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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
December 31, 2000 | Commission file number: 0-18188
|------------------------------------------- | -------------------------------

FORM 10-KSB/A

(Amendment No.2)

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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: $15,876,000

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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PART I

ITEM 1. DESCRIPTION OF BUSINESS



Paulson Capital Corp. ("Paulson Capital" or the "Company"), established in 1970, is a holding company whose only operating subsidiary is Paulson Investment
Company, Inc. ("PIC"), a full service brokerage firm engaged in the purchase and sale of securities from and to the public and for its own account and in investment banking activities. The
Company operates in one industry segment, the financial services industry. At December 31, 2000, PIC employed 18 brokers and had independent contractor arrangements with 65 brokers registered
with the National Association of Securities Dealers, Inc. ("NASD"). PIC also employed a support staff of 50 persons in its headquarters in Portland, Oregon and in certain of its branch offices.
At December 31, 2000 PIC had 35 branch offices throughout the United States.

The
Company's headquarters are located at 811 S.W. Naito Parkway, Suite 200, Portland, Oregon 97204. Its telephone number is (503) 243-6000.



Virtually all of Paulson Capital's business is carried on through PIC. PIC is involved in the purchase and sale of most investment securities but is not
involved in commodities or futures. Three broad categories of securities activities contribute to revenues of PIC: general securities (or retail), trading and market making (or wholesale) and
corporate finance/investment banking. PIC also receives revenues from gains and losses in investment accounts, from the exercise of underwriter warrants received in connection with its corporate
finance activities, and from other sources.

The
following table indicates the approximate percentage of revenues that were accounted for by each of these categories and from investment income (including underwriter warrants) in
the last three fiscal years:

|                   |  | 2000 |   | 1999 |   | 1998 |  
|------------------ |  | ---- | - | ---- | - | ---- | -
|General Securities |  | 94   | % | 43   | % | 124  | %
|Trading            |  | 12   |   | 1    |   | 6    |  
|Corporate Finance  |  | 34   |   | 15   |   | 54   |  
|Investment Income  |  | (41  | ) | 40   |   | (85  | )
|Other              |  | 1    |   | 1    |   | 1    |  

In
this table, "Trading" includes only the net profit or loss from PIC's trading activities. See "Trading and Market Making."



As a securities broker, PIC acts as agent for its customers in the purchase and sale of common and preferred stocks, options and debt securities traded on
securities exchanges or in the over-the-counter ("OTC") market. A major portion of its revenues is derived from commissions from customers on these transactions. In the OTC
market, transactions with customers in securities not listed on an exchange may be effected as principal, rather than agent, primarily where PIC is a market maker in that security. Customer
transactions in securities are effected either on a cash or margin basis.

PIC
enters into dealer agreements with mutual fund management companies and publicly registered limited partnerships. Commissions on the sale of these securities are derived from the
standard dealers discounts, which range from approximately 1 percent to 8.5 percent of the purchase

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price of the securities, depending on the terms of the dealer agreement and the amount of the purchase. PIC does not generally sell interests in limited partnerships which are not publicly registered.

Pursuant
to an agreement between PIC and Correspondent Services Corporation ("CSC"), a subsidiary of PaineWebber Group, Inc., CSC carries all of PIC's customer securities
accounts and performs the following services: (1) preparation and mailing of monthly statements to PIC customers; (2) settlement of contracts and transactions in securities between PIC
and other broker-dealers and between PIC and its customers; (3) custody and safe-keeping of securities and cash, the handling of margin accounts, dividends, exchanges, rights
offerings and tender offers; and (4) the execution of customer orders placed on an exchange. PIC determines the amount of commission to be charged to its customers on agency transactions and
the price of securities purchased or sold in principal transactions. CSC receives compensation based on the size of the transaction, subject to certain minimum and maximum amounts. The agreement
between PIC and CSC may be canceled by either party upon 60 days written notice, which period may be reduced in certain events. In the event of a liability arising from a bad debt from a
customer, PIC is required to indemnify CSC against any loss. This potential liability is uninsured.

In
addition to providing clearing services for PIC, CSC loans money to PIC in the ordinary course of PIC's business, pursuant to an arrangement under which CSC agrees to finance PIC's
trading accounts. At December 31, 2000, no net loans were outstanding pursuant to this arrangement. See "Item 6Management's Discussion and Analysis or Plan of Operation."



In addition to executing trades as an agent, PIC regularly acts as a principal in executing trades in equity securities, corporate debt securities and
municipal bonds. The amount of trading by PIC in the high yield bond market has not been material. At December 31, 2000, PIC made a market in 34 securities of 25 issuers. Of these, 21 were
corporations for which PIC has acted as managing or co-managing underwriter of public financings. In addition, at December 31, 2000, PIC held securities of 27 companies in its
investment account. In 2000, the value of securities held in the trading accounts and investment account ranged between $14,369,124 and $48,333,493. The level of positions carried in PIC's trading and
investment accounts fluctuates significantly. The size of the securities positions at any date may not be representative of PIC's exposure on any other date, because the securities positions vary
substantially depending upon economic and market conditions, the allocation of capital among types of inventories, underwriting commitments, customer demands and trading volume. The aggregate
value of inventories that PIC may carry is limited by certain requirements under the SEC's net capital rules. See "Net Capital Requirements."

PIC's
market making activities are conducted both with other dealers in the "wholesale market" and with PIC's customers. Transactions with customers are effected as principal at a net
price equal to the current interdealer price plus or minus the approximate equivalent of a brokerage commission. Securities are purchased primarily to provide an inventory for customers who wish to
buy, and short sales are likewise made primarily to serve customers. PIC's transactions as principal expose PIC to risk because securities positions are subject to fluctuations in market value and
liquidity. Profits or losses on trading and investment positions depend upon the skills of the employees in PIC's trading department and employees responsible for taking investment positions. The
trading department is headquartered in PIC's Portland, Oregon office.



PIC raises capital through public offerings of securities for corporations that are engaged in a variety of businesses. PIC participates in underwritings of
corporate securities as managing underwriter and as a syndicate member. Management of an underwriting account is generally more profitable than

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participation as a member of an underwriting syndicate. Revenues generated by syndicate participations have not been material.

PIC
generally underwrites public offerings of securities in the range of $5 million to $20 million on a "firm commitment" basis, which means that it agrees to purchase a
specific amount of securities from the issuer at a discount after the registration statement for the offering is declared effective by the Securities and Exchange Commission (the "SEC") and resells
the securities to the public at a specified price. The underwriting involves risk of loss if PIC is unable to resell at a profit the securities it is committed to purchase. This risk is usually
reduced by accepting other stock brokerage firms as a part of an underwriting syndicate in which each member commits to purchase a specified amount of the offering. PIC and other underwriters may also
sell a portion of their commitment through a "selling group" of other stock brokerage firms that participate in selling the offering but are not subject to an underwriter's commitment. As an
underwriter, PIC is also subject to potential liability under federal and state securities laws and other laws if the registration statement or prospectus contains a material misstatement or omission.
PIC's potential liability as an underwriter is uninsured.

The
commitment of capital by PIC between the time a firm commitment underwriting agreement becomes effective and the time PIC resells the securities constitutes a charge against its
net capital.
Accordingly, PIC's participation in or initiation of underwritings may be limited by the financial requirements of the SEC and NASD. See "Net Capital Requirements."

Between
June 1, 1978 and December 31, 2000 PIC acted as the managing underwriter or co-managing underwriter for 139 securities offerings, raising
approximately $870 million for corporate finance clients. Of these, 85 were initial public offerings. PIC typically receives 2 to 3 percent of the aggregate amount of money raised in an
offering to cover nonaccountable expenses and between 7 and 9 percent as compensation to underwriters, selling group members and registered representatives, although these percentages may be
lower for larger transactions. PIC also typically receives warrants to purchase securities, equal to 10 percent of the securities sold in the offering, for a period of five years at a price
equal to 120 percent of the public offering price, although a portion of these warrants are typically transferred as compensation to persons associated with PIC and, in certain cases, to other
major underwriters in the public offering. See "Item 6Management's Discussion and Analysis or Plan of OperationLiquidity and Capital Resources."



PIC branch offices are generally run by independent contractors that assume liability for all the operating expenses of the branch. PIC typically receives
between 15 and 20 percent of the gross commission earned by the branch, with the balance retained by the branch to pay its expenses and staff. Persons in these branches are registered with PIC,
and PIC assumes the same compliance and regulatory obligations as would be the case if PIC were fully responsible for the branch's expenses. As of December 31, 2000, PIC had 35 branch offices
in Alabama, California, Connecticut, District of Columbia, Georgia, Idaho, Nevada, New Jersey, New York, Oregon, Utah and Washington. All of these branches except one in Salem, Oregon are operating as
independent contractor offices. PIC continues to be responsible for all expenses of the Salem office.



PIC employs three persons that devote a majority of their time to gathering and analyzing information which is intended to provide PIC with an adequate basis
for performing its investment banking activities and to provide customers with a regular flow of information on the companies for which PIC has in the past provided investment banking services.

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PIC is registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934. It is also registered as a broker-dealer under the laws of 45
states and Washington, D.C. PIC is a member of the NASD.

The
securities business is subject to extensive regulation under federal and state laws. The principal purpose of regulation and discipline of broker-dealers is the protection of
customers and the securities markets rather than protection of creditors and stockholders of broker-dealers. The SEC is the federal agency charged with administration of the federal securities laws.
Much of the regulation of broker-dealers, however, has been delegated to self-regulatory organizations, principally the NASD. These self-regulatory organizations adopt rules
(subject to approval by the SEC) that govern the industry and conduct periodic examinations of member broker-dealers. Securities firms are also subject to regulation and examination by state
securities commissions in the states in which they are registered.

The
regulations to which broker-dealers are subject cover all aspects of the securities business, including sales methods, trading practices among broker-dealers, capital structure of
securities firms, record keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and by self-regulatory bodies or
changes in the interpretation or enforcement of existing laws and rules often affect directly the method of operation and profitability of broker-dealers. The SEC, NASD and state regulatory
authorities may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees.



PIC is required to maintain minimum "net capital" under the SEC's net capital rule of not less than 6.67 percent of its aggregate indebtedness. As of
December 31, 2000, PIC had net capital of $18,029,122, which exceeded its minimum requirement of $100,000 by $17,929,122. The ratio of aggregate indebtedness of $1,197,364 to net capital of
$18,029,122 on December 31, 2000 was approximately 0.07 to 1. In a public offering in which PIC acts as an underwriter, PIC must have sufficient net capital to cover the amount of securities
underwritten, applying applicable formulae mandated by the SEC, during the period between effectiveness and the closing of the transaction (usually about one week). This results in a significant
temporary increase in PIC's required net capital. In many cases, the amount of securities underwritten by PIC has been limited by its net capital. Any significant reduction in PIC's net capital, even
if PIC were still in compliance with the SEC's net capital rule for its retail and trading activities, could have a material adverse impact on PIC's ability to continue its investment banking
activities.



All aspects of PIC's business are highly competitive. In its general brokerage activities, PIC competes directly with numerous other broker-dealers, many of
which are large well known firms with substantially greater financial and personnel resources than PIC. Many of PIC's competitors employ extensive advertising and actively solicit potential clients in
order to increase business. In addition, brokerage firms compete by furnishing investment research publications to existing clients, the quality and breadth of which are considered important in the
development of new business and the retention of existing clients. PIC also competes with a number of smaller regional brokerage firms.

Some
commercial banks and thrift institutions offer securities brokerage services. Many commercial banks offer a variety of investment banking services. Competition among financial
services firms also exists for investment representatives and other personnel.

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The securities industry has become considerably more concentrated and more competitive since the Company was founded, as numerous securities firms have either ceased operations or
have been acquired by or merged into other firms. This trend has been particularly pronounced among firms similar in size and business mix to PIC. In addition, companies not engaged primarily in the
securities business, but with substantial financial resources, have acquired leading securities firms. These developments have increased competition from firms with greater capital resources than
those of the Company. Various legislative and regulatory developments have tended to increase competition within the industry or reduced profits for the industry. In particular, various recent
developments have tended to increase competition from commercial banks.

The
securities industry has experienced substantial commission discounting by broker-dealers competing for brokerage business. In addition, an increasing number of specialized firms
now offer "discount" services to individual customers. These firms generally effect transactions for their customers on an "execution only" basis without offering other services such as portfolio
valuation, investment recommendations and research. A growing number of discount brokerage firms offer their services over the Internet, further decreasing offered commission rates and increasing ease
of use for customers. The continuation of such discounting and an increase in the number of new and existing firms offering discounts could adversely affect the Company. In addition, rapid growth in
the mutual fund industry is presenting potential customers of PIC with an increasing number of alternatives to traditional stock brokerage accounts.

In
its investment banking activities, PIC competes with other brokerage firms, venture capital firms, banks and all other sources of capital for small, growing companies. Since PIC
generally manages offerings smaller than $20 million, it does not typically compete with the investment banking
departments of large, well-known national brokerage firms. Nevertheless, PIC occasionally manages larger offerings. In addition, large national and regional investment banking firms
occasionally manage offerings of a size that is competitive with PIC, typically for fees and compensation less than that charged by PIC. When the market for initial public offerings is active, many
small regional firms that do not typically engage in investment banking activities also begin to compete with PIC.



At December 31, 2000, PIC had 68 employees, of whom 50 were executives and support staff and 18 were involved in brokerage activities and compensated
primarily on a commission basis. PIC also had independent contractor arrangements with 65 independent contractors, all of whom are compensated solely on a commission basis. Paulson Capital had no
employees separate from PIC.

ITEM 2.  DESCRIPTION OF PROPERTY

PIC leases approximately 17,100 square feet of space for its office in Portland, Oregon under a lease expiring May 31, 2002 at a monthly rent of
$22,848. PIC's Salem office leases space under a lease expiring on October 31, 2002 at a monthly rent of $2,921.69, with rent subject to increases based upon inflation. The Company believes the
existing leased space is suitable and adequate for its business for the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS

In October 1998, Russell W. Cummings, a former PIC customer, filed a lawsuit in California state court asserting claims against PIC and a former PIC
registered representative alleging violations of the California Consumers Legal Remedies Act, fraud, negligent misrepresentation, breach of contract, tortious breach of the implied covenant of good
faith and fair dealing, breach of fiduciary duty and negligence. Plaintiff had agreed to arbitrate the matter before the NASD but never did so. Consequently, in July 2000, the California state
court dismissed the case. In November 2000, the

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California state court reinstated the case and, in January 2001, Cummings filed an arbitration claim against PIC and its former registered representative. The complaint seeks $250,000 in actual
damages and $1,500,000 in punitive damages. PIC has not had an opportunity to fully investigate this claim, but believes it has meritorious defenses and intends to defend this matter vigorously.

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

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

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

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ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's common stock trades in the over-the-counter market. The Company's stock has not been actively traded. The Company's stock
is quoted on the Nasdaq SmallCap Market under the symbol "PLCC." The following are high and low sales prices for the common stock for the periods shown, as obtained from the Nasdaq Stock Market.

|            |  | 2000 Prices |       | 1999 Prices |   | 1998 Prices
|----------- |  | ----------- | ----- | ----------- | - | -----------
|
|1st Quarter |  | $           | 7.844 |             | $ | 5.156      
|2nd Quarter |  |             | 8.125 |             |   | 6.500      
|3rd Quarter |  |             | 8.750 |             |   | 5.688      
|4th Quarter |  |             | 9.625 |             |   | 5.062      

The
high and low price for the first quarter of 2001 through March 19, 2001 were $6.875 and $4.000, respectively.

As
of March 19, 2001, there were 3,276,866 shares of the Company's common stock outstanding and held of record by 115 holders. The number of record holders includes as single
holders various institutions (such as brokerage firms) that hold shares in "street name" for multiple shareholders. Based on the number of requests for the Company's proxy materials for its 2000
annual meeting, the Company believes there are approximately 424 beneficial holders of its common stock. The Company
repurchased 189,869 shares of common stock during 2000. Additional shares of common stock may be repurchased from time to time in the future.

The
Company has never paid a dividend on its common stock. Regulatory net capital requirements may limit the ability of PIC to pay dividends to the Company, which would affect the
Company's ability to pay dividends to its shareholders. The Company anticipates that, for the foreseeable future, earnings will be retained for use in its business and does not anticipate the payment
of dividends.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

SELECTED FINANCIAL DATA(in thousands except per share amounts) Income Statement Information

|                                            |  | Years Ended December 31, |       
|------------------------------------------- |  | ------------------------ | ------
|
|Revenues                                    |  | $                        | 15,876
|Commissions and Salaries                    |  |                          | 15,651
|Other Expenses                              |  |                          | 4,351 
|Total Expenses                              |  |                          | 20,002
|Pretax Income (loss)                        |  |                          | (4,126
|Net Income (loss)                           |  |                          | (3,048
|Diluted Earnings (loss) per share           |  | $                        | (0.88 
|Average number of common shares outstanding |  |                          | 3,487 

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Balance Sheet Information
(restated)

|                     |  | December 31,
|-------------------- |  | ------------
|
|Total Assets         |  | $           
|Working Capital      |  |             
|Short-Term Debt      |  |             
|Long-Term Debt       |  |             
|Shareholders' Equity |  |             

Overview

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



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

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

A
substantial portion of our investment banking business consists of acting as managing underwriter of initial and follow-on public offerings for microcap companies. As a
part of our underwriter compensation for this activity, we typically receive warrants exercisable to purchase securities identical to those that we offer and sell to the public. The warrants are not
exercisable for the first year after the offering in which they are earned and are thereafter exercisable for four years, after which they expire. The exercise price is typically 120% of the price at
which we initially sold the

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securities to the public. Accordingly, unless there is at least a 20% increase in the price of these securities at some time more than one and less than five years after the offering, the warrants
will remain "under water" and will ultimately expire unexercised.

Under
Statement of Financial Accounting Standards No. 133, as amended by SFAS 137 and 138, we are required to estimate the value of all derivative securities that we
hold at the date of any financial statements and to include that value, and changes in such value, in those financial statements. The warrants described above are derivative securities for the purpose
of SFAS 133. Accordingly, the aggregate estimated value of our warrants as of the date of any balance sheet is recorded as an asset on that balance sheet. When a new warrant is earned as a
result of our investment banking activity, its estimated value is included in corporate finance revenue for the period in which it is earned. In subsequent periods, any change in estimated value is
recorded as investment income or loss for the period. If, and when, a warrant is exercised the book value is adjusted to reflect the value of the securities purchased, net of the exercise price, and
the adjustment amount is recorded as income or loss for the relevant period. If the warrant expires unexercised, the book value is adjusted to zero and the decrease is recorded as a loss in the
relevant period.

In
order to comply with SFAS 133, we have changed our method of estimating the value of our underwriter warrants from the "intrinsic value' method to the Black-Scholes Option
Pricing Model. We have restated our financial results for the years ending 1998, 1999 and 2000 using this new model. The model requires us to use historical price data combined with various
assumptions and judgments to develop the inputs for the model. In particular, we have calculated a volatility factor for each company's warrants that is based on its own stock price movements as well
as an index: as our warrants get closer to their expiration date their individual volatility factors are almost entirely based on the historical price volatility of each company's common stock. We
cannot assure you that we will ultimately be able to exercise any of our warrants in a way that will realize the value that we attribute to them in our financial statements based on this model.

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

Results of Operations

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

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Summary of Changes in Major Categories of Revenues and Expense
(restated)

|              |                          | 2000 vs. 1999 |             | 1999 vs. 1998 |      
|------------- | ------------------------ | ------------- | ----------- | ------------- | -----
|Revenues:     |                          |               |             |               |      
|              | Sales Commissions        |               | $           | (162,968      | )    
|              | Corporate Finance        |               |             | (44,303       | )    
|              | Investment Income        |               |             | (20,358,835   | )    
|              | Trading Income           |               |             | 1,730,259     |      
|              | Other                    |               |             | 58,105        |      
|              |                          |               |             |               |      
|Total         |                          | $             | (18,777,742 | )             | (54.2
|Expenses:     |                          |               |             |               |      
|              | Commissions and Salaries |               | $           | (41,689       | )    
|              | Underwriting Expenses    |               |             | (827,542      | )    
|              | Rent, Telephone & Quotes |               |             | 70,306        |      
|              | Other                    |               |             | 925,580       |      
|              |                          |               |             |               |      
|Total         |                          | $             | 126,655     |               | 0.6  
|Pretax Income |                          | $             | (18,904,397 | )             | N/A  

2000 Compared to 1999

Total revenues for 2000 fell 54.2 percent from 1999, to $15,875,840 from $34,653,582. As shown in the table above, sales commissions fell $162,968, or
1.1 percent, to $14,912,599 in 2000 from $15,075,567 in 1999. This decrease resulted primarily from the less favorable price movements and trading levels in smaller capitalization OTC issues in
2000 compared to 1999. The Nasdaq Industrial Average rose 71.67 percent in 1999 but fell 33.76 percent in 2000. PIC's focus is on very small capitalization issues, especially those tied
to PIC's corporate finance clients. Corporate finance revenues decreased 0.8 percent, or $44,303, in 2000 compared to 1999. Four transactions were completed in 2000, raising a total of
$63 million for the issuers; four transactions were also completed in 1999, raising a total of $43 million for corporate finance clients. In general, corporate finance revenues increase
with the amount of money raised for clients. Investment income includes realized gains from the exercise of underwriter warrants, gains and losses from the sales of investment securities and the
unrealized appreciation (depreciation) of underwriter warrants and other investment securities. Investment income decreased $20,358,835, to a loss of $6,481,555 in 2000 from a profit of $13,877,280 in
1999, due to a decline in unrealized appreciation (depreciation) of underwriter warrants held by the Company, based upon the Company's estimate of their fair value, gains in the value of the
underwriter warrants sold and lower profits on other investment securities held. As noted above, OTC prices, particularly in the technology sector, declined in 2000 compared to significant gains in
1999. Trading income rose $1,730,259, or 545.6 percent, to $2,047,418 in 2000 from $317,159 in 1999. This increase was primarily due to active trading in the securities of PIC's corporate
finance clients, despite the more favorable markets in smaller capitalization OTC issues in 1999 compared to 2000.

Total
expenses rose $126,655 in 2000 from 1999, an increase of 0.6 percent to $20,001,741 from $19,875,086. Commissions and salaries fell $41,689, or 0.3 percent, to
$15,651,244 in 2000 from $15,692,933 in 1999. This decrease was primarily due to slightly decreased commission revenues resulting in a lower level of commissions paid and lower accruals for PIC's
profit sharing plan. (Higher commission rates are generally paid to employee registered representatives at higher production levels as an incentive.) Underwriting expenses decreased by $827,542, or
61.3 percent. While the same number of transactions were completed in 1999 as in 2000, the 1999 transactions incurred higher legal

11

---

and other expenses. In addition, more expenses were incurred in 1999 on transactions that were not completed. Rent, telephone and quote expenses increased to $961,014 in 2000 from $890,708 in 1999, an
increase of 7.9 percent. Other expenses increased 47.7 percent, to $2,866,653 in 2000 from $1,941,073 in 1999, primarily due to write-downs of a note receivable of $436,984, $317,750 in
expense from a grant of stock options and expenses related to a conference hosted by PIC.

The
Company had a pretax loss of $4,125,901 in 2000 compared to pretax income of $14,778,496 in 1999. The primary reason for this decrease was the significant decrease in investment
income. Independent of investment income, the Company would have had pretax income of $901,216 in 1999 compared to pretax income of $2,355,654 in 2000. Investment income in 1999 was significantly
higher than in any other year in the Company's history, due to unrealized appreciation of underwriter warrants held by the Company, based upon the Company's estimate of their fair value, gains in the
value of the underwriter warrants sold and greater profits on other investment securities held in response to significant increases in OTC prices, particularly the technology sector. This source of
income cannot be expected to regularly recur. Significant fluctuations can occur in PIC's revenues and operating results from one period to another. The Company also incurred an income tax benefit of
$1,077,687 in 2000, compared to an expense of $5,862,260 in 1999.

1999 Compared to 1998

Total revenues for 1999 increased 277.7 percent from 1998, from $9,175,532 to $34,653,582. As shown in the table above, sales commissions rose
$3,751,155, or 33.1 percent, from $11,324,412 in 1998 to $15,075,567 in 1999. This increase resulted primarily from the more favorable price movements and trading levels in smaller
capitalization OTC issues in 1999 compared to 1998. The Nasdaq Industrial Average rose 71.67 percent in 1999 and 6.82 percent in 1998, and PIC's focus is on very small capitalization
issues, especially those tied to PIC's corporate finance clients, which experienced a more favorable market in 1999. Corporate finance revenues rose 7.3 percent, or $365,928, in 1999 compared
to 1998. Four transactions were completed in 1998, raising a total of $37 million for the issuers; four transactions were also completed in 1999, raising an aggregate of $43 million for
corporate finance clients. Investment income increased $21,663,542, from a loss of $7,786,262 in 1998 to income of $13,877,280 in 1999, due to unrealized appreciation of underwriter warrants held by
the Company, based upon the Company's estimate of their fair value, gains in the value of the underwriter warrants sold and greater profits on other investment securities held in response to
significant increases in OTC prices, particularly the technology sector. No underwriter warrants were exercised in 1998 while four warrants were exercised in 1999. Additionally, the profits from
investments sold in the investment account in 1999 were greater than in 1998. Trading income fell $272,663, or 46.2 percent, from $589,822 in 1998 to $317,159 in 1999. This decline was
primarily due to losses on one large holding late in 1999 offsetting the more favorable markets in smaller capitalization OTC issues in 1999 compared to 1998.

Total
expenses rose $5,395,897 in 1999 from 1998, an increase of 37.3 percent from $14,479,189 to $19,875,086. Commissions and salaries rose $5,321,954, or 51.3 percent,
from $10,370,979 in 1998 to $15,692,933 in 1999. This increase was primarily due to increased commission revenues resulting in a
higher level of commissions paid and higher accruals for PIC's profit sharing plan. (Higher commission rates are generally paid to employee registered representatives at higher production levels as an
incentive.) Underwriting expenses increased by $619,337, or 84.7 percent. While the same number of transactions was completed in 1999 as in 1998, the 1999 transactions incurred somewhat higher
legal and other expenses. In addition, expenses were incurred on transactions that were not completed. Rent, telephone and quote expenses increased from $842,437 in 1998 to $890,708 in 1999, an
increase of 5.7 percent. Other expenses decreased 23.4 percent, from $2,534,738 in 1998 to $1,941,073 in 1999, with decreased settlements and advertising/promotion expenses more than
offsetting increases in conference, travel and entertainment, depreciation and other expenses.

12

---

The Company had a pretax loss of $5,303,657 in 1998 compared to pretax income of $14,778,496 in 1999. The primary reason for this increase was the significant increase in investment
income. Independent of investment income, the Company would have had pretax income of $901,216 in 1999 compared to pretax income of $2,482,605 in 1998. Investment income in 1999 was significantly
higher than in any other year in the Company's history, due to unrealized appreciation of underwriter warrants held by the Company, based upon the Company's estimate of their fair value, gains in the
value of the underwriter warrants sold and greater profits on other investment securities held in response to significant increases in OTC prices, particularly the technology sector. This source of
income cannot be expected to regularly recur. Significant fluctuations can occur in PIC's revenues and operating results from one period to another. The Company also incurred a benefit of $1,948,017
from income taxes in 1998, compared to an expense of $5,862,260 in 1999.

Liquidity and Capital Resources

Conducting business as a dealer in securities requires that a substantial inventory of securities be maintained and that a large amount of liquid assets be
readily available. PIC is also required to maintain net capital as described in "Item 1Description of BusinessNet Capital Requirements" above. The Company's working capital
at December 31, 2000 was $26,440,803. Of PIC's total assets (net of intercompany accounts) at December 31, 2000 of $32,818,154 approximately 52 percent consisted of securities in
PIC's investment account, trading inventory and underwriter warrant securities, at fair value, and approximately 28 percent consisted of cash, certificates of deposit and receivables from its
correspondent broker.

PIC's
securities inventory is stated at market value. The liquidity of the market for many of PIC's securities holdings, however, varies with trends in the stock market. Since many of
the securities held by PIC are thinly traded, and PIC is in many cases a primary market maker in the issues held, any significant sales of PIC's positions could adversely affect the liquidity and
prices of the issues held. In general, falling prices in OTC securities (which make up most of PIC's trading positions) lead to decreased liquidity in the market for these issues, while rising prices
in OTC issues tends to increase the liquidity of the market for these securities. The overall decline in prices for the very small capitalization OTC securities traded by PIC in 2000 and 1998 were
combined with a general reduction
in the liquidity of the markets for these securities. This situation was the reverse of 1999, 1997, 1996 and 1995, when increases in prices of OTC securities increased the liquidity of the markets for
these securities. PIC's investment account and trading inventory accounts are stated at fair market value, which is at or below quoted market price. They include shares of restricted stock recorded by
PIC, with an original cost of $4,146,301, currently valued at $1,121,901, which the Company believes, based upon available evidence, approximates market value.

PIC
borrows money from CSC in the ordinary course of its business, pursuant to an arrangement under which CSC agrees to finance PIC's trading accounts in an amount determined by the
size of those accounts and the type of securities held, with interest charged at prevailing margin rates. As of December 31, 2000, no net loans were owed by PIC to CSC pursuant to this
arrangement. PIC and the Company are generally able to meet their compensation and other obligations out of current liquid assets.

The
recorded value of our underwriter's warrants is typically not readily realizable, either because the warrants are not currently exercisable or because their exercise price is more
than the price that we could realize if we exercised the warrant and sold the underlying securities. There is no public market for our underwriter warrants and the warrants themselves are transferable
only under very limited circumstances. Accordingly, their value cannot be realized by selling the warrants themselves. Underwriter's warrants exercisable to purchase securities having a value in
excess of the exercise price are liquid, subject to restrictions on liquidity applicable to OTC securities generally and discussed in the foregoing paragraph. The securities issuable on exercise of
our underwriter's warrants are registered

13

---

under the Securities Act of 1933, as amended, and, in some cases, may also be resold under an exemption from registration. Accordingly, there is no legal impediment to liquidity with respect to these
securities, except during the first year following a company's public offering.

In
2000, $12,968,921 of net cash was used in operating activities. The major adjustments to reconcile this result to the Company's net income included realized gain on investment
securities of $29,316,895, receipt of underwriter warrants valued at $2,797,000, a change in deferred income taxes of $12,614,400, a decrease in accounts payable and accrued liabilities of $3,950,643
and an increase in receivables of $1,454,511, partially offset by unrealized depreciation on investment securities and underwriter warrants of $35,797,450, an increase in income taxes payable of
$2,779,200, a decrease in trading securities of $932,809, a writedown of notes receivable, net of recoveries of $436,984 and compensation expense of stock option grants of $317,750. In 2000,
$14,230,332 of net cash was provided by investing activities, primarily sales of investment securities exceeding purchases of investment securities, additions to furniture and equipment of $166,745
and the issuance of a note receivable of $100,000. Net cash used in financing activities in 2000 totaled $1,205,312, resulting from payments to repurchase common stock of $1,276,312 exceeding $71,000
in proceeds from the issuance of common stock. See "Financial StatementsConsolidated Statements of Cash Flows."

As
a securities broker-dealer, the Company's wholly owned subsidiary, PIC, is required by SEC regulations to meet certain liquidity and capital standards. In the unlikely event that
PIC was unable to meet these regulatory standards, it would be unable to pay dividends to the Company. Since PIC is the Company's only operating business, such a failure could have a material adverse
affect on the Company.

At
December 31, 2000, the Company had no material commitments for capital expenditures.

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

Inflation

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

14

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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

|                                                                                                    |  | Page
|--------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                    |  |     
|(a) Financial Statements                                                                            |  |     
|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-17
|Schedule IIValuation and Qualifying Account                                                        |  | F-18

15

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PART III

All information required by Items 9, 10, 11 and 12 of Part III of this Report will be included in the Company's definitive proxy statement for its 2001
annual meeting of shareholders filed or to be filed not later than 120 days after the end of the fiscal year covered by this Report and is incorporated herein by reference, other than the
information with respect to executive officers of the Company included below.

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Directors of the Company are elected for a term of one year and until their successors are elected and qualify. Executive officers are appointed by the board
of directors and do not have fixed terms of office. The board of directors and executive officers as of December 31, 2000 are set forth below. The year each person became a director follows his
or her name.

|Name                         |  | Age |  | Position(s) with Company         |  | Principal Occupation(s) During Past Five Years                                                                                                                                                                                                 
|---------------------------- |  | --- |  | -------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Chester L.F. Paulson
(1970)  |  | 64  |  | President and Director           |  | Director of Corporate Finance of PIC                                                                                                                                                                                                           
|Jacqueline M. Paulson
(1976) |  | 61  |  | Secretary-Treasurer and Director |  | Secretary-Treasurer of PIC                                                                                                                                                                                                                     
|Glen Davis
(1999)            |  | 44  |  | Director                         |  | President of PIC since February 1998 (Senior Vice President of PIC until February 1998)                                                                                                                                                        
|Shannon P. Pratt
(1998)      |  | 67  |  | Director                         |  | Managing Director, FounderWillamette Management Associates, a business valuation firm                                                                                                                                                         
|Paul Shoen
(1998)            |  | 44  |  | Director                         |  | Chairman of the Board of Directors and Chief Executive Officer of Panetechnicon Aviation, an operator and lessor of aircraft; private investor; DirectorAMERCO, the parent company of U-Haul Trucking Rental, from January 1997 to August
1998
|John Westergaard
(1998)      |  | 69  |  | Director                         |  | Publisher/Editor of Westergaard Online Systems, Inc., an Internet publisher of financial "webzines"                                                                                                                                            

Chester
L.F. Paulson and Jacqueline M. Paulson are husband and wife.

16

---

(a) Exhibits

|Number |  | Description                                                                                                                                                                                                                        
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1    |  | Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form 10 filed with the Commission on December 18, 1989 (the "Form 10"))                                             
|3.2    |  | Bylaws (incorporated by reference to Exhibit 3.2 to the Form 10)                                                                                                                                                                   
|10.1   |  | Office lease dated June 28, 1988 (incorporated by reference to Exhibit 10.2 to the Form 10)                                                                                                                                        
|10.3   |  | Contract with Correspondent Services Corporation, dated July 24, 1992 (Incorporated by reference to Exhibit 10.3 to the Form 10-Q for the quarter ended September 30, 1992 filed with the Commission on November 13, 1992)         
|10.4   |  | Office Lease renewal for the period from 6/1/97 to 5/31/02, dated as of May 6, 1997 (Incorporated by reference to Exhibit 10.4 to the Form 10-QSB for the quarter ended June 30, 1997 filed with the Commission on August 13,
1997)
|10.5   |  | 1999 Stock Option Plan (incorporated by reference to Exhibit 10.5 to the Form 10-KSB for the year ended December 31, 1999)                                                                                                         
|21.1   |  | SubsidiariesThe Company's only subsidiary is Paulson Investment Company, Inc., an Oregon corporation.                                                                                                                             

(b) There
were no reports on Form 8-K filed during the last quarter of the period covered by this report.

17

---



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: December 17, 2001 |  | By: | /s/ CHESTER L.F. PAULSONChester L.F. Paulson President

18

---



|Exhibit
Number |  | Description                                                                                                                                                                                                                         |  | Page
Number
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|3.1            |  | Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form 10 filed with the Commission on December 18, 1989 (the "Form 10"))                                              |  |            
|3.2            |  | Bylaws (incorporated by reference to Exhibit 3.2 to the Form 10)                                                                                                                                                                    |  |            
|10.1           |  | Office lease dated June 28, 1988 (incorporated by reference to Exhibit 10.2 to the Form 10)                                                                                                                                         |  |            
|10.3           |  | Contract with Correspondent Services Corporation, dated July 24, 1992 (Incorporated by reference to Exhibit 10.3 to the Form 10-Q for the quarter ended September 30, 1992 filed with the Commission on November 13,
1992)          |  |            
|10.4           |  | Office Lease renewal for the period from 6/1/97 to 5/31/02, dated as of May 6, 1997 (Incorporated by reference to Exhibit 10.4 to the Form 10-QSB for the quarter ended June 30, 1997 filed with the Commission on August 13,
1997) |  |            
|10.5           |  | 1999 Stock Option Plan (incorporated by reference to Exhibit 10.5 to the Form 10-KSB for the year ended December 31, 1999)                                                                                                          |  |            
|21.1           |  | SubsidiariesThe Company's only subsidiary is Paulson Investment Company, Inc., an Oregon corporation.                                                                                                                              |  |            

19

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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.

As
discussed in Note N of Notes to Consolidated Financial Statements, the 2000, 1999 and 1998 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, 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.

|Portland, Oregon                                                                                                                                                     |  | /s/ Grant Thornton LLP
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------
|January 29, 2001, (except for the last paragraph of Note C,
as to which the date is February 16, 2001, and Notes E and N,
as to which the date is November 28, 2001) |  |                       

F1

---



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                                                                                   |                                      |            | 2,702,000                
|                             | Prepaid and deferred expenses                                                                                                   |                                      |            | 865,986                  
|                             | Deferred income taxes                                                                                                           |                                      |            | 4,262,000                
|                             |                                                                                                                                 |                                      |            |                          
|                             |                                                                                                                                 |                                      |            | Total current assets     
|                             |                                                                                                                                 |                                      |            |                          
|NOTES RECEIVABLE             |                                                                                                                                 |                                      | 103,551    |                          
|                             |                                                                                                                                 |                                      |            |                          
|FURNITURE AND EQUIPMENT, net |                                                                                                                                 |                                      | 509,676    |                          
|                             |                                                                                                                                 |                                      |            |                          
|INVESTMENT IN REAL ESTATE    |                                                                                                                                 |                                      | 169,900    |                          
|                             |                                                                                                                                 |                                      |            |                          
|                             |                                                                                                                                 | $                                    | 33,212,149 |                          
|                             |                                                                                                                                 |                                      |            |                          
|                             |                                                                                                                                 | 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                                                                                                               |                                      |            | 26,104,819               
|                             |                                                                                                                                 |                                      |            |                          
|                             |                                                                                                                                 |                                      | 27,184,830 |                          
|                             |                                                                                                                                 |                                      |            |                          
|                             |                                                                                                                                 | $                                    | 33,212,149 |                          
|                             |                                                                                                                                 |                                      |            |                          

The
accompanying notes are an integral part of these statements.

F2

---

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                      |      |                                     | 5,301,316  |   |            | 5,345,619 
|                                  | Investment income (loss)               |      |                                     | (6,481,555 | ) |            | 13,877,280
|                                  | Trading income                         |      |                                     | 2,047,418  |   |            | 317,159   
|                                  | Interest and dividends                 |      |                                     | 91,650     |   |            | 16,641    
|                                  | Other                                  |      |                                     | 4,412      |   |            | 21,316    
|                                  |                                        |      |                                     |            |   |            |           
|                                  |                                        |      | 15,875,840                          |            |   | 34,653,582 |           
|                                  |                                        |      |                                     |            |   |            |           
|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 |            |   | (4,125,901 | )         
|Income tax expense (benefit)      |                                        |      | (1,077,687                          | )          |   | 5,862,260  |           
|                                  |                                        |      |                                     |            |   |            |           
|                                  |                                        |      | NET EARNINGS (LOSS)                 |            | $ | (3,048,214 | )         
|                                  |                                        |      |                                     |            |   |            |           
|Basic earnings (loss) per share   |                                        | $    | (.88                                | )          | $ | 2.41       |           
|                                  |                                        |      |                                     |            |   |            |           
|Diluted earnings (loss) per share |                                        | $    | (.88                                | )          | $ | 2.41       |           
|                                  |                                        |      |                                     |            |   |            |           

The
accompanying notes are an integral part of these statements.

F3

---



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

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

The
accompanying notes are an integral part of this statement.

F4

---

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)                                                                                 |                                                                                          | $                                        | (3,048,214                                          | )           | $          | 8,916,236  
|                                                 | Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities |                                                                                          |                                          |                                                     |             |            |            
|                                                 |                                                                                                     | Receipt of underwriter warrants                                                          |                                          |                                                     | (2,797,000  | )          |            
|                                                 |                                                                                                     | Unrealized (appreciation) depreciation on investment securities and underwriter warrants |                                          |                                                     | 35,797,450  |            |            
|                                                 |                                                                                                     | Realized (gain) loss on investment securities                                            |                                          |                                                     | (29,316,895 | )          |            
|                                                 |                                                                                                     | Deferred income taxes                                                                    |                                          |                                                     | (12,614,400 | )          |            
|                                                 |                                                                                                     | 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                                        | )           |            | (41,501,353
|                                                 | Proceeds from sale of investment securities                                                         |                                                                                          |                                          | 132,268,612                                         |             |            | 50,636,252 
|                                                 | Proceeds from repayment of notes receivable                                                         |                                                                                          |                                          |                                                    |             |            | 211,725    
|                                                 | Issuance of note receivable                                                                         |                                                                                          |                                          | (100,000                                            | )           |            | (1,100,000 
|                                                 | Additions to furniture and equipment                                                                |                                                                                          |                                          | (166,745                                            | )           |            | (302,661   
|                                                 |                                                                                                     |                                                                                          |                                          |                                                     |             |            |            
|                                                 |                                                                                                     |                                                                                          |                                          | Net cash provided by (used in) investing activities |             |            | 14,230,332 
|                                                 |                                                                                                     |                                                                                          |                                          |                                                     |             |            |            

F5

---

|Cash flows from financing activities           |                                                       |   |         |                                                      |   |         |            |   |         |           
|---------------------------------------------- | ----------------------------------------------------- | - | ------- | ---------------------------------------------------- | - | ------- | ---------- | - | ------- | ----------
|                                               | Proceeds from issuance of stock                       |   | $       | 71,000                                               |   | $       |           |   | $       |          
|                                               | Payments to retire common stock                       |   |         | (1,276,312                                           | ) |         | (1,116,812 | ) |         | (486,916  
|                                               |                                                       |   |         |                                                      |   |         |           
|                                               |                                                       |   |         | Net cash used in financing activities                |   |         | (1,205,312 | ) |         | (1,116,812
|                                               |                                                       |   |         |                                                      |   |         |           
|                                               |                                                       |   |         | Net Increase (Decrease) in Cash and Cash Equivalents |   |         | 56,099     |   |         | (52,135   
|Cash and cash equivalents at beginning of year |                                                       |   | 48,210  |                                                      |   | 100,345 |            |   | 73,220  |           
|                                               |                                                       |   |         |                                                      |   |         |           
|Cash and cash equivalents at end of year       |                                                       | $ | 104,309 |                                                      | $ | 48,210  |            | $ | 100,345 |           
|                                               |                                                       |   |         |                                                      |   |         |           
|Cash paid during the year for                  |                                                       |   |         |                                                      |   |         |            |   |         |           
|                                               | Interest                                              |   | $       | 85                                                   |   | $       | 1,248      |   | $       | 61,389    
|                                               |                                                       |   |         |                                                      |   |         |           
|                                               | Income taxes                                          |   | $       | 8,785,000                                            |   | $       | 1,441,715  |   | $       | 901,408   
|                                               |                                                       |   |         |                                                      |   |         |           
|Noncash investing and financing activity       |                                                       |   |         |                                                      |   |         |            |   |         |           
|                                               | Repayment of secured demand note collateral agreement |   | $       |                                                     |   | $       |           |   | $       | 100,000   
|                                               |                                                       |   |         |                                                      |   |         |           

The
accompanying notes are an integral part of these statements.

F6

---



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.

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.

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. Revenue from the receipt of underwriter warrants, received in
corporate finance transactions, is recognized based on the estimated fair value of the securities received as estimated using the Black-Scholes option-pricing model. 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. Underwriter warrants are valued at estimated
fair value using the Black-Scholes option-pricing model, taking into account the exercise price, remaining life of the warrant, the current price of the underlying stock and its expected volatility,
expected dividends on the stock and the risk-free interest rate for the remaining term of the warrant.

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.

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

---

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.

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.

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).

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.

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.

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

F8

---

NOTE CNOTES AND OTHER RECEIVABLES

Notes
and other receivables consist of the following:

|                    |  | 2000 |           | 1999
|------------------- |  | ---- | --------- | ----
|Notes receivable    |  | $    | 741,854   |     
|Employees           |  |      | 97,051    |     
|Independent brokers |  |      | 306,647   |     
|Other               |  |      | 101,968   |     
|                    |  |      |           |     
|                    |  | $    | 1,247,520 |     
|                    |  |      |           |     

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 to other operating expenses.

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.

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

F9

---

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.

F10

---

NOTE EUNDERWRITER WARRANTS

The estimated fair value of warrants is determined by management using the Black-Scholes option-pricing model, taking into account the exercise price,
remaining contractual life of the warrant, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the
remaining term of the warrant (see Note A2). The warrants generally have a five-year expiration date and vest immediately. The warrants are generally subject to a
one-year restriction period in which the Company cannot exercise the warrants. Significant assumptions used to estimate the fair values of the warrants include the risk-free
interest rate, expected volatility factors for the underlying securities and an expected dividend yield for those securities that were expected to pay dividends. The expected volatility factors were
determined using historical volatility of the underlying stock if available and historical volatility of a peer group if volatility for the underlying stock is not available.

The
following table summarized activity in underwriter warrants (restated):

Estimated value at January 1, 1998

$
21,662,000Warrants received


3,263,000Warrants exercised


0Warrants expired


(1,382,122
)Appreciation (depreciation) in estimated value


(7,265,878
)Estimated fair value at December 31, 1998


16,277,000Warrants received


3,230,000Warrants exercised


(4,220,580
)Warrants expired


(252
)Appreciation (depreciation) in estimated value


4,459,832Estimated fair value at December 31, 1999


19,746,000Warrants received


2,797,000Warrants exercised


(12,010,813
)Warrants expired


(15,794
)Appreciation (depreciation) in estimated value


(7,814,393
)Estimated fair value at December 31, 2000

$
2,702,000


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


F11

---

NOTE GINCOME TAXES

Income tax expense (benefit) consists of the following:

2000

1999

1998(restated)

(restated)

(restated)Current tax expenseFederal

$
8,638,164

$
1,921,593

$
724,613State


2,899,549


782,794


110,64311,537,713


2,704,387


835,256Deferred tax expense (benefit)Federal


(9,384,596
)

2,798,507


(2,447,332
)State


(3,230,804
)

359,366


(335,941
)(12,615,400
)

3,157,873


(2,783,273
)$
(1,077,687
)
$
5,862,260

$
(1,948,017
)


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(restated)

(restated)

(restated)Income tax expense (benefit) at statutory federal tax rate

$
(1,403,000
)
$
5,025,000

$
(1,803,000
)State and local taxes net of federal benefit


(14,000
)

644,000


(231,000
)Large corporation incremental rate


252,000





Permanent and other differences


87,313


193,260


85,983$
(1,077,687
)
$
5,862,260

$
(1,948,017
)


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

2000

1999(restated)

(restated)Unrealized depreciation (appreciation) on securities

$
4,225,100

$
(8,473,000
)Accrued expenses





48,000State net operating loss carryforwards


76,000


67,100Fixed asset depreciation


(39,100
)

(34,600
)$
4,262,000

$
(8,392,500
)


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.

F12

---

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 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
Amount1998 (restated)Basic and diluted earnings (loss) per shareIncome (loss) available to common stockholders

$
(3,355,640
)
3,917,788

$
(.86
)1999 (restated)Basic and diluted earnings per shareIncome available to common stockholders

$
8,916,236

3,704,360

$
2.412000 (restated)Basic and diluted earnings per shareIncome available to common stockholders

$
(3,048,214
)
3,474,142

$
(.88
)


F13

---

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.

NOTE NRESTATEMENT

During the fourth quarter of 2001, the Company changed its valuation methodology for underwriter warrants. Previously the Company carried these securities at
their estimated fair value once the restriction periods had lapsed. Upon reconsideration, it was determined that it is appropriate under generally accepted accounting principles to carry these
securities at their estimated fair value as soon as the securities are received. 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 accounting principles generally accepted in the United States.

The
effect of the change on the 2000 financial statements was to increase corporate finance revenue by $2,797,000, increase investment loss by $9,351,000, decrease earnings before
income taxes by

F14

---

$6,554,000, decrease income tax expense by $2,514,000, decrease net earnings by $4,040,000, decrease basic earnings per share by $1.17 and decrease diluted earnings per share by $1.16. The effect of
the change on the 1999 financial statements was to increase corporate finance revenue by $3,230,000, decrease investment income by $7,763,000, decrease earnings before income taxes by $4,533,000,
decrease income tax expense by $1,738,000, decrease net earnings by $2,795,000, decrease basic and
diluted earnings per share by $.75. The effect of the change on the 1998 financial statements was to increase corporate finance revenue by $3,263,000, increase investment loss by $5,837,000, increase
loss before income taxes by $2,574,000, increase income tax benefit by $987,000, increase net loss by $1,587,000, increase basic and diluted loss per share by $.41. The effect of the adjustment on
periods prior to 1998 was to increase retained earnings by $10,088,000.

The
effect of the restatement on each of the quarter for the years 2000, 1999 and 1998 is as follows (unaudited and restated):

|                                                          |  | Three months ended |           
|--------------------------------------------------------- |  | ------------------ | ----------
|
|Net income (loss), as previously reported                 |  | $                  | 9,111,084 
|Effect of adjustment, net of income taxes                 |  |                    | 3,085,730 
|                                                          |  |                    |           
|Net income (loss), as restated                            |  | $                  | 12,196,814
|                                                          |  |                    |           
|Effect of adjustment on income before income taxes        |  | $                  | 5,005,730 
|Effect of adjustment on income taxes                      |  |                    | (1,920,000
|                                                          |  |                    |           
|Effect of adjustment, net of income taxes                 |  | $                  | 3,085,730 
|                                                          |  |                    |           
|Basic earnings (loss) per share, as previously reported   |  | $                  | 2.57      
|Effect of adjustment, net of income taxes                 |  |                    | 0.87      
|                                                          |  |                    |           
|Basic earnings per share, as restated                     |  | $                  | 3.44      
|                                                          |  |                    |           
|Diluted earnings (loss) per share, as previously reported |  | $                  | 2.57      
|Effect of adjustment, net of income taxes                 |  |                    | 0.87      
|                                                          |  |                    |           
|Diluted earnings per share, as restated                   |  | $                  | 3.44      
|                                                          |  |                    |           

|                                                             |  | Three months ended |           
|------------------------------------------------------------ |  | ------------------ | ----------
|
|Net income, as previously reported                           |  | $                  | 1,048,963 
|Effect of adjustment, net of income taxes                    |  |                    | (963,000  
|                                                             |  |                    |           
|Net income (loss) as restated                                |  | $                  | 85,963    
|                                                             |  |                    |           
|Effect of adjustment on income before taxes                  |  | $                  | (1,563,000
|Effect of adjustment on income taxes                         |  |                    | 600,000   
|                                                             |  |                    |           
|Effect of adjustment, net of income taxes                    |  | $                  | (963,000  
|                                                             |  |                    |           
|Basic and diluted earnings per share, as previously reported |  | $                  | 0.28      
|Effect of adjustment, net of income taxes                    |  |                    | (0.26     
|                                                             |  |                    |           
|Basic and diluted earnings (loss) per share, as restated     |  | $                  | 0.02      
|                                                             |  |                    |           

F15

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|                                                                    |  | Three months ended |           
|------------------------------------------------------------------- |  | ------------------ | ----------
|
|Net income (loss), as previously stated                             |  | $                  | 21,604    
|Effect of adjustment, net of income taxes                           |  |                    | (1,208,000
|                                                                    |  |                    |           
|Net income (loss), as restated                                      |  | $                  | (1,186,396
|                                                                    |  |                    |           
|Effect of adjustment on income before taxes                         |  | $                  | (1,960,000
|Effect of adjustment on income taxes                                |  |                    | 752,000   
|                                                                    |  |                    |           
|Effect of adjustment, net of income taxes                           |  | $                  | (1,208,000
|                                                                    |  |                    |           
|Basic and diluted earnings (loss) per share, as previously reported |  | $                  | 0.01      
|Effect of adjustment, net of income taxes                           |  |                    | (0.31     
|                                                                    |  |                    |           
|Basic and diluted earnings (loss) per share, as restated            |  | $                  | (0.30     
|                                                                    |  |                    |           

F16

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Paulson Capital Corp. and Subsidiary        SUPPLEMENTARY SCHEDULE OF WARRANTS OWNED        December 31, 2000

|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. 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17

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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18

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