --------------        --------------

NOTE RECEIVABLE                                                                         1,100,000                     -
                                                                                   --------------        --------------

FURNITURE AND EQUIPMENT, net                                                              525,716               359,329
                                                                                   --------------        --------------

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

                                                                                   $   37,451,066        $   17,605,239
                                                                                   ==============        ==============

               LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable and accrued liabilities                                        $      814,935        $      738,155
   Payable to broker-dealers and clearing organizations                                 1,883,602               753,413
   Compensation, employee benefits and payroll taxes                                    3,312,829             1,240,510
   Securities sold, not yet purchased                                                      65,794                61,479
   Income taxes payable                                                                 1,116,800                     -
   Deferred income taxes                                                                4,842,500                     -
                                                                                   --------------        --------------

               Total current liabilities                                               12,036,460             2,793,557
                                                                                   --------------        --------------

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, 3,541,235 and
      3,796,852, respectively                                                             732,343               775,323
   Retained earnings                                                                   24,682,263            14,036,359
                                                                                   --------------        --------------

                                                                                       25,414,606            14,811,682
                                                                                   --------------        --------------

                                                                                   $   37,451,066        $   17,605,239
                                                                                   ==============        ==============

</Table>

The accompanying notes are an integral part of these statements.

                                              F-2

<Page>

                                     Paulson Capital Corp. and Subsidiary

                                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                         Year ended December 31, 1999

<Table>
<Caption>
                                                                   1999                  1998                  1997
                                                               ------------          -------------         ------------
                                                                                     (restated)             (restated)
<S>                                                            <C>                   <C>                   <C>
Revenues
   Commissions                                                 $ 15,075,567          $ 11,324,412          $ 12,728,794
   Corporate finance                                              2,115,619             1,716,691             3,925,514
   Investment income (loss)                                      21,640,280            (1,949,262)            9,792,011
   Trading income                                                   317,159               589,822             1,195,585
   Interest and dividends                                            16,641                48,668                 7,010
   Other                                                             21,316                19,201                35,147
                                                               ------------          -------------         ------------
                                                                 39,186,582            11,749,532            27,684,061
                                                               ------------          -------------         ------------
Expenses
   Commissions and salaries                                      15,692,933            10,370,979            12,551,806
   Underwriting expenses                                          1,350,372               731,035               762,317
   Rent, telephone and quotation services                           890,708               842,437               835,472
   Interest expense                                                   1,248                60,889                 5,996
   Professional fees                                                394,368               389,478               639,386
   Bad debt expense                                                       -               267,193                     -
   Travel and entertainment                                         333,927               283,234               158,649
   Settlements                                                       59,000               518,362                67,299
   Other                                                          1,152,530             1,015,582             1,534,148
                                                               ------------          -------------         ------------
                                                                 19,875,086            14,479,189            16,555,073
                                                               ------------          -------------         ------------
               Earnings (loss) before income taxes               19,311,496            (2,729,657)           11,128,988

Income tax expense (benefit)                                      7,600,260              (961,017)            4,178,593
                                                               ------------          -------------         ------------
               NET EARNINGS (LOSS)                             $ 11,711,236          $ (1,768,640)         $  6,950,395
                                                               ============          =============         ============
Basic earnings (loss) per share                                $       3.16          $       (.45)         $       1.75
                                                               ============          =============         ============
Diluted earnings (loss) per share                              $       3.16          $       (.45)         $       1.74
                                                               ============          =============         ============
</Table>





The accompanying notes are an integral part of these statements.

                                                          F-3
<Page>


                                      Paulson Capital Corp. and Subsidiary

                                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

                                    Three year period ended December 31, 1999

<Table>
<Caption>
                                                                            Common Stock
                                                                   -----------------------------            Retained
                                                                     Shares             Amount              Earnings
                                                                   ---------        ------------        ---------------
<S>                                                                <C>              <C>                 <C>

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

Restatement (Note N)                                                       -                   -                671,000
                                                                   ---------        ------------        ---------------
Balance at December 31, 1996, as restated                          4,081,241             733,701              9,835,846

Exercise of stock options                                             87,140              89,283                      -

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

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

Net earnings for the year, as restated                                     -                   -              6,950,395
                                                                   ---------        ------------        ---------------
Balance at December 31, 1997, as restated                          3,970,536             794,416             16,256,322

Issuance of common stock in lieu
   of directors' cash compensation                                     4,283              16,500                      -

Redemption of common stock                                          (177,967)            (35,593)              (451,323)

Net loss for the year, as restated                                         -                   -             (1,768,640)
                                                                   ---------        ------------        ---------------
Balance at December 31, 1998, as restated                          3,796,852             775,323             14,036,359

Issuance of common stock in lieu
   of directors' cash compensation                                     1,783               8,500                      -

Redemption of common stock                                          (257,400)            (51,480)            (1,065,332)

Net earnings for the year                                                  -                   -             11,711,236
                                                                   ---------        ------------        ---------------
Balance at December 31, 1999                                       3,541,235        $    732,343        $    24,682,263
                                                                   =========        ============        ===============
</Table>







The accompanying notes are an integral part of this statement.

                                                          F-4

<Page>

                        Paulson Capital Corp. and Subsidiary

                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                             Year ended December 31,

<Table>
<Caption>
                                                                          1999             1998             1997
                                                                     -------------     ------------     ------------
                                                                                        (restated)       (restated)
<S>                                                                  <C>               <C>              <C>
Increase (Decrease) in Cash and Cash Equivalents

Cash flows from operating activities
   Net earnings (loss)                                               $  11,711,236     $ (1,768,640)    $  6,950,395
   Adjustments to reconcile net earnings (loss) to
      net cash provided by (used in) operating activities
         Unrealized (appreciation) depreciation
            on investment securities and underwriter warrants          (13,556,395)        1,816,738      (3,803,194)
         Realized (gain) loss on investment securities                  (8,083,884)          404,441      (5,988,817)
         Deferred income taxes                                           4,895,873        (1,796,273)      1,448,300
         Common stock issued for compensation
            of directors                                                     8,500            16,500           8,000
         Depreciation and amortization                                     136,274            89,448          59,994
         (Gain)/loss from sale of furniture and equipment                        -             6,180          (6,800)
         Write-down of notes receivable, net of recoveries                (267,193)          267,193               -
         Changes in assets and liabilities
            Receivables                                                 (6,082,055)        3,051,643         562,999
            Trading securities                                            (119,061)        6,782,065      (3,749,019)
            Income taxes receivable/payable                              1,284,859           (66,152)        310,354
            Prepaid and deferred expenses                                  (91,043)         (177,711)       (240,724)
            Accounts payable and accrued liabilities                     3,279,288        (5,516,418)      2,236,523
            Securities sold, not yet purchased                               4,315          (269,250)         50,041
                                                                     -------------     ------------     ------------
               Net cash provided by (used in)
                  operating activities                                  (6,879,286)        2,839,764      (2,161,948)

Cash flows from investing activities
   Purchases of investment securities                                  (41,501,353)      (27,439,553)    (28,103,962)
   Proceeds from sale of investment securities                          50,636,252        25,400,567      31,405,663
   Proceeds from repayment of notes receivable                             211,725           500,000               -
   Issuance of note receivable                                          (1,100,000)         (534,385)       (500,000)
   Additions to furniture and equipment                                   (302,661)         (254,652)       (114,474)
   Purchase of real estate                                                       -                 -        (169,900)
   Proceeds from sale of furniture and equipment                                 -             2,300           9,600
                                                                     -------------     ------------     ------------
               Net cash provided by (used in)
                  investing activities                                   7,943,963        (2,325,723)      2,526,927
                                                                     -------------     ------------     ------------
</Table>

The accompanying notes are an integral part of these statements.

                                       F-5
<Page>

                        Paulson Capital Corp. and Subsidiary

                 CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                             Year ended December 31,

<Table>
<Caption>
                                                                          1999             1998             1997
                                                                     -------------     ------------     ------------
                                                                                        (restated)       (restated)
<S>                                                                  <C>               <C>              <C>
Cash flows from financing activities
   Proceeds from exercise of stock options                           $           -     $          -     $     89,283
   Payments to retire common stock                                      (1,116,812)        (486,916)        (566,487)
                                                                     -------------     ------------     ------------
               Net cash used in financing activities                    (1,116,812)        (486,916)        (477,204)
                                                                     -------------     ------------     ------------

               Net Increase (Decrease) in Cash and
                  Cash Equivalents                                         (52,135)          27,125         (112,225)

Cash and cash equivalents at beginning of year                             100,345           73,220          185,445
                                                                     -------------     ------------     ------------
Cash and cash equivalents at end of year                             $      48,210     $    100,345     $     73,220
                                                                     =============     ============     ============


CASH PAID DURING THE YEAR FOR

   Interest                                                          $       1,248     $     61,389     $      6,000
                                                                     =============     ============     ============
   Income taxes                                                      $   1,441,715     $    901,408     $  2,405,275
                                                                     =============     ============     ============
NONCASH INVESTING AND FINANCING ACTIVITY

   Repayment of secured demand note collateral agreement             $           -     $    100,000     $         -
                                                                     =============     ============     ============
</Table>

The accompanying notes are an integral part of these statements.

                                       F-6

<Page>

                      Paulson Capital Corp. and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Paulson Capital Corp. (the Company) is a holding company whose wholly-owned
   subsidiary, Paulson Investment Company, Inc. (Subsidiary) is a registered
   broker-dealer in securities under the Securities and Exchange Act of 1934, as
   amended. The Subsidiary renders broker-dealer services in securities on both
   an agency and principal basis to its customers who are fully introduced to
   Correspondent Services Corporation (CSC), a subsidiary of Paine Webber Group,
   Inc. The Subsidiary also acts as lead or participating underwriter for
   over-the-counter securities offerings. The Subsidiary conducts business
   throughout the United States. The Subsidiary is exempt from the reserve
   requirements under SEC Rule 15c3-3(k)(2)(ii), since it does not handle or
   carry customer securities and cash.

   A summary of the significant accounting policies consistently applied in the
   preparation of the accompanying financial statements follows.

   1. PRINCIPLES OF CONSOLIDATION

   The accompanying consolidated financial statements include the accounts of
   Paulson Capital Corp. and its wholly-owned subsidiary, Paulson Investment
   Company, Inc. All significant intercompany balances and transactions have
   been eliminated in the consolidation.

   2. SECURITIES TRANSACTIONS

   Securities transactions and related revenue are recorded on a trade date
   basis. Manager's fees, underwriter's fees, and other underwriting revenues
   are recognized at the time the underwriting is completed. Tax shelter revenue
   is recognized at the time individual tax shelter units are sold.

   Marketable securities are valued at market value, and securities not readily
   marketable are valued at fair value as determined by management. The fair
   value of not readily marketable securities is estimated by management using
   available information including the following: Quoted market prices of
   similar securities (i.e. unrestricted shares of the same company); price of
   recent known trades of the same or similar securities; the cost of the
   security if recently purchased adjusted for changes in the financial
   condition of the issuer; all other information available from review of
   available documents related to the issuer or discussions with management of
   the issuer. Changes in the value of these securities are reflected currently
   in the results of operations.

   3. FAIR VALUE OF FINANCIAL INSTRUMENTS

   The carrying amounts reflected in the balance sheet for cash, cash
   equivalents, notes and other receivables and payables approximate their
   respective fair values due to the short maturities of these instruments. The
   fair values of trading and investing securities owned and securities sold,
   not yet purchased are recorded primarily at quoted prices for those or
   similar instruments. Underwriter warrants are recorded at estimated fair
   value as determined by management. Changes in the market value of these
   securities are reflected currently in the results of operations.

   4. FURNITURE AND EQUIPMENT

   Depreciation of furniture and equipment is computed generally by the
   straight-line method over their estimated useful lives (5 years). Leasehold
   improvements are amortized over the lesser of their estimated useful life or
   the lives of their respective leases (2.5 years).


                                     F-7
<Page>

                   Paulson Capital Corp. and Subsidiary

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

   5. CASH FLOWS

   For purposes of reporting cash flows, cash and cash equivalents include cash
   on hand, cash due from banks and brokerage accounts, certificates of deposit
   and highly liquid debt instruments purchased with a maturity of three months
   or less.

   6. USE OF ESTIMATES

   In preparing the Company's financial statements, management is required to
   make estimates and assumptions that affect the reported amounts of assets and
   liabilities, the disclosure of contingent assets and liabilities at the date
   of the financial statements and the reported amounts of revenues and expenses
   during the reporting period. Actual results could differ from those
   estimates.

   7. EARNINGS PER SHARE

   The Company adopted Financial Accounting Standard No. 128, "Earnings Per
   Share" in 1997. Earnings (loss) per share are computed based on the weighted
   average number of common and dilutive common equivalent shares outstanding
   during the year (Note I).

   8. INCOME TAXES

   The Company provides for income taxes under the liability method. Deferred
   tax assets and liabilities are determined based on differences between
   financial reporting and tax bases of assets and liabilities as measured by
   the enacted tax rates which are expected to be in effect when these
   differences reverse. Income tax expense is the tax payable for the period and
   the change during the period in net deferred tax assets and liabilities.

   9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

   In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
   of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
   Derivative Instruments and Hedging Activities. SFAS 133 will require the
   Company to record all derivatives on the balance sheet at fair value. The new
   standard, as amended by SFAS 137 and SFAS 138, is effective for fiscal years
   beginning after June 15, 2000. As part of certain underwriting agreements,
   the Company receives underwriter warrants. These warrants are derivatives
   under the definition of SFAS 133. The Company does not have any hedging
   activities. The Company believes the impact of adopting this standard will
   not be material to its results of operations or equity since it currently
   marks all investments to fair value.


                                     F-8
<Page>

                   Paulson Capital Corp. and Subsidiary

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE B - RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CLEARING
           ORGANIZATIONS

   The Subsidiary introduces all customer transactions in securities traded on
   U.S. securities markets to CSC on a fully-disclosed basis. The agreement
   between the Subsidiary and its clearing broker provides that the Subsidiary
   is obligated to assume any exposure related to nonperformance by customers or
   counterparties. The Subsidiary monitors clearance and settlement of all
   customer transactions on a daily basis.

   The exposure to credit risk associated with the nonperformance of customers
   and counterparties in fulfilling their contractual obligations pursuant to
   these securities transactions can be directly impacted by volatile trading
   markets which may impair the customer's or counterparty's ability to satisfy
   their obligations to the Subsidiary. In the event of nonperformance, the
   Subsidiary may be required to purchase or sell financial instruments at
   unfavorable market prices resulting in a loss. Management does not anticipate
   nonperformance by customers and counterparties in the above situations.

   In addition to the clearing services provided, CSC also loans money to the
   Subsidiary to finance trading accounts.


                                     F-9
<Page>

                   Paulson Capital Corp. and Subsidiary

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE B - RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CLEARING
           ORGANIZATIONS - Continued

   At December 31, the above clearing services and trading account financing
resulted in the following:

<Table>
<Caption>
                                                       1999               1998
                                                   ------------       ------------
         <S>                                       <C>                <C>
         Receivable from CSC                       $  7,336,562       $  1,430,586
         Payable to CSC                              (1,883,602)          (753,413)
                                                   ------------       ------------
         Net receivable                            $  5,452,960       $    677,173
                                                   ============       ============
</Table>


NOTE C - NOTES AND OTHER RECEIVABLES

   Notes and other receivables consist of the following:

<Table>
<Caption>
                                                       1999               1998
                                                   ------------       ------------
         <S>                                       <C>                <C>
         Underwriting                              $          -       $    267,191
         Employees                                      558,131             49,493
         Independent brokers                             59,045             69,909
         Other                                           54,338             53,374
                                                   ------------       ------------
                                                   $    671,514       $    439,967
                                                   ============       ============
</Table>

   In connection with an underwriting, the Subsidiary accepted a note receivable
   on December 18, 1997 in the amount of $500,000. On February 6, 1998 the note
   was paid. Three additional notes totaling $534,385 were accepted during 1998.
   These notes were uncollateralized and the Subsidiary recorded an allowance of
   $267,193 against them. During 1999, collection was received on one of the
   notes and the remainder of the other two were written off.

   Employee and independent broker receivables relate principally to advances,
   expenses inventory losses and settlements charged to the registered
   representatives of the Subsidiary in excess of commission earnings. For the
   years ended December 31, 1999, 1998, and 1997, receivables from employees and
   independent brokers of $80,379, $85,448, and $17,206, respectfully, were
   determined by management to be uncollectible and written off.

   At December 31, 1999 the Company had a $1,100,000 unsecured note receivable
   from a company that was subordinated to the interest of another creditor.
   This note has an interest rate of 6% and is due October 21, 2001.


                                     F-10
<Page>

                   Paulson Capital Corp. and Subsidiary

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE D - TRADING AND INVESTMENT SECURITIES

   Trading securities and securities sold not yet purchased represent the market
   value of securities held long and short by the Company's subsidiary.

   The categories of trading securities and their related market values follow:

<Table>
<Caption>
                                                         1999                             1998
                                              ---------------------------     --------------------------
                                                  Long           Short           Long           Short
                                              -----------     -----------     -----------    -----------
         <S>                                  <C>             <C>             <C>            <C>
         Common stock                         $ 1,895,409     $    65,794     $ 1,686,731    $    50,672
         Preferred stock                                -               -          39,008          5,511
         State and municipal bonds                262,082               -         243,055          5,296
         Corporate bonds                           81,307               -         150,943              -
                                              -----------     -----------     -----------     ----------
                                              $ 2,238,798     $    65,794     $ 2,119,737     $   61,479
                                              ===========     ===========     ===========     ==========
</Table>


   As a securities broker-dealer, the Subsidiary is engaged in various
   securities trading and brokerage activities as principal. In the normal
   course of business, the Subsidiary has sold securities that it does not
   currently own and will therefore be obligated to purchase such securities at
   a future date. This obligation is recorded in the financial statements at the
   market value of the related securities. A trading loss will occur on the
   securities if the market price increases and a trading gain will occur if the
   market price decreases.

   Investment securities held by the Subsidiary which are readily marketable are
   stated at market value. Included in investment securities are certain
   securities which are not readily marketable. Securities not readily
   marketable include investment securities (a) for which there is no market on
   a securities exchange or no independent publicly quoted market, (b) that
   cannot be publicly offered or sold unless registration has been effected
   under the Securities Act of 1933, or (c) that cannot be offered or sold
   because of other arrangements, restrictions, or conditions applicable to the
   securities or to the Company. At December 31, 1999 these securities consist
   of corporate stocks and warrants at estimated fair value of $914,210 and a
   convertible debenture valued at $100,000. At December 31, 1998 these
   securities consisted of corporate stocks at estimated fair value of $325,475.
   A summary of the investment security portfolio follows:

<Table>
<Caption>
                                                                 Market        Unrealized      Carrying
                                                  Cost           Value         Gain (Loss)       Value
                                              -----------     -----------     ------------    -----------
         <S>                                  <C>             <C>             <C>             <C>
         1999
           Corporate equities                 $11,752,070     $14,178,877     $  2,426,807    $14,178,877
           Corporate bonds                        102,420          21,890          (80,530)        21,890
                                              -----------     -----------     ------------    -----------
                                              $11,854,490     $14,200,767     $  2,346,277    $14,200,767
                                              ===========     ===========     ============    ===========
         1998
           Corporate equities                 $11,993,688     $ 9,697,387     $ (2,296,301)   $ 9,697,387
                                              ===========     ===========     ============    ===========
</Table>

   Realized gain (loss) included in the  determination of net earnings was
   $8,083,884, $(404,441), and $5,988,817 for the years ended December 31,
   1999, 1998 and 1997, respectively.


                                    F-11

<Page>

                  Paulson Capital Corp. and Subsidiary

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE E - UNDERWRITER WARRANTS

   As provided in certain underwriting agreements, Paulson Investment Company,
   Inc. obtains warrants to purchase equity instruments from client companies.
   During the restriction periods on these warrants, the Company recognizes no
   value. When the restrictions expire and the underlying securities become
   exercisable, the Company marks the warrants to estimated fair value.

   The estimated fair value of warrants is determined in good faith by
   management taking into consideration all indications of value and factors
   relevant to the value of the warrant (Note A2) that are available.

   The following table summarized activity in underwriter warrants:


<Table>

   <S>                                                       <C>
   Estimated fair value at January 1, 1997                   $ 1,088,000
   Unrealized gain                                             4,211,000
                                                             ------------
   Estimated value at December 31, 1997                        5,299,000
   Unrealized loss                                            (2,811,000)
                                                             ------------
   Estimated fair value at December 31, 1998                   2,488,000
   Realized gain                                              (6,852,854)
   Unrealized gain                                            14,854,854
                                                             ------------
   Estimated fair value at December 31, 1999                 $10,490,000
                                                             ============

</Table>

NOTE F - FURNITURE AND EQUIPMENT

   Furniture and equipment are stated at cost and consist of the following:


<Table>
<Caption>

                                                    1999             1998
                                               ---------------  ---------------
        <S>                                    <C>              <C>
        Office equipment                       $  1,173,097     $    905,710
        Leasehold improvements                       35,274          120,354
        Vehicles                                     65,619           65,619
                                               ---------------  ---------------
                                                  1,273,990        1,091,683
        Less accumulated depreciation
           and amortization                         748,274          732,354
                                               ---------------  ---------------

                                               $    525,716     $    359,329
                                               ===============  ===============

</Table>





                                    F-12

<Page>

                  Paulson Capital Corp. and Subsidiary

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE G - INCOME TAXES

   Income tax expense (benefit) consists of the following:


<Table>
<Caption>

                                          1999          1998          1997
                                       -----------  -------------  -----------
      <S>                              <C>          <C>            <C>
      Current tax expense
         Federal                       $ 1,921,593  $    724,613   $ 2,364,177
         State                             782,794       110,643       366,116
                                       -----------  -------------  -----------

                                         2,704,387       835,256     2,730,293
                                       -----------  -------------  -----------


      Deferred tax expense (benefit)
         Federal                         4,338,537    (1,579,461)    1,289,457
         State                             557,336      (216,812)      158,843
                                       -----------  -------------  -----------

                                         4,895,873    (1,796,273)    1,448,300
                                       -----------  -------------  -----------

                                       $ 7,600,260  $   (961,017)  $ 4,178,593
                                       ===========  =============  ===========

</Table>



























                                    F-13

<Page>

                  Paulson Capital Corp. and Subsidiary

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE G - INCOME TAXES - Continued

   Income tax expense (benefit) for each year varies from the amount computed by
   applying the statutory federal income tax rate to earnings (loss) before
   taxes as follows:


<Table>
<Caption>

                                             1999         1998          1997
                                          -----------  -----------  ------------
      <S>                                 <C>          <C>          <C>
      Income tax expense (benefit) at
         statutory federal tax rate       $ 6,566,000  $ (928,000)  $ 3,784,000
      State taxes net of federal benefit      841,000    (119,000)      485,000
      Permanent and other differences         193,260      85,983       (90,407)
                                          -----------  -----------  ------------

                                          $ 7,600,260  $ (961,017)  $ 4,178,593
                                          ===========  ===========  ============

</Table>

   The deferred income tax asset (liability) consists of the following at
   December 31,:


<Table>
<Caption>


                                                           1999          1998
                                                       ------------   ----------
      <S>                                              <C>            <C>
      Unrealized appreciation on securities            $(4,923,000)   $ (55,000)
      Accrued expenses                                      48,000            -
      State net operating loss carryforwards                67,100            -
      Allowance on notes receivable                              -      105,000
      Fixed asset depreciation                             (34,600)       3,373
                                                       ------------   ----------

                                                       $(4,842,500)   $  53,337
                                                       ============   ==========

</Table>

   No valuation allowance is considered necessary. The state net operating loss
   carryforwards expire through 2014.


NOTE H - COMMON STOCK

   Directors are compensated for their attendance at a maximum of six scheduled
   meetings per year. Compensation is approximately $500 of the Company's stock
   for each meeting. The value of the stock is determined at the close of
   business the day prior to a scheduled meeting.

   The Subsidiary has a key employee stock purchase plan. Under the plan, the
   Subsidiary will match funds (up to $25,000) committed by key employees for
   the purchase of shares of the Company's common stock. The committed and
   matching funds will be used by the Subsidiary to purchase stock of the
   Company in the open market or by negotiated transactions. One half of the
   shares will be resold to the participating employee and one half of the
   shares will be transferred to the employee for no cash consideration. The
   named participants, the number of shares purchased in the open market and the
   amount of matching funds will be at the discretion of the Board of Directors
   of the Subsidiary. No participants were named and no purchases of common
   stock under this plan were made during 1999, 1998 or 1997.

   The Company's Nonemployee Stock Option Plan had 100,000 registered shares of
   common stock reserved for issuance.


                                    F-14

<Page>

                  Paulson Capital Corp. and Subsidiary

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE H - COMMON STOCK - Continued

   The Company has adopted the disclosure only provisions of Financial
   Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS
   123). It applies APB Opinion No. 25, "Accounting for Stock Issued to
   Employees," in accounting for its Plans and therefore does not recognize
   compensation expense. Had the Company elected to recognize compensation
   expense based upon the fair value at the grant date for awards under these
   Plans consistent with the methodology prescribed by FAS 123, the effect on
   the Company's pro forma net income and earnings per share would have been
   immaterial. The fair value of each option grant is estimated on the date of
   grant using the Black-Scholes options-pricing model with the following
   weighted-average assumptions: no dividends; expected volatility of 62%;
   risk-free interest rate of 5.9% and expected life of 2.5 years.

   There was no activity under the Nonemployee Stock Option Plan during 1999 or
   1998. The following table summarizes activity under the Plan for the year
   ended December 31, 1997:


<Table>
<Caption>

                                                                Weighted
                                               Shares            Average
                                                Under           Exercise
                                               Option             Price
                                             ------------      ------------
        <S>                                  <C>               <C>
        Balance at December 31, 1996            101,425        $      1.01
           Granted                                    -                  -
           Exercised                            (87,140)              1.02
           Canceled                             (14,285)               .91
                                             ------------

        Balance at December 31, 1997                  -
                                             ============

</Table>

   On September 30, 1999, the Board of Directors approved the 1999 Stock Option
   Plan. The plan reserves 500,000 shares of the Company's common stock for
   issuance upon exercise of the options. Also effective September 30, 1999, the
   Board of Directors approved the grant of 128,000 options to directors and
   employees of the Company. The approved grant price of the options was $4.44
   per share, the September 30, 1999 market value. However, the plan is subject
   to shareholder approval at the June 2000 shareholder meeting. Because
   approval is not virtually certain, the options have not been included in the
   diluted earnings per share calculation for the year ended December 31, 1999.
   If the market value of the stock, on the date of approval, is greater than
   the grant price, the Company will incur compensation expense equal to the
   price per share differential times the number of shares granted.










                                    F-15

<Page>

                  Paulson Capital Corp. and Subsidiary

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE I - EARNINGS PER SHARE

   The following table is a reconciliation of the numerators and denominators of
   the basic and diluted per share computations for each of the three years in
   the period ended December 31, 1999:


<Table>
<Caption>

                                                                                Weighted
                                                                                 Average             Per
                                                                Income           Shares             Share
                                                              (Numerator)     (Denominator)         Amount
                                                             -------------   ---------------       --------
      <S>                                                    <C>             <C>                   <C>
      1997 (restated)
      ---------------
         Basic earnings per share
            Income available to
               common stockholders                           $  6,950,395       3,973,034            $1.75

         Effect of dilutive securities
            Stock options                                               -          32,344
                                                             -------------   ---------------

         Diluted earnings per share
            Income available to
               common stockholders                           $  6,950,395       4,005,378            $1.74
                                                             =============   ==============        ========

      1998 (restated)
      ---------------
         Basic earnings (loss) per share
            Income (loss) available to
               common stockholders                           $ (1,768,640)      3,917,788            $(.45)
                                                             =============   ==============        ========

      1999
      ----
         Basic earnings per share
            Income available to
               common stockholders                           $ 11,711,236       3,704,360            $3.16
                                                             =============   ==============        ========

</Table>

   During the years ended December 31, 1999 and 1998 there were no potentially
   dilutive securities outstanding. During the year ended December 31, 1997 all
   outstanding stock options were included in the computation of diluted
   earnings per share since the options' exercise price was less than the
   average market price of the common shares.



                                    F-16

<Page>

                  Paulson Capital Corp. and Subsidiary

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE J - LEASES

   Future minimum payments, by year and in the aggregate, required under
   non-cancelable operating leases with initial or remaining terms of one year
   or more consist of the following:


<Table>
<Caption>

           Year ended
          December 31,
          ------------
          <S>                                         <C>
              2000                                    $  274,176
              2001                                       274,176
              2002                                       114,240
                                                      ----------

                                                      $  662,592
                                                      ==========

</Table>

   The leases provide for payment of taxes and other expenses by the Company.
   Rental expense for the years ended December 31, 1999, 1998 and 1997
   approximated $265,000, $270,000, and $240,000, respectively.

NOTE K - EMPLOYEE BENEFIT PLANS

   Retirement benefits for employees of the Company, who have completed certain
   service requirements, are provided by a defined contribution profit-sharing
   plan. Plan contributions are determined by the Board of Directors.
   Contributions to the plan for the years ended December 31, 1999, 1998 and
   1997 were $600,000, $0 and $500,000, respectively.

NOTE L - CONTINGENCIES

   The Company and its Subsidiary have been named by individuals in certain
   legal actions, some of which claim state and federal securities law
   violations and claim principal and punitive damages. As preliminary hearings
   and discovery in these cases is not complete, it is not possible to assess
   the degree of liability, the probability of an unfavorable outcome or the
   impact on the Company's financial statements, if any. Management denies the
   charges in these legal actions and is vigorously defending against them. No
   provision for any liability that may result from the above contingencies has
   been made in the financial statements.

   The Company and its Subsidiary are defendants in a class action alleging
   violations of California securities law and other laws relating to a public
   offering in which the Subsidiary acted as the managing underwriter. The
   Subsidiary and the plaintiffs reached a settlement in principle during 1998,
   which is subject to court approval. The total payment by the Subsidiary under
   the settlement depends upon the number of purchasers in the public offering
   who file valid claims. Management believes the range of payment possible
   under the settlement is between approximately $350,000 and $900,000. An
   accrual of $500,000 has been recorded based upon management's estimate of the
   most likely amount.

NOTE M - NET CAPITAL REQUIREMENT

   The Subsidiary is subject to the net capital rule (Rule 15c3-1) of the
   Securities and Exchange Commission. This rule prohibits the Subsidiary from
   engaging in any securities transaction at a time when its "aggregate
   indebtedness" exceeds fifteen times its "net capital" as those terms are
   defined by the rule. At December 31, 1999, the Subsidiary's net capital and
   required net capital were $17,506,585 and $273,057, respectively, and its
   ratio of aggregate indebtedness to net capital was .234 to 1. The
   Subsidiary's absolute minimum net capital is $100,000.




                                    F-17

<Page>

                  Paulson Capital Corp. and Subsidiary

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE N - RESTATEMENT

   During the fourth quarter of 1999, the Company changed its method of
   accounting for underwriter warrants. Previously the Company recognized no
   value for these warrants. Upon reconsideration, it was determined that it is
   appropriate under generally accepted accounting principles to carry these
   securities at their estimated fair value. Accordingly, the financial
   statements for previous periods have been restated to correct this error in
   previously issued financial statements that were not in compliance with
   existing accounting principles generally accepted in the United States.

   The effect of the change on the 1999 financial statements was to increase
   investment income and earnings before income taxes by $8,002,000, net income
   by $4,933,000 and basic and diluted earnings per share by $1.33. For the year
   ended December 31, 1998, the effect of the restatement was to decrease
   investment income and earnings before income taxes by $2,811,000 increase net
   loss by $1,733,000 and increase the basic and diluted loss per share by $.44.
   For the year ended December 31, 1997, the effect of the restatement was to
   increase investment income and earnings before income taxes by
   $4,211,000, increase net income by $2,596,000 and increase the basic and
   diluted earnings per share by $.65. The effect of the adjustment for periods
   prior to 1997 was to increase shareholders' equity by $671,000.

   The effect of the restatement on each of the quarters for the years 1999,
   1998 and 1997 is as follows (unaudited):

<Table>
<Caption>
                                                                              Three months ended
                                                       -----------------------------------------------------------
                                                         March 31,      June 30,     September 30,    December 31,
                                                       -----------    -----------    -------------    ------------
<S>                                                    <C>            <C>            <C>              <C>
1999
----
Net income (loss), as previously reported              $   7112,963    $ 1,269,203    $    (426,746)   $  5,822,816
Effect of adjustment                                       936,000      2,398,000        1,603,000          (4,000)
                                                       -----------    -----------    -------------    ------------
Net income, as restated                                $ 1,048,963    $ 3,667,203    $   1,176,254    $  5,818,816
                                                       ===========    ===========    =============    ============

Earnings (loss) per share, as previously reported      $      0.03    $      0.34    $       (0.12)   $       1.61
Effect of adjustment                                          0.25           0.63             0.44               -
                                                       -----------    -----------    -------------    ------------
Earnings per share, as restated                        $      0.28    $      0.97    $        0.32    $       1.61
                                                       ===========    ===========    =============    ============
1998
----
Net income (loss), as previously reported              $   173,604    $  (879,490)   $  (2,101,563)   $  2,771,809
Effect of adjustment                                      (152,000)    (1,086,000)        (740,000)        245,000
                                                       -----------    -----------    -------------    ------------
Net income (loss), as restated                         $    21,604    $(1,965,490)   $  (2,841,563)   $  3,016,809
                                                       ===========    ===========    =============    ============

Earnings (loss) per share, as previously reported      $      0.04    $     (0.22)   $       (0.55)   $       0.70
Effect of adjustment                                         (0.03)         (0.28)           (0.17)           0.09
                                                       -----------    -----------    -------------    ------------
Earnings (loss) per share, as restated                 $      0.01    $     (0.50)   $       (0.72)   $       0.79
                                                       ===========    ===========    =============    ============

1997
----
Net income, as previously reported                     $   791,059    $   583,370    $   1,807,880    $  1,172,086
Effect of adjustment                                       250,000      1,311,000        2,032,000        (997,000)
                                                       -----------    -----------    -------------    ------------
Net income, as restated                                $ 1,041,059    $ 1,894,370    $   3,839,880    $    175,086
                                                       ===========    ===========    =============    ============
Earnings per share, as previously reported             $      0.20    $      0.15    $        0.45    $       0.30
Effect of adjustment                                          0.06           0.33             0.52           (0.26)
                                                       -----------    -----------    -------------    ------------
Basic earnings per share, as restated                  $      0.26    $      0.48    $        0.97    $       0.04
                                                       ===========    ===========    =============    ============

Diluted earnings per share, as previously reported     $      0.20    $      0.15    $        0.45    $       0.29
Effect of adjustment                                          0.06           0.32             0.52           (0.25)
                                                       -----------    -----------    -------------    ------------
Diluted earnings per share, as restated                $      0.26    $      0.47    $        0.97    $       0.04
                                                       ===========    ===========    =============    ============
</Table>

                                    F-18

<Page>

                      Paulson Capital Corp. and Subsidiary


                           SCHEDULE OF WARRANTS OWNED


                                  December 31,


<Table>
<Caption>

                                                       Shares      Exercise
                                                    Entitled to     Price        Expiration
             Description                              Purchase     Per-Share         Date
---------------------------------------------      -------------  ------------   ------------
<S>                                                <C>            <C>            <C>
Advantage Marketing Systems* (units)                    65,520    $       5.40   2002, 11/12
Audiohighway* (units)                                  163,900    $       7.80   2003, 12/17,
AVI Biopharma, Inc.* (units)                           112,700    $      10.80   2002, 06/03
C3, Inc.*                                              214,592    $      18.00   2002, 11/14
Cal-Maine Foods, Inc.*                                 177,100    $       8.40   2001, 12/10
Caring Products International, Inc.* (units)            83,075    $       6.00   2002, 12/09
Cell Robotics International, Inc. (units)               9.3725    $  25,000.00   2000, 09/18
Cell Robotics International, Inc.* (units)              29,800    $       9.90   2003, 02/01
Cellegy Pharmaceuticals, Inc.* (units)                  18,745    $      20.63   2000, 08/11
Complete Management, Inc.*                             107,720    $      10.80   2000, 12/27
Complete Management, Inc.*                              31,377    $      21.04   2001, 06/11
Cusac Industries, Ltd.* (units)                         11,901    $      12.00   2000, 01/11
E.Com International, Inc.*                              75,587    $       3.50   2002, 12/31
Evergreen Resources, Inc.                              134,375    $       6.90   2001, 10/22
Fortune Petroleum Corp.*                                50,000    $       4.00   1999, 05/19
Global Payment Technology ERC 2-6-96                   103,500    $       6.60   2000, 02/06
Hometown Auto Retailers NC*                            120,690    $      10.80   2003, 07/28
International Nursing Services, Inc.* (units)           15,301    $      28.20   1999, 09/12
Kyzen Corporation* (units)                              15,498    $      14.95   2000, 08/03
Microfield Graphics, Inc.*                              79,750    $       7.20   2000, 06/22
Microvision Inc. (units) ERC 8-27-97                   123,760    $       9.60   2001, 08/27
Neotherapeutics Inc. (units) ERC 9-25-97               161,000    $       9.12   2001, 09/25
Northern Bank of Commerce ERC 8-4-94                     2,000    $       6.60   1999, 08/04
Pacific Aerospace & Electronics* (units)               146,700    $       3.75   2001, 07/15
Pearce Systems International, Inc.* (units)             47,722    $       8.70   1999, 02/11
Premium Cigars International, Ltd.*                      2,000    $       8.40   2002, 08/21
R-B Rubber Products, Inc.*                              55,100    $       5.10   2000, 05/10
Sparta Surgical Corp.* (units)                          11,221    $      12.00   1999, 07/12
Supergen, Inc. (units) ERC 3-12-97                     268,950    $       7.20   2001, 03/12
Telepartners A/S* (units)                              102,437    $       6.00   2002, 06/30
WSG Systems, Inc.*                                     11.0260    $   6,000.00   2003, 03/31

</Table>

*Warrants valued at $0.00



                                       F-19

<Page>


                                                                     Schedule II

                        Paulson Capital Corp. and Subsidiary


                        Valuation and Qualifying Accounts


                   Years ended December 31, 1999, 1998 and 1997


<Table>
<Caption>

                              Balance     Additions-Charges                     Balance
                             Beginning       to Cost and        Deductions      at End
     Description              of Year         Expenses          Write-offs      of Year
------------------------    ------------  -----------------     -----------    -----------
<S>                         <C>           <C>                   <C>            <C>
Allowance for doubtful
   accounts:

Year ended Dec. 31, 1999    $    267,193     $        -         $  267,193     $        -
Year ended Dec. 31, 1998               -        267,193         $        -     $   267,193
Year ended Dec. 31, 1997               -              -                                  -

</Table>




                                       F-20

<Page>



                          SIGNATURES

Pursuant to the requirements of Section 13 or 15 of the Securities and
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: August 3, 2001                  By: /s/ CHESTER L.F. PAULSON
                                         --------------------------
                                          Chester L.F. Paulson
                                          President