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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON D.C. 20549

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Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the fiscal year ended



Commission file number:December 31, 2000



0-18188


FORM 10-KSB/A
(Amendment No. 1)

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

Oregon(State or other jurisdiction of incorporation or organization)

93-0589534(I.R.S. Employer Identification No.)811 S.W. Naito Parkway, Suite 200
Portland, OR(Address of principal
executive offices)

97204(Zip Code)


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 valueTitle of class

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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.

State
issuer's revenues for its most recent fiscal year:

$22,429,840

As
of March 19, 2001, 3,276,866 shares of the registrant's common stock, no par value, were outstanding and the aggregate market value of the shares of common stock of the
Registrant held by non-affiliates (based upon the average of the closing bid and asked prices of Registrant's shares in the over-the-counter market as of such date)
was $7,765,017.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Registrant's definitive proxy statement for the 2001 annual meeting of shareholders to be filed with the Securities and Exchange Commission are incorporated by
reference into Part III.

Transitional
Small Business Disclosure Format:

Yes / /  No /x/

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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

|(a) Financial Statements                                                                            |  | Page
|--------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Certified Public Accountants                                                  |  | F-1 
|Consolidated Balance Sheets as of December 31, 2000 and 1999                                        |  | F-2 
|Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998          |  | F-3 
|Consolidated Statement of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 |  | F-4 
|Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998          |  | F-5 
|Notes to Consolidated Financial Statements                                                          |  | F-7 
|Supplementary Schedule of Warrants Owned                                                            |  | F-15
|Schedule IIValuation and Qualifying Account                                                        |  | F-16

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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, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.

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, 2000 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, 2000. 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 29, 2001, (except for the last paragraph of Note C,
  as to which the date is February 16, 2001)

F1

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Paulson Capital Corp. and Subsidiary        CONSOLIDATED BALANCE SHEETS        December 31,

|                                     |                                                                                                                                 | 2000                      |            | 1999      
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ---------- | ----------
|ASSETS                              
|CURRENT ASSETS                       |                                                                                                                                 |                           |            |           
|                                     | Cash and cash equivalents                                                                                                       |                           | $          | 104,309   
|                                     | Receivable from clearing organization                                                                                           |                           |            | 8,878,083 
|                                     | Notes and other receivables                                                                                                     |                           |            | 1,247,520 
|                                     | Trading securities, at market value                                                                                             |                           |            | 1,305,989 
|                                     | Investment securities, at market value                                                                                          |                           |            | 13,063,135
|                                     | Underwriter warrants, at estimated fair value                                                                                   |                           |            |          
|                                     | Prepaid and deferred expenses                                                                                                   |                           |            | 865,986   
|                                     | Deferred income taxes                                                                                                           |                           |            | 5,298,000 
|                                     |                                                                                                                                 |                           |            |           
|                                     |                                                                                                                                 | Total current assets      |            |           
|                                     |                                                                                                                                 |                           |            |           
|NOTES RECEIVABLE                     |                                                                                                                                 |                           | 103,551    |           
|                                     |                                                                                                                                 |                           |            |           
|FURNITURE AND EQUIPMENT, net         |                                                                                                                                 |                           | 509,676    |           
|                                     |                                                                                                                                 |                           |            |           
|INVESTMENT IN REAL ESTATE            |                                                                                                                                 |                           | 169,900    |           
|                                     |                                                                                                                                 |                           |            |           
|                                     |                                                                                                                                 | $                         | 31,546,149 |           
|                                     |                                                                                                                                 |                           |            |           
|LIABILITIES AND SHAREHOLDERS' EQUITY
|CURRENT LIABILITIES                  |                                                                                                                                 |                           |            |           
|                                     | Accounts payable and accrued liabilities                                                                                        |                           | $          | 194,399   
|                                     | Payable to clearing organization                                                                                                |                           |            | 828,859   
|                                     | Compensation, employee benefits and payroll taxes                                                                               |                           |            | 1,037,465 
|                                     | Securities sold, not yet purchased, at market value                                                                             |                           |            | 31,496    
|                                     | Income taxes payable                                                                                                            |                           |            | 3,896,000 
|                                     | Deferred income taxes                                                                                                           |                           |            |          
|                                     |                                                                                                                                 |                           |            |           
|                                     |                                                                                                                                 | Total current liabilities |            |           
|                                     |                                                                                                                                 |                           |            |           
|DEFERRED INCOME TAXES                |                                                                                                                                 |                           | 39,100     |           
|SHAREHOLDERS' EQUITY                 |                                                                                                                                 |                           |            |           
|                                     | Preferred stock, no par value; authorized, 500,000 shares; issued and outstanding, no shares                                    |                           |            |          
|                                     | Common stock, no par value; authorized, 10,000,000 shares; issued and outstanding, 3,367,366 and 3,541,235 shares, respectively |                           |            | 1,080,011 
|                                     | Retained earnings                                                                                                               |                           |            | 24,438,819
|                                     |                                                                                                                                 |                           |            |           
|                                     |                                                                                                                                 |                           | 25,518,830 |           
|                                     |                                                                                                                                 |                           |            |           
|                                     |                                                                                                                                 | $                         | 31,546,149 |           
|                                     |                                                                                                                                 |                           |            |           

The
accompanying notes are an integral part of these statements.

F2

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Paulson Capital Corp. and Subsidiary        CONSOLIDATED STATEMENTS OF OPERATIONS        Year ended December 31,

|                                  |                                        | 2000                                |            | 1999       |           | 1998       |           
|--------------------------------- | -------------------------------------- | ----------------------------------- | ---------- | ---------- | --------- | ---------- | ----------
|Revenues                          |                                        |                                     |            |            |           |            |           
|                                  | Commissions                            |                                     | $          | 14,912,599 |           | $          | 15,075,567
|                                  | Corporate finance                      |                                     |            | 2,504,316  |           |            | 2,115,619 
|                                  | Investment income (loss)               |                                     |            | 2,869,445  |           |            | 21,640,280
|                                  | Trading income                         |                                     |            | 2,047,418  |           |            | 317,159   
|                                  | Interest and dividends                 |                                     |            | 91,650     |           |            | 16,641    
|                                  | Other                                  |                                     |            | 4,412      |           |            | 21,316    
|                                  |                                        |                                     |            |            |           |            |           
|                                  |                                        |                                     | 22,429,840 |            |           | 39,186,582 |           
|                                  |                                        |                                     |            |            |           |            |           
|Expenses                          |                                        |                                     |            |            |           |            |           
|                                  | Commissions and salaries               |                                     |            | 15,651,244 |           |            | 15,692,933
|                                  | Underwriting expenses                  |                                     |            | 522,830    |           |            | 1,350,372 
|                                  | Rent, telephone and quotation services |                                     |            | 961,014    |           |            | 890,708   
|                                  | Interest expense                       |                                     |            | 85         |           |            | 1,248     
|                                  | Professional fees                      |                                     |            | 302,952    |           |            | 394,368   
|                                  | Bad debt expense                       |                                     |            | 436,984    |           |            |          
|                                  | Travel and entertainment               |                                     |            | 284,542    |           |            | 333,927   
|                                  | Settlements                            |                                     |            | 59,336     |           |            | 59,000    
|                                  | Other                                  |                                     |            | 1,782,754  |           |            | 1,152,530 
|                                  |                                        |                                     |            |            |           |            |           
|                                  |                                        |                                     | 20,001,741 |            |           | 19,875,086 |           
|                                  |                                        |                                     |            |            |           |            |           
|                                  |                                        | Earnings (loss) before income taxes |            |            | 2,428,099 |            |           
|Income tax expense (benefit)      |                                        |                                     | 1,436,313  |            |           | 7,600,260  |           
|                                  |                                        |                                     |            |            |           |            |           
|                                  |                                        | NET EARNINGS (LOSS)                 |            | $          | 991,786   |            | $         
|                                  |                                        |                                     |            |            |           |            |           
|Basic earnings (loss) per share   |                                        | $                                   | 0.29       |            | $         | 3.16       |           
|                                  |                                        |                                     |            |            |           |            |           
|Diluted earnings (loss) per share |                                        | $                                   | 0.28       |            | $         | 3.16       |           
|                                  |                                        |                                     |            |            |           |            |           

The
accompanying notes are an integral part of these statements.

F3

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Paulson Capital Corp. and Subsidiary        CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY        Three year period ended December 31, 2000

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

The
accompanying notes are an integral part of these statements.

F4

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Paulson Capital Corp. and Subsidiary        CONSOLIDATED STATEMENTS OF CASH FLOWS        Year ended December 31,

|                                                 |                                                                                                     | 2000                                                                                     |                                          | 1999                                                |              | 1998       |            
|------------------------------------------------ | --------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------------------------- | --------------------------------------------------- | ------------ | ---------- | -----------
|Increase (Decrease) in Cash and Cash Equivalents |                                                                                                     |                                                                                          |                                          |                                                     |              |            |            
|Cash flows from operating activities             |                                                                                                     |                                                                                          |                                          |                                                     |              |            |            
|                                                 | Net earnings (loss)                                                                                 |                                                                                          | $                                        | 991,786                                             |              | $          | 11,711,236 
|                                                 | Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities |                                                                                          |                                          |                                                     |              |            |            
|                                                 |                                                                                                     | Unrealized (appreciation) depreciation on investment securities and underwriter warrants |                                          |                                                     | 26,447,450   |            |            
|                                                 |                                                                                                     | Realized (gain) loss on investment securities                                            |                                          |                                                     | (29,316,895  | )          |            
|                                                 |                                                                                                     | Deferred income taxes                                                                    |                                          |                                                     | (10,101,400  | )          |            
|                                                 |                                                                                                     | Common stock issued for compensation of directors                                        |                                          |                                                     |             |            |            
|                                                 |                                                                                                     | Compensation expense on stock option grants                                              |                                          |                                                     | 317,750      |            |            
|                                                 |                                                                                                     | Depreciation and amortization                                                            |                                          |                                                     | 182,785      |            |            
|                                                 |                                                                                                     | Loss from sale of furniture and equipment                                                |                                          |                                                     |             |            |            
|                                                 |                                                                                                     | Write-down of notes receivable, net of recoveries                                        |                                          |                                                     | 436,984      |            |            
|                                                 |                                                                                                     | Interest accrued on notes receivable                                                     |                                          |                                                     | (3,551       | )          |            
|                                                 |                                                                                                     | Changes in assets and liabilities                                                        |                                          |                                                     |              |            |            
|                                                 |                                                                                                     |                                                                                          | Receivables                              |                                                     |              | (1,454,511 | )          
|                                                 |                                                                                                     |                                                                                          | Trading securities                       |                                                     |              | 932,809    |            
|                                                 |                                                                                                     |                                                                                          | Income taxes receivable/payable          |                                                     |              | 2,779,200  |            
|                                                 |                                                                                                     |                                                                                          | Prepaid and deferred expenses            |                                                     |              | (196,387   | )          
|                                                 |                                                                                                     |                                                                                          | Accounts payable and accrued liabilities |                                                     |              | (3,950,643 | )          
|                                                 |                                                                                                     |                                                                                          | Securities sold, not yet purchased       |                                                     |              | (34,298    | )          
|                                                 |                                                                                                     |                                                                                          |                                          |                                                     |              |            |            
|                                                 |                                                                                                     |                                                                                          |                                          | Net cash provided by (used in) operating activities |              |            | (12,968,921
|                                                 |                                                                                                     |                                                                                          |                                          |                                                     |              |            |            
|                                                 | Cash flows from investing activities                                                                |                                                                                          |                                          |                                                     |              |            |            
|                                                 |                                                                                                     | Purchases of investment securities                                                       |                                          |                                                     | (117,771,535 | )          |            
|                                                 |                                                                                                     | Proceeds from sale of investment securities                                              |                                          |                                                     | 132,268,612  |            |            
|                                                 |                                                                                                     | Proceeds from repayment of notes receivable                                              |                                          |                                                     |             |            |            
|                                                 |                                                                                                     | Issuance of note receivable                                                              |                                          |                                                     | (100,000     | )          |            
|                                                 |                                                                                                     | Additions to furniture and equipment                                                     |                                          |                                                     | (166,745     | )          |            
|                                                 |                                                                                                     |                                                                                          |                                          |                                                     |              |            |            
|                                                 |                                                                                                     |                                                                                          |                                          | Net cash provided by (used in) investing activities |              |            | 14,230,332 
|                                                 |                                                                                                     |                                                                                          |                                          |                                                     |              |            |            

The
accompanying notes are an integral part of these statements.

F5

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Paulson Capital Corp. and Subsidiary        CONSOLIDATED STATEMENTS OF CASH FLOWSCONTINUED        Year ended December 31,

|                                               |                                                       | 2000 |         | 1999                                                 |   | 1998    |           
|---------------------------------------------- | ----------------------------------------------------- | ---- | ------- | ---------------------------------------------------- | - | ------- | ----------
|Cash flows from financing activities           |                                                       |      |         |                                                      |   |         |           
|                                               | Proceeds from issuance of stock                       |      | $       | 71,000                                               |   | $       |          
|                                               | Payments to retire common stock                       |      |         | (1,276,312                                           | ) |         | (1,116,812
|                                               |                                                       |      |         |                                                      |   |         |           
|                                               |                                                       |      |         | Net cash used in financing activities                |   |         | (1,205,312
|                                               |                                                       |      |         |                                                      |   |         |           
|                                               |                                                       |      |         | Net Increase (Decrease) in Cash and Cash Equivalents |   |         | 56,099    
|Cash and cash equivalents at beginning of year |                                                       |      | 48,210  |                                                      |   | 100,345 |           
|                                               |                                                       |      |         |                                                      |   |         |           
|Cash and cash equivalents at end of year       |                                                       | $    | 104,309 |                                                      | $ | 48,210  |           
|                                               |                                                       |      |         |                                                      |   |         |           
|Cash paid during the year for                  |                                                       |      |         |                                                      |   |         |           
|                                               | Interest                                              |      | $       | 85                                                   |   | $       | 1,248     
|                                               |                                                       |      |         |                                                      |   |         |           
|                                               | Income taxes                                          |      | $       | 8,785,000                                            |   | $       | 1,441,715 
|                                               |                                                       |      |         |                                                      |   |         |           
|Noncash investing and financing activity       |                                                       |      |         |                                                      |   |         |           
|                                               | Repayment of secured demand note collateral agreement |      | $       |                                                     |   | $       |          
|                                               |                                                       |      |         |                                                      |   |         |           

The
accompanying notes are an integral part of these statements.

F6

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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.Security 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. Changes in the value of these securities are reflected currently in the results of operations.

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.

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.

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

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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

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.

NOTE BRECEIVABLE FROM AND PAYABLE TO CLEARING ORGANIZATION

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.

F8

---

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

NOTE CNOTES AND OTHER RECEIVABLES

Notes and other receivables consist of the following:

2000

1999Notes receivable

$
741,854

$
Employees


97,051


558,131Independent brokers


306,647


59,045Other


101,968


54,338$
1,247,520

$
671,514


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, 2000, 1999, and 1998, receivables from employees and independent brokers of $175,702, $80,379, and $85,448, respectively, were
determined by management to be uncollectible and written off.

The
Company has a note receivable of $103,551 (including $3,551 of accrued interest). This note is unsecured, has an interest rate of 7% and does not have a stated due date.

At
December 31, 2000 the Company had a $1,100,000 (plus related accrued interest of $78,838) unsecured note receivable from a company that was subordinated to the interest of another
creditor. This note had an interest rate of 6% and was due October 21, 2001. On February 16, 2001, the Company settled this note in exchange for stock of the debtor. The value of the stock received
was $741,854 on February 16, 2001. Accordingly, the note receivable was written down to $741,854 at December 31, 2000.

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:

|                          |  | 2000 |           | 1999
|------------------------- |  | ---- | --------- | ----
|
|Common stock              |  | $    | 886,732   |     
|State and municipal bonds |  |      | 219,008   |     
|Corporate bonds           |  |      | 200,249   |     
|                          |  |      |           |     
|                          |  | $    | 1,305,989 |     
|                          |  |      |           |     

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.

F9

---

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, 2000 these securities consist of corporate stocks and warrants at estimated fair value of $1,021,901 and a convertible debenture valued at $100,000. 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. A summary of the investment securities portfolio
follows:

|                  |                    | Cost |            | Market
Value |   | Unrealized
Gain (Loss) |            | Carrying
Value
|----------------- | ------------------ | ---- | ---------- | ------------ | - | ---------------------- | ---------- | --------------
|December 31, 2000 |                    |      |            |              |   |                        |            |               
|                  | Corporate equities |      | $          | 25,109,289   |   | $                      | 12,818,560 |               
|                  | Corporate warrants |      |            | 583,851      |   |                        | 144,575    |               
|                  | Corporate bonds    |      |            | 202,420      |   |                        | 100,000    |               
|                  |                    |      |            |              |   |                        |            |               
|                  |                    | $    | 25,895,560 |              | $ | 13,063,135             |            | $             
|                  |                    |      |            |              |   |                        |            |               
|December 31, 1999 |                    |      |            |              |   |                        |            |               
|                  | Corporate equities |      | $          | 10,802,353   |   | $                      | 11,481,077 |               
|                  | Corporate warrants |      |            | 949,717      |   |                        | 2,697,800  |               
|                  | Corporate bonds    |      |            | 102,420      |   |                        | 21,890     |               
|                  |                    |      |            |              |   |                        |            |               
|                  |                    | $    | 11,854,490 |              | $ | 14,200,767             |            | $             
|                  |                    |      |            |              |   |                        |            |               

Realized
gain (loss) included in the determination of net earnings was $29,316,895, $8,083,884, and $(404,441), for the years ended December 31, 2000, 1999 and 1998, respectively.

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 period for which the warrants are restricted 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.

F10

---

The following table summarized activity in underwriter warrants:

Estimated value at January 1, 1998

$
5,299,000Unrealized loss


(2,811,000
)Estimated fair value at December 31, 1998


2,488,000Realized gain


(6,852,854
)Unrealized gain


14,854,854Estimated fair value at December 31, 1999


10,490,000Cost of warrants exercised, but not sold, and transferred to securities owned


(398,331
)Realized gain


(23,472,158
)Unrealized gain


13,380,489Estimated fair value at December 31, 2000

$



NOTE FFURNITURE AND EQUIPMENT

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

2000

1999Office equipment

$
1,304,545

$
1,173,097Leasehold improvements


70,571


35,274Vehicles


65,619


65,6191,440,735


1,273,990Less accumulated depreciation and amortization


931,059


748,274$
509,676

$
525,716


NOTE GINCOME TAXES

Income tax expense (benefit) consists of the following:

|                               |         | 2000 |             | 1999       |   | 1998      |          
|------------------------------ | ------- | ---- | ----------- | ---------- | - | --------- | ---------
|Current tax expense            |         |      |             |            |   |           |          
|                               | Federal |      | $           | 8,638,164  |   | $         | 1,921,593
|                               | State   |      |             | 2,899,549  |   |           | 782,794  
|                               |         |      |             |            |   |           |          
|                               |         |      | 11,537,713  |            |   | 2,704,387 |          
|                               |         |      |             |            |   |           |          
|Deferred tax expense (benefit) |         |      |             |            |   |           |          
|                               | Federal |      |             | (7,514,500 | ) |           | 4,338,537
|                               | State   |      |             | (2,586,900 | ) |           | 557,336  
|                               |         |      |             |            |   |           |          
|                               |         |      | (10,101,400 | )          |   | 4,895,873 |          
|                               |         |      |             |            |   |           |          
|                               |         | $    | 1,436,313   |            | $ | 7,600,260 |          
|                               |         |      |             |            |   |           |          

F11

---

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:

|                                                           |  | 2000 |           | 1999 |   | 1998      | 
|---------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | 
|Income tax expense (benefit) at statutory federal tax rate |  | $    | 825,560   |      | $ | 6,566,000 | 
|State and local taxes net of federal benefit               |  |      | 271,257   |      |   | 841,000   | 
|Large corporation incremental rate                         |  |      | 251,707   |      |   |          | 
|Permanent and other differences                            |  |      | 87,789    |      |   | 193,260   | 
|                                                           |  |      |           |      |   |           | 
|                                                           |  | $    | 1,436,313 |      | $ | 7,600,260 | 
|                                                           |  |      |           |      |   |           | 

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

2000

1999Unrealized depreciation (appreciation) on securities

$
5,222,000

$
(4,923,000
)Accrued expenses





48,000State net operating loss carryforwards


76,000


67,100Fixed asset depreciation


(39,100
)

(34,600
)$
5,258,900

$
(4,842,500
)


The
state net operating loss carryforwards expire through 2015.

NOTE HCOMMON STOCK

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 2000, 1999 or 1998.

On
September 30, 1999, the Board of Directors approved the 1999 Stock Option Plan. The plan received shareholder approval at the June 20, 2000 shareholder meeting. The plan reserves
500,000 shares of the Company's common stock for issuance upon exercise of the options. The 1999 Stock Option Plan provides for the grant of incentive options and nonqualified options. The options
granted during 2000 have an exercise price of $4.4375, vest immediately and expire on August 15, 2004. The market price at the date of grant was $7.00, which resulted in the Company recording
compensation expense of $317,750 during the year ended December 31, 2000. The estimated fair value of the options

F12

---

at the date of grant, as calculated using the Black-Scholes option-pricing model, was $4.359 per share. The following table summarizes activity under the Plan for the year ended December 31, 2000:

Shares
Under
Option

Exercise
PriceBalance at December 31, 1999



$
Granted

124,000


4.44Exercised

(16,000
)

4.44Canceled




Balance at December 31, 2000

108,000


4.44


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. 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 net income and earnings
per share would have been to decrease net income and earnings per share by approximately $40,500 and $.01 for the year ended December 31, 2000. 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 55%; risk-free interest rate of 6.2% and expected life
of 4 years.

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, 2000:

|     |                                 | Income
(Numerator)                             |  | Weighted
Average
Shares
(Denominator) |            | Per
Share
Amount |          
|---- | ------------------------------- | ---------------------------------------------- |  | ------------------------------------- | ---------- | ---------------- | ---------
|1998 |                                 |                                                |  |                                       |            |                  |          
|     | Basic earnings (loss) per share |                                                |  |                                       |            |                  |          
|     |                                 | Income (loss) available to common stockholders |  | $                                     | (1,768,640 | )                | 3,917,788
|     |                                 |                                                |  |                                       |            |                  |          
|1999 |                                 |                                                |  |                                       |            |                  |          
|     | Basic earnings per share        |                                                |  |                                       |            |                  |          
|     |                                 | Income available to common stockholders        |  | $                                     | 11,711,236 |                  | 3,704,360
|     |                                 |                                                |  |                                       |            |                  |          
|2000 |                                 |                                                |  |                                       |            |                  |          
|     | Basic earnings per share        |                                                |  |                                       |            |                  |          
|     |                                 | Income available to common stockholders        |  | $                                     | 991,786    |                  | 3,474,142
|     | Effect of dilutive securities   |                                                |  |                                       |            |                  |          
|     |                                 | Stock options                                  |  |                                       |           |                  | 12,546   
|     |                                 |                                                |  |                                       |            |                  |          
|     | Diluted earnings per share      |                                                |  |                                       |            |                  |          
|     |                                 | Income available to common stockholders        |  | $                                     | 991,786    |                  | 3,486,688
|     |                                 |                                                |  |                                       |            |                  |          

F13

---

During
the year ended December 31, 2000 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. During the years ended December 31, 1999 and 1998 there were no potentially dilutive securities outstanding.

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:

Year ending December 31,2001

$
309,2362002


143,457


The
leases provide for payment of taxes and other expenses by the Company. Rental expense for the years ended December 31, 2000, 1999 and 1998 approximated $272,000, $265,000, and
$270,000, 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, 2000, 1999 and 1998 were $300,000 $600,000, and $0, 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, if
any, that may result from the above contingencies has been made in the financial statements.

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, 2000, the Subsidiary's net
capital and required net capital were $18,029,122 and $100,000, respectively, and its ratio of aggregate indebtedness to net capital was .06 to 1. The Subsidiary's minimum net capital requirement is
$100,000.

F14

---



Paulson Capital Corp. and Subsidiary        SUPPLEMENTARY SCHEDULE OF WARRANTS OWNED

|Description                                               |  | Shares
Entitled to
Purchase |  | Exercise
Price
Per-Share |          | Expiration
Date
|--------------------------------------------------------- |  | --------------------------- |  | ------------------------ | -------- | ---------------
|AdStar.com (units) ERC 12-17-00                           |  | 60,500                      |  | $                        | 7.20     |                
|AdStar.com, Inc. ERC 9-25-01                              |  | 149,000                     |  | $                        | 1.80     |                
|Advantage Marketing Systems (units) ERC 11-12-98          |  | 65,520                      |  | $                        | 5.40     |                
|Audiohighway (units) ERC 12-17-99                         |  | 163,900                     |  | $                        | 7.80     |                
|AVI Biopharma, Inc. (units) ERC 6-3-98 (ANTIVIRALS)       |  | 112,700                     |  | $                        | 10.80    |                
|AVI Biopharma, Inc. (units) ERC 7-26-01                   |  | 151,014                     |  | $                        | 8.70     |                
|Beta Oil & Gas, Inc. ERC 7-30-00                          |  | 9,300                       |  | $                        | 7.50     |                
|Charles & Colvard, Ltd. ERC 11-14-98 (C3, Inc.)           |  | 214,592                     |  | $                        | 18.00    |                
|Cal-Maine Foods, Inc. ERC 12-11-97                        |  | 177,100                     |  | $                        | 8.40     |                
|Careside, Inc. (units) ERC 06-15-00                       |  | 92,650                      |  | $                        | 9.00     |                
|Caring Products International, Inc. (units) ERC 12-9-98   |  | 83,075                      |  | $                        | 6.00     |                
|Cell Robotics International, Inc. (units) ERC 2-2-99      |  | 29,800                      |  | $                        | 9.90     |                
|Complete Management, Inc. ERC 6-11-97                     |  | 31,377                      |  | $                        | 21.04    |                
|Dag Media, Inc. ERC 05-12-00                              |  | 90,562                      |  | $                        | 7.80     |                
|E.Com International, Inc. ERC 12-5-97                     |  | 75,587                      |  | $                        | 3.50     |                
|Hometown Auto Retailers NC ERC 7-28-99                    |  | 120,690                     |  | $                        | 10.80    |                
|Imageware Systems, Inc. (units) ERC 3-30-01               |  | 106,323                     |  | $                        | 9.60     |                
|Neotherapeutics Inc. (units) ERC 9-25-97                  |  | 161,000                     |  | $                        | 9.12     |                
|Pacific Aerospace & Electronics (Units) ERC 7-15-97 (PCT) |  | 146,700                     |  | $                        | 3.75     |                
|Pacific Mercantile Bancorp ERC 6-15-01                    |  | 158,350                     |  | $                        | 9.60     |                
|Premium Cigars International, Ltd. ERC 8-21-98            |  | 2,000                       |  | $                        | 8.40     |                
|3D shopping.com (units) ERC 07-20-00                      |  | 73,466                      |  | $                        | 14.40    |                
|WSG Systems, Inc. ERC 4-8-99                              |  | 11.0260                     |  | $                        | 6,000.00 |                

F15

---



Schedule II

Paulson Capital Corp. and Subsidiary        Valuation and Qualifying Accounts        Years ended December 31, 2000, 1999 and 1998

|Description                      |  | Balance
Beginning
of Year |         | Additions-Charges
to Cost and
Expenses |   | Deductions
Write-offs |  | Balance
at End
of Year
|-------------------------------- |  | ------------------------- | ------- | -------------------------------------- | - | --------------------- |  | ----------------------
|Allowance for doubtful accounts: |  |                           |         |                                        |   |                       |  |                       
|Year ended Dec. 31, 2000         |  | $                         |        |                                        | $ | 436,984               |  | $                     
|Year ended Dec. 31, 1999         |  |                           | 267,193 |                                        |   |                      |  |                       
|Year ended Dec. 31, 1998         |  |                           |        |                                        |   | 267,193               |  | $                     

F16

---

SIGNATURES

Pursuant to the requirements of Section 13 or 15 of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on
its behalf by the undersigned, thereunto duly authorized.

|                     |  | Paulson Capital Corp.
|-------------------- |  | ---------------------
|Date: August 3, 2001 |  | By:                  

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