<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

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

For the fiscal year ended                       Commission file number: 0-18188
   December 31, 1999
                                   FORM 10-KSB

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

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


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

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

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

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



Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes   X    No
     ---     ---

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


                                       1
<PAGE>


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

                                  $39,186,582

         As of March 17, 2000, 3,549,535 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 $15,162,624.

                DOCUMENTS INCORPORATED BY REFERENCE


         Portions of the Registrant's definitive proxy statement for the 2000
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
   ---     ---


                                       2
<PAGE>

                              PART I

ITEM 1. DESCRIPTION OF BUSINESS

         GENERAL

         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, 1999 PIC employed 19
brokers and had independent contractor arrangements with 86 brokers registered
with the National Association of Securities Dealers, Inc. ("NASD"). PIC also
employed a support staff of 47 persons in its headquarters in Portland, Oregon
and in certain of its branch offices. At December 31, 1999 PIC had 39 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.

         PRINCIPAL PRODUCTS, SERVICES AND MARKETS

         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:

<TABLE>
<CAPTION>
                                              1999          1998          1997
<S>                                           <C>           <C>           <C>
GENERAL SECURITIES                             38%           96%           46%
TRADING                                          1             5             4
CORPORATE FINANCE                                5            15            14
INVESTMENT INCOME                               55          (17)            35
OTHER                                            1             1             1
</TABLE>

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


                                       3
<PAGE>

     GENERAL SECURITIES

         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 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, 1999, no net
loans were outstanding pursuant to this arrangement. See "Item 6 - Management's
Discussion and Analysis or Plan of Operation."

     TRADING AND MARKET MAKING

         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, 1999, PIC made a market in approximately
34 securities of 25 issuers. Of these, 18 were corporations for which PIC has
acted as managing or co-managing underwriter of public financings. In addition,
at December 31, 1999, PIC held securities of 38 companies in its investment
account. In 1999, the value of securities held in the trading accounts and
investment account ranged between


                                      4
<PAGE>

$7,870,602 and $16,439,565. 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.

     CORPORATE FINANCE

         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
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."


                                      5
<PAGE>

         Between June 1, 1978 and December 31, 1999 PIC acted as the managing
underwriter or co-managing underwriter for 135 securities offerings, raising
approximately $807 million for corporate finance clients. Of these, 84 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."

         BRANCH OFFICES

         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, 1999, PIC had 39 branch offices in
California, Connecticut, District of Columbia, Georgia, Hawaii, 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.

         RESEARCH

         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.

         REGULATION

         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) which govern the
industry and conduct periodic


                                      6
<PAGE>

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 which can
result in censure, fine, suspension or expulsion of a broker-dealer, its
officers or employees.

         NET CAPITAL REQUIREMENTS

         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, 1999, PIC had net capital of $17,506,585, which exceeded its
minimum requirement of $273,057 by $17,233,528. The ratio of aggregate
indebtedness of $4,095,864 to net capital of $17,506,585 on December 31, 1999
was approximately 0.23 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.

         COMPETITION

         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.

         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


                                      7
<PAGE>

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.

         EMPLOYEES

         At December 31, 1999, PIC had 66 employees, of whom 47 were executives
and support staff and 19 were involved in brokerage activities and compensated
primarily on a commission basis. PIC also had independent contractor
arrangements with 86 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.


                                      8
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

         The Company and PIC are defendants in HOLLY MILLAR AND BERTRAM
OSTRAU V. PEARCE SYSTEMS INTERNATIONAL, INC., ET AL., filed in San Francisco
Superior Court, State of California, in March 1996. An asserted class action,
plaintiffs allege violations of the California securities law, deceit,
negligent misrepresentation and unfair business practices relating to alleged
misstatements in the prospectus used in connection with a February 1994, $5
million public offering in which PIC acted as the managing underwriter.
Plaintiffs seek rescission of the offering as well as actual damages,
interest, attorney fees and punitive damages. No class has been certified. No
date for a trial has been set. Pursuant to a tolling agreement with the
plaintiff, the Company (but not PIC) expects to be dismissed without
prejudice from the lawsuit. PIC and plaintiffs have reached a settlement of
this matter. The settlement is subject to final court approval. The total
payment by PIC under the settlement would depend upon the number of
purchasers in the public offering who file valid claims. PIC believes the
maximum total payment by PIC under the settlement would be approximately
$900,000, but the actual payment could be less, depending upon the number of
valid claims filed.

         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. Prior to filing the complaint,
plaintiff demanded payment of $250,000. The complaint seeks damages in excess
of $100,000 in connection with options and short sales transactions beginning
in 1996. Plaintiff has agreed to arbitrate the matter before the NASD. PIC
has not had an opportunity to fully investigate this claim, but believes it
has meritorious defenses and intends to defend this matter vigorously.
Discovery has not yet commenced.

         In October 1998, Masood Asif and Bobbie Sierra, former PIC
customers, filed an arbitration against PIC, an officer and director of PIC,
and a former PIC registered representative alleging breach of fiduciary duty,
negligent misrepresentation, suppression of facts and churning. Plaintiff
seeks damages of $100,000 and punitive damages of $100,000. 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 January 1999, Shahid and Lita Choudhry and Iqbal Waraich, former
customers of PIC, filed an NASD arbitration claim against PIC and a former
PIC registered representative alleging that the registered representative
managed their account improperly, failed to follow claimant's instructions on
particular transactions and failed to provide ongoing investment advice.
Claimants allege negligence, fraud, unsuitability, breach of fiduciary duty,
violations of the federal securities laws, failure to supervise and violation
of NASD rules, seeking damages of $115,000, plus punitive damages and
interest. PIC has not had an opportunity to fully investigate this claim, but
believes it has meritorious defenses and intends to defend this matter
vigorously.


                                       9
<PAGE>

         In April 1999, Philip Cutler, a former PIC customer, filed an NASD
arbitration claim asserting claims against PIC for alleged
misrepresentations, excessive commissions and a failure to supervise.
Claimant alleges damages in excess of $100,000. PIC has not had an
opportunity to investigate this matter fully, but believes it has meritorious
defenses and intends to defend this matter vigorously. This matter is set for
arbitration on May 30, 2000.

         In January of 2000, Paulson received notice that Paul Monka, as
trustee for the Urantia Corporation defined benefit pension plan, filed an
arbitration against PIC and a former PIC registered representative alleging
violations of NASD rules, misrepresentation, fraud, breach of contract, and
breach of fiduciary duty. Claimant seeks compensatory damages in excess of
$460,000 and 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 December of 1999, Francis Hoffman, a former PIC customer, sent a
written complaint to PIC alleging that PIC and one of its registered
representatives churned her account, placed her in unsuitable investments,
and violated its duty of care and loyalty, the Oregon Securities Law, the
NASD Rules and the Oregon Administrative Rules. The customer claims she has
lost in excess of $220,000. PIC has not had an opportunity to fully
investigate this claim, but believes it has meritorious defenses and intends
to defend this matter vigorously.

         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.


                                       10
<PAGE>

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.

<TABLE>
<CAPTION>

                               1999 PRICES                      1998 PRICES                      1997 PRICES
                          HIGH             LOW             HIGH             LOW             HIGH             LOW
<S>                       <C>              <C>             <C>              <C>             <C>              <C>
1ST QUARTER                 $7.000           $2.625          $6.750           $4.625           $3.188          $2.500
2ND QUARTER                  5.125            3.500           5.625            4.125            5.250           2.562
3RD QUARTER                  5.250            3.688           4.125            2.312            6.875           3.500
4TH QUARTER                  5.500            3.688           3.875            2.000            6.562           4.625
</TABLE>

The high and low closing price for the first quarter of 2000 through March 10
were $9.250 and $5.062, respectively.

         As of March 10, 2000, there were 3,549,535 shares of the Company's
common stock outstanding and held of record by 134 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
1999 annual meeting, the Company believes there are approximately 520
beneficial holders of its common stock. The Company repurchased 257,400
shares of common stock during 1999. 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.

         In 1999 the Company issued an aggregate of 1,783 unregistered Shares
of the Company's stock as compensation to persons attending meetings of its
board of directors. Such persons include directors, executive officers of the
Company, and a director of PIC who is neither an officer of the Company or
PIC. These issuances are exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended.


                                       11
<PAGE>

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

                             SELECTED FINANCIAL DATA

                     (in thousands except per share amounts)

                          INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>

                                                   YEARS ENDED DECEMBER 31,
                                             1999            1998            1997
                                      ----------------------------------------------
<S>                                         <C>             <C>             <C>
Revenues                                    $39,187         $11,749         $27,684
Commissions and Salaries                     15,693          10,371          12,552
Other Expenses                                4,183           4,108           4,003
Total Expenses                               19,876          14,479          16,555
Pretax Income (loss)                         19,311          (2,730)         11,129
Net Income (loss)                            11,711          (1,769)          6,950
Diluted Earnings (loss)                       $3.16           ($.45)          $1.74
 per share
Average number of common shares               3,704           3,918           4,005
 outstanding


                                                 BALANCE SHEET INFORMATION

                                                        DECEMBER 31,
                                            1999            1998            1997
                                      --------------------------------------------
<S>                                         <C>             <C>             <C>
Total Assets                                $37,451         $17,605         $27,473
Working Capital                              23,619          14,282          16,678
Short-Term Debt                                   0               0             100
Long-Term Debt                                    0               0               0
Shareholders' Equity                        $25,415         $14,812         $17,051

</TABLE>

During the fourth quarter of 1999, the Company changed its method of accounting
for underwriter warrants. Previously the Company recognized no value for these
warrants. Upon reconsideration, it was determined that it is appropriate under
generally accepted accounting principles to carry these securities at their
estimated fair value. Accordingly, the financial statements for previous periods
have been restated to reflect this change. See Note N on page F-16 in "Notes to
Consolidated Financial Statements."

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


                                       12
<PAGE>

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.

                     SUMMARY OF CHANGES IN MAJOR CATEGORIES
                             OF REVENUES AND EXPENSE
<TABLE>
<CAPTION>

                                                      1999 VS. 1998                          1998 VS. 1997
<S>                                            <C>               <C>                <C>                <C>
Revenues:
   Sales Commissions                            $3,751,155           33.1%           ($1,404,382)        (11.0%)
   Corporate Finance                               398,928           23.2%            (2,208,823)        (56.3%)
   Investment Income                            23,589,542            N/A            (11,741,273)       (119.9%)
   Trading Income                                 (272,663)         (46.2%)             (605,763)        (50.7%)
   Other                                           (29,912)         (44.1%)               25,712          61.0%
                                                 ---------         --------              --------         -----

Total                                          $27,437,050          233.5%           (15,934,529)        (57.6%)

Expenses:
   Commissions and Salaries                     $5,321,954           51.3%           ($2,180,827)        (17.4%)
   Underwriting Expenses                           352,144           35.3%               235,911          31.0%
   Rent, Telephone & Quotes                         48,271            5.7%                 6,965           0.8%
   Other                                          (326,472)         (14.4%)             (137,933)         (5.7%)

Total                                           $5,395,897           37.3%           ($2,075,884)        (12.5%)

Pretax Income                                  $22,041,153            N/A           ($13,858,645)       (124.5%)
</TABLE>

1999 COMPARED TO 1998

         Total revenues for 1999 rose 233.5 percent from 1998, from
$11,749,532 to $39,186,582. 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 less in 1999 (11.37
percent) than in 1998 (17.97 percent), but 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 23.2 percent, or $398,928, in 1999 compared to 1998. Four
transactions were completed in 1998, raising a total of $37 million for the
issuers; 4 transactions were also completed in 1999, raising an aggregate of
$43 million for corporate finance clients. Investment income


                                       13
<PAGE>

increased $23,589,542, from a loss of $1,949,262 in 1998 to income of
$21,640,280 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
positions 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 resulting in profits of
$11,356,582, and 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 $352,144, or 35.3 percent. While the same
number of transactions were 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 14.4 percent, from
$2,267,545 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.

         The Company had a pretax loss of $2,729,657 in 1998 compared to a
pretax profit of $19,311,496 in 1999. The primary reason for this increase
was the significant increase in investment income. Independent of investment
income, the Company would have had a pretax loss of $2,328,784 in 1999
compared to a pretax loss of $780,395 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 positions 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 $961,017 from
income taxes in 1998, compared to an expense of $7,600,260 in 1999.

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


                                       14
<PAGE>

1998 COMPARED TO 1997

         Total revenues for 1998 fell 57.6 percent from 1997, to $11,749,532
from $27,684,061. As shown in the table above, sales commissions fell
$1,404,382, or 11.0 percent, to $11,324,412 in 1998 from $12,728,794 in 1997.
This decrease resulted primarily from the less favorable price movements and
trading levels in smaller capitalization OTC issues in 1998 compared to 1997.
The Nasdaq Industrial Average rose more in 1997 (11.17 percent) than in 1998
(6.55 percent), and PIC's focus is on very small capitalization issues,
especially those tied to PIC's corporate finance clients, which experienced a
less favorable market in 1998. Corporate finance revenues fell 56.3 percent,
or $2,208,823, in 1998 compared to 1997. Four transactions were completed in
1998, raising a total of $37 million for the issuers; 6 transactions were
completed in 1997, raising an aggregate of $93 million for corporate finance
clients. Investment income decreased $11,741,273, to a loss of $1,949,262 in
1998 from income of $9,792,011 in 1997, primarily as a result of unrealized
depreciation of the value of underwriter warrants held by the Company, based
upon the Company's estimate of their fair value. No underwriter warrants were
exercised in 1998 while one warrant was exercised in 1997, and the profits
from investments sold in the investment account in 1997 were significantly
greater than in 1998. Trading income fell $605,763, or 50.7 percent, to
$589,822 in 1998 from $1,195,585 in 1997. This decline was due to lower
trading levels in 1998 and the generally more favorable markets in smaller
capitalization OTC issues in 1997 compared to 1998.

         Total expenses fell $2,075,884 in 1998 from 1997, a decrease of 12.5
percent to $14,479,189 from $16,555,073. Commissions and salaries fell
$2,180,827, or 17.4 percent, to $10,370,979 in 1998 from $12,551,806 in 1997.
This decrease was primarily due to decreased commission revenues resulting in
a lower level of commissions paid. Higher commission rates are generally paid
to employee registered representatives at higher production levels as an
incentive. Underwriting expenses increased by $235,911, or 31.0 percent.
While fewer transactions were completed in 1998, PIC was the sole manager for
all transactions and bore all the expenses. In addition, expenses were
incurred on transactions that were not completed. Rent, telephone and quote
expenses increased to $842,437 in 1998 from $835,472 in 1997, an increase of
0.8 percent. Other expenses decreased 5.7 percent, to $2,267,545 in 1998 from
$2,405,478 in 1997, with increased settlements and travel and entertainment
expenses more than offset by declines in professional fees and other expenses.

         The Company had a pretax loss of $2,729,657 in 1998 compared to a
pretax profit of $11,128,988 in 1997. The primary reasons for this decrease
were the significant decreases in investment income, corporate finance
revenues and trading income. Independent of investment income, the Company
would have had pretax income of $1,336,977 in 1997 compared to a pretax loss
of $780,395 in 1998. Investment income in 1995 through 1997 was significantly
higher than in any previous year in the Company's history, primarily as a
result of increases in 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
positions 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


                                       15
<PAGE>

PIC's revenues and operating results from one period to another. The Company
also incurred a benefit of $961,017 from income taxes in 1998, compared to an
expense of $4,178,593 in 1997.

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, 1999 was
$23,618,990. Of PIC's total assets (net of intercompany accounts) at December
31, 1999 of $35,639,226, approximately 76 percent consisted of securities in
PIC's investment account, trading inventory and underwriter warrant
securities, at fair value, and approximately 21 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 1994 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 $1,014,210, currently valued at
$1,014,210, 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, 1999, 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.

         Another source of capital to PIC and the Company has been the
exercise of underwriter warrants issued to PIC in connection with its
corporate finance activities and the sale of the underlying securities. These
warrants are not reflected on the balance sheet of PIC or Paulson Capital.
While the warrants and the securities issuable upon exercise of the warrants
are not immediately saleable, PIC receives the right to require the issuer to
register the underlying securities for resale to the public. Profits, if any,
from the warrants are realized based upon the difference between the market
price and the exercise price on the date of exercise. Further profits or
losses are subsequently realized when the underlying securities are sold.
Profits and losses realized from the warrants are recorded as "Investment
Income." There is no public market for the


                                       16
<PAGE>

underwriter warrants. The securities receivable upon exercise of the
underwriter warrants cannot be resold unless the issuer has registered these
securities with the SEC and the states in which the securities will be sold
or exemptions are available. Any delay or other problem in the registration
of these securities would have an adverse impact upon PIC's ability to obtain
funds from the exercise of the underwriter warrants and the resale of the
underlying securities. At December 31, 1999, PIC owned 28 underwriter
warrants (from 26 issuers), of which 23 were currently exercisable and 8 had
an exercise price below the current market price of the securities receivable
upon exercise. The value of the firm's underwriter warrants depends on the
prices of the underlying securities. These prices are influenced by general
movements in the prices of OTC securities as well as the success of the
issuers of the underwriter warrants. As of December 31, 1999, the Company
estimated that the value of PIC's underwriter warrants that had an exercise
price below the current market price of the securities receivable upon
exercise was $10,490,000. This estimate includes estimates by the Company of
discounts for lack of marketability, risk of failure of the issuer to
register the securities for resale and other possible difficulties that may
prevent the Company from realizing the value of the underwriter warrants. The
prices of the securities underlying the underwriter warrants are very
volatile, and substantial fluctuations in the Company's estimate of their
value can be expected in the future.

         In 1999, $6,879,286 of net cash was used in operating activities. The
major adjustments to reconcile this result to the Company's net income included
unrealized appreciation on investment securities and underwriter warrants of
$13,556,395, a realized gain of $8,083,884 on investment securities, an increase
in receivables of $6,082,055 and an increase in trading securities of $119,061,
partially offset by an increase in accounts payable and accrued liabilities of
$3,279,288, a change in deferred income taxes of $1,826,873, income taxes
payable of $1,284,859 and depreciation and amortization of $136,274. In 1999,
$7,943,963 of net cash was provided by investing activities, primarily sales of
investment securities exceeding purchases investment securities and the issuance
of a note receivable of $1,100,000. Net cash used in financing activities in
1999 totaled $1,116,812, resulting from payments to repurchase 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, 1999, 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.


                                      17
<PAGE>

YEAR 2000 EFFORTS

         In 1998 and 1999, the Company took various steps to address the issue
of computer programs and embedded computer chips being unable to distinguish
between the year 1900 and the year 2000 (the "Y2K" issue). The Company has no
proprietary operating system or applications software, nor do any of its
operations use mainframe or mini-computer systems. Therefore, the Company's
focus with respect to the Y2K issue was: (1) its PC hardware and software
purchased from third parties; and (2) external suppliers and service providers.
While there is no assurance that associated problems may not arise in the
future, to date the Company has not experienced any material problems relating
to the Y2K issue.

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.


                                      18
<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

<TABLE>
<CAPTION>

 (a) FINANCIAL STATEMENTS                                                                                  PAGE
<S>                                                                                                        <C>
Report of Independent Certified Public Accountants                                                         F-1

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

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

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

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

Notes to Consolidated Financial Statements                                                                 F-7

Supplementary Schedule of Warrants Owned                                                                   F-17

Schedule II - Valuation and Qualifying Account                                                             F-18
</TABLE>


<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors and Shareholders
Paulson Capital Corp.

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

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

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

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

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

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


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


                                      F-1
<PAGE>

                      Paulson Capital Corp. and Subsidiary


                           CONSOLIDATED BALANCE SHEETS

                                  December 31,

<TABLE>
<CAPTION>
                              ASSETS                                                    1999                  1998
                                                                                   ----------------      ----------------
                                                                                                           (restated)
<S>                                                                                <C>                   <C>
CURRENT ASSETS
   Cash and cash equivalents                                                       $       48,210        $      100,345
   Receivable from broker-dealers and clearing organizations                            7,336,562             1,430,586
   Notes and other receivables                                                            671,514               439,967
   Trading securities                                                                   2,238,798             2,119,737
   Investment securities                                                               14,200,767             9,697,387
   Underwriter warrants                                                                10,490,000             2,488,000
   Refundable income taxes                                                                      -               168,059
   Prepaid and deferred expenses                                                          669,599               578,556
   Deferred income taxes                                                                        -                53,373
                                                                                   ----------------      ----------------

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

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

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


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

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

               LIABILITIES AND SHAREHOLDERS' EQUITY

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

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

SHAREHOLDERS' EQUITY
   Preferred stock, no par value; authorized, 500,000
      shares; issued and outstanding, no shares                                                 -                     -
   Common stock, no par value; authorized, 10,000,000
      shares; issued and outstanding, 3,541,235 and
      3,796,852, respectively                                                             732,343               775,323
   Retained earnings                                                                   24,682,263            14,036,359
                                                                                   ----------------      ----------------

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

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

The accompanying notes are an integral part of this statement.
</TABLE>


                                     F-2
<PAGE>

                      Paulson Capital Corp. and Subsidiary

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                                  1999                  1998                  1997
                                                             ----------------      ----------------      ----------------
                                                                                     (restated)            (restated)
<S>                                                          <C>                   <C>                   <C>
Revenues
   Commissions                                               $   15,075,567        $   11,324,412        $   12,728,794
   Corporate finance                                              2,115,619             1,716,691             3,925,514
   Investment income (loss)                                      21,640,280            (1,949,262)            9,792,011
   Trading income                                                   317,159               589,822             1,195,585
   Interest and dividends                                            16,641                48,668                 7,010
   Other                                                             21,316                19,201                35,147
                                                             ----------------      ----------------      ----------------

                                                                 39,186,582            11,749,532            27,684,061
                                                             ----------------      ----------------      ----------------
Expenses
   Commissions and salaries                                      15,692,933            10,370,979            12,551,806
   Underwriting expenses                                          1,350,372               998,228               762,317
   Rent, telephone and quotation services                           890,708               842,437               835,472
   Interest expense                                                   1,248                60,889                 5,996
   Professional fees                                                394,368               389,478               639,386
   Bad debt expense                                                  80,379                84,670                55,011
   Travel and entertainment                                         333,927               283,234               158,649
   Settlements                                                       59,000               518,362                67,299
   Other                                                          1,072,151               930,912             1,479,137
                                                             ----------------      ----------------      ----------------
                                                                 19,875,086            14,479,189            16,555,073
                                                             ----------------      ----------------      ----------------

               Earnings (loss) before income taxes               19,311,496            (2,729,657)           11,128,988

Income tax expense (benefit)                                      7,600,260              (961,017)            4,178,593
                                                             ----------------      ----------------      ----------------

               NET EARNINGS (LOSS)                           $   11,711,236        $   (1,768,640)       $    6,950,395
                                                             ================      ================      ================

Basic earnings (loss) per share                              $         3.16        $         (.45)       $         1.75
                                                             ================      ================      ================

Diluted earnings (loss) per share                            $         3.16        $         (.45)       $         1.74
                                                             ================      ================      ================
</TABLE>

The accompanying notes are an integral part of this statement.


                                     F-3
<PAGE>

                     Paulson Capital Corp. and Subisidiary

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

                    Three year period ended December 31, 1999

<TABLE>
<CAPTION>

                                                                          Common Stock
                                                                ----------------------------------         Retained
                                                                   Shares              Amount              Earnings
                                                                --------------      --------------      ----------------
<S>                                                             <C>                 <C>                 <C>
Balance at December 31, 1996, as previously reported               4,081,241        $    733,701        $     9,164,846

Restatement (Note N)                                                       -                   -                671,000
                                                                --------------      --------------      ----------------

Balance at December 31, 1996, as restated                          4,081,241             733,701              9,835,846

Exercise of stock options                                             87,140              89,283                      -

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

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

Net earnings for the year, as restated                                     -                   -              6,950,395
                                                                --------------      --------------      ----------------

Balance at December 31, 1997, as restated                          3,970,536             794,416             16,256,322

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

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

Net loss for the year, as restated                                         -                   -             (1,768,640)
                                                                --------------      --------------      ----------------

Balance at December 31, 1998, as restated                          3,796,852             775,323             14,036,359

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

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

Net earnings for the year                                                  -                   -             11,711,236
                                                                --------------      --------------      ----------------

Balance at December 31, 1999                                       3,541,235        $    732,343        $    24,682,263
                                                                ==============      ==============      ================
</TABLE>

The accompanying notes are an integral part of these statements.


                                      F-4
<PAGE>

                 Paulson Capital Corp. and Subsidiary

                 CONSOLIDATED STATEMENTS OF CASH FLOWS

                        Year ended December 31,

<TABLE>
<CAPTION>

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

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

               Net cash provided by (used in)
                  operating activities                                  (6,879,286)        2,839,764        (2,161,948)
                                                                     ----------------  ----------------  ----------------

Cash flows from investing activities
   Purchases of investment securities                                  (41,501,353)      (27,439,553)      (28,103,962)
   Proceeds from sale of investment securities                          50,636,252        25,400,567        31,405,663
   Proceeds from repayment of notes receivable                             211,725           500,000                 -
   Issuance of note receivable                                          (1,100,000)         (534,385)         (500,000)
   Additions to furniture and equipment                                   (302,661)         (254,652)         (114,474)
   Purchase of real estate                                                       -                 -          (169,900)
   Proceeds from sale of furniture and equipment                                 -             2,300             9,600
                                                                     ----------------  ----------------  ----------------

               Net cash provided by (used in)
                  investing activities                                   7,943,963        (2,325,723)        2,526,927
                                                                     ----------------  ----------------  ----------------

</TABLE>

The accompanying notes are an integral part of these statements.


                                      F-5
<PAGE>

                    Paulson Capital Corp. and Subsidiary

              CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                          Year ended December 31,

<TABLE>
<CAPTION>

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

               Net cash used in financing activities                         (1,116,812)       (486,916)       (477,204)
                                                                          --------------- --------------- ---------------


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

Cash and cash equivalents at beginning of year                                  100,345          73,220         185,445
                                                                          --------------- --------------- ---------------

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



CASH PAID DURING THE YEAR FOR

   Interest                                                               $       1,248   $      61,389   $       6,000
                                                                          =============== =============== ===============

   Income taxes                                                           $   1,441,715   $     901,408   $   2,405,275
                                                                          =============== =============== ===============

NONCASH INVESTING AND FINANCING ACTIVITY

   Repayment of secured demand note collateral agreement                  $         -     $     100,000   $         -
                                                                          =============== =============== ===============

</TABLE>


The accompanying notes are an integral part of these statements.

                                     F-6

<PAGE>

                      Paulson Capital Corp. and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

   1. PRINCIPLES OF CONSOLIDATION

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

   2. REVENUE RECOGNITION

   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.

   3. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

   4. FURNITURE AND EQUIPMENT

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

   5. CASH FLOWS

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


                                       F-7

<PAGE>


                      Paulson Capital Corp. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


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

   6. USE OF ESTIMATES

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

   7. EARNINGS PER SHARE

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

   8. INCOME TAXES

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


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

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

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

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


                                      F-8
<PAGE>

                      Paulson Capital Corp. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


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

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

<TABLE>
<CAPTION>
                                                                      1999                 1998
                                                                 ---------------      ----------------
       <S>                                                      <C>                  <C>
        Receivable from CSC                                      $    7,336,562       $    1,430,586
        Payable to CSC                                               (1,883,602)            (753,413)
                                                                 ---------------      ----------------

        Net receivable                                           $    5,452,960       $      677,173
                                                                 ===============      ================
</TABLE>

NOTE C - NOTES AND OTHER RECEIVABLES

   Notes and other receivables consist of the following:

<TABLE>
<CAPTION>
                                                                      1999                  1998
                                                                 ---------------       ---------------
       <S>                                                      <C>                   <C>
        Underwriting                                             $          -          $    267,191
        Employees                                                     558,131                49,493
        Independent brokers                                            59,045                69,909
        Other                                                          54,338                53,374
                                                                 ---------------       ---------------

                                                                 $    671,514          $    439,967
                                                                 ===============       ===============
</TABLE>

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

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

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


                                      F-9
<PAGE>


                      Paulson Capital Corp. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE D - TRADING AND INVESTMENT SECURITIES

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

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

<TABLE>
<CAPTION>
                                                            1999                                  1998
                                               --------------------------------      -------------------------------
                                                   Long              Short               Long             Short
                                               --------------     ------------      ---------------    -------------
       <S>                                    <C>                <C>               <C>                <C>
        Common stock                           $   1,895,409      $    65,794       $   1,686,731      $    50,672
        Preferred stock                                    -                -              39,008            5,511
        State and municipal bonds                    262,082                -             243,055            5,296
        Corporate bonds                               81,307                -             150,943                -
                                               --------------     ------------      ---------------    -------------

                                               $   2,238,798      $    65,794       $   2,119,737      $    61,479
                                               ==============     ============      ===============    =============
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                                   Market          Unrealized         Carrying
                                                  Cost             Value          Gain (Loss)           Value
                                             ---------------   ---------------  -----------------  ----------------
       <S>                                  <C>               <C>              <C>                <C>
        1999
           Corporate equities                $  11,752,070     $  14,178,877    $     2,426,807    $  14,178,877
           Corporate bonds                         102,420            21,890            (80,530)          21,890
                                             ---------------   ---------------  -----------------  ----------------

                                             $  11,854,490     $  14,200,767    $     2,346,277    $  14,200,767
                                             ===============   ===============  =================  ================

        1998
           Corporate equities                $  11,993,688     $   9,697,387    $    (2,296,301)   $   9,697,387
                                             ===============   ===============  =================  ================
</TABLE>

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

                                   F-10

<PAGE>


NOTE E - UNDERWRITER WARRANTS

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

   In estimating fair value of the warrants, management considers the trading
   volume and quoted prices of the underlying securities, the number of such
   securities held by the public, the remaining warrant exercise period and
   other factors that they believe might effect the value of the warrants.


NOTE F - FURNITURE AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                                      1999                 1998
                                                                                 ---------------      ---------------

<S>                                                                              <C>                  <C>
        Office equipment                                                         $  1,173,097         $    905,710
        Leasehold improvements                                                         35,274              120,354
        Vehicles                                                                       65,619               65,619
                                                                                 ---------------      ---------------
                                                                                    1,273,990            1,091,683
        Less accumulated depreciation
           and amortization                                                           748,274              732,354
                                                                                 ---------------      ---------------
                                                                                 $    525,716         $    359,329
                                                                                 ===============      ===============
</TABLE>

NOTE G - INCOME TAXES

   Income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
                                                                 1999                 1998                 1997
                                                            ---------------      ---------------      ---------------
<S>                                                         <C>                  <C>                  <C>
      Current tax expense
         Federal                                            $   1,921,593        $     724,613        $   2,364,177
         State                                                    782,794              110,643              366,116
                                                            ---------------      ---------------      ---------------
                                                                2,704,387              835,256            2,730,293
                                                            ---------------      ---------------      ---------------

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

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

                                                            $   7,600,260        $    (961,017)       $   4,178,593
                                                            ===============      ===============      ===============
</TABLE>


                                     F-11
<PAGE>

NOTE G - INCOME TAXES - Continued

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

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

                                                            $   7,600,260        $    (961,017)      $   4,178,593
                                                            ==============       ===============     ===============
</TABLE>

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

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

                                                                               $  (4,842,500)       $      53,337
                                                                               ================     ===============
</TABLE>

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


NOTE H - COMMON STOCK

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

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

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


                                     F-12
<PAGE>

NOTE H - COMMON STOCK - Continued

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

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

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

        Balance at December 31, 1997                                                       -
                                                                                  ============
</TABLE>

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


                                     F-13
<PAGE>

NOTE I - EARNINGS PER SHARE

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

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

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

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

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

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

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


                                     F-14
<PAGE>


NOTE J - LEASES

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

<TABLE>
<CAPTION>

           Year ended
          December 31,
        -----------------
<S>                                                                               <C>
              2000                                                                $  274,176
              2001                                                                   274,176
              2002                                                                   114,240
                                                                                  ------------
                                                                                  $  662,592
                                                                                  ============
</TABLE>

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


NOTE K - EMPLOYEE BENEFIT PLANS

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


NOTE L - CONTINGENCIES

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

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


NOTE M - NET CAPITAL REQUIREMENT

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


                                     F-15
<PAGE>

NOTE N - RESTATEMENT

   During the fourth quarter of 1999, the Company changed its method of
   accounting for underwriter warrants. Previously the Company recognized no
   value for these warrants. Upon reconsideration, it was determined that it is
   appropriate under generally accepted accounting principles to carry these
   securities at their estimated fair value. Accordingly, the financial
   statements for previous periods have been restated to reflect this change.

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

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

<TABLE>
<CAPTION>
                                                                              Three months ended
                                                       ------------------------------------------------------------------
                                                         March 31,        June 30,      September 30,     December 31,
                                                       --------------- --------------- ---------------- -----------------
<S>                                                    <C>             <C>             <C>              <C>
1999
Net income (loss), as previously reported              $     112,963   $   1,269,203   $      (426,746) $     5,822,816
Effect of adjustment                                         936,000       2,398,000         1,603,000           (4,000)
                                                       --------------- --------------- ---------------- -----------------
Net income, as restated                                $   1,048,963   $   3,667,203   $     1,176,254  $     5,818,816
                                                       =============== =============== ================ =================

Earnings (loss) per share, as previously reported      $      $0.03    $       0.34    $        (0.12)  $         1.61
Effect of adjustment                                           0.25            0.63              0.44                -
                                                       --------------- --------------- ---------------- -----------------
Earnings per share, as restated                        $       0.28    $       0.97    $         0.32   $         1.61
                                                       =============== =============== ================ =================

1998
Net income (loss), as previously reported              $     173,604   $    (879,490)  $    (2,101,563) $     2,771,809
Effect of adjustment                                        (152,000)     (1,086,000)         (740,000)         245,000
                                                       --------------- --------------- ---------------- -----------------
Net income (loss), as restated                         $      21,604   $  (1,965,490)  $    (2,841,563) $     3,016,809
                                                       =============== =============== ================ =================

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

1997
Net income, as previously reported                     $     791,059   $     583,370   $     1,807,880  $     1,172,086
Effect of adjustment                                         250,000       1,311,000         2,032,000         (997,000)
                                                       --------------- --------------- ---------------- -----------------
Net income, as restated                                $   1,041,059   $   1,894,370   $     3,839,880  $       175,086
                                                       =============== =============== ================ =================

Earnings per share, as previously reported             $       0.20    $       0.15    $         0.45   $         0.30
Effect of adjustment                                           0.06            0.33              0.52            (0.26)
                                                       --------------- --------------- ---------------- -----------------
Basic earnings per share, as restated                  $       0.26    $       0.48    $         0.97   $         0.04
                                                       =============== =============== ================ =================

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

                                      F-16
<PAGE>


                      Paulson Capital Corp. and Subsidiary

                   SUPPLEMENTARY SCHEDULE OF WARRANTS OWNED

                              December 31, 1999

<TABLE>
<CAPTION>
                                                                               Shares       Exercise
                                                                            Entitled to       Price         Expiration
                               Description                                    Purchase      Per-Share          Date
--------------------------------------------------------------------------  ------------- --------------  ---------------
<S>                                                                         <C>           <C>             <C>
AdStar.com (units) ERC 12-17-00                                                  60,500   $       7.20    2004, 12/16
Advantage Marketing Systems (units) ERC 11-12-98                                 65,520   $       5.40    2002, 11/12
Audiohighway (units) ERC 12-17-99                                               163,900   $       7.80    2003, 12/17
AVI Biopharma, Inc. (units) ERC 6-3-98                                          112,700   $      10.80    2002, 06/03
Beta Oil & Gas, Inc. ERC 7-30-00                                                  9,300   $       7.50    2004, 07/30
C3, Inc. ERC 11-14-98                                                           214,592   $      18.00    2002, 11/14
Cal-Maine Foods, Inc. ERC 12-11-97                                              177,100   $       8.40    2001, 12/10
Careside, Inc. (units) ERC 06-15-00                                              92,650   $       9.00    2004, 06/15
Caring Products International, Inc. (units) ERC 12-9-98                          83,075   $       6.00    2002, 12/09
Cell Robotics International, Inc. (units) ERC 9-19-96                           9.3725    $  25,000.00    2000, 09/18
Cell Robotics International, Inc. (units) ERC 2-2-99                             29,800   $       9.90    2003, 02/01
Cellegy Pharmaceuticals, Inc. (units) ERC 8-11-96                                18,745   $      20.63    2000, 08/11
Complete Management, Inc. ERC 12-27-96                                          107,720   $      10.80    2000, 12/27
Complete Management, Inc. ERC 6-11-97                                            31,377   $      21.04    2001, 06/11
Cusac Industries, Ltd. (units) ERC 1-11-96                                       11,901   $      12.00    2000, 01/11
Dag Media, Inc. ERC 05-12-00                                                     90,562   $       7.80    2004, 05/12
E.Com International, Inc. ERC 12-5-97                                            75,587   $       3.50    2002, 12/31
Global Payment Technology ERC 2-6-96                                            103,500   $       6.60    2000, 02/06
Hometown Auto Retailers NC ERC 7-28-99                                          120,690   $      10.80    2003, 07/28
Kyzen Corporation (units) ERC 8-3-96                                             15,498   $      14.95    2000, 08/03
Microfield Graphics, Inc. ERC 6-22-96                                            79,750   $       7.20    2000, 06/22
Neotherapeutics Inc. (units) ERC 9-25-97                                        161,000   $       9.12    2001, 09/25
Pacific Aerospace & Electronics (Units) ERC 7-15-97                             146,700   $       3.75    2001, 07/15
Premium Cigars International, Ltd. ERC 8-21-98                                    2,000   $       8.40    2002, 08/21
R-B Rubber Products, Inc. ERC 5-10-96                                            55,100   $       5.10    2000, 05/10
Supergen, Inc. (units) ERC 3-12-97                                              218,950   $       7.20    2001, 03/12
3D shopping.com (units) ERC 07-20-00                                             73,466   $      14.40    2004, 07/20
WSG Systems, Inc. ERC 4-8-99                                                   11.0260    $   6,000.00    2003, 03/31
</TABLE>


                                     F-17
<PAGE>

                     Paulson Capital Corp. and Subsidiary           Schedule II

                      Valuation and Qualifying Accounts

                 Years ended December 31, 1999, 1998 and 1997

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

Year ended Dec. 31, 1999                         $    267,193                $55,466      $    322,659*     $        -
Year ended Dec. 31, 1998                                    -                352,641      $     85,448      $    267,193
Year ended Dec. 31, 1997                                    -                 17,206            17,206                 -


*  Net of recoveries of previously reserved amounts of $105,863.
</TABLE>


                                      F-18


<PAGE>



ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         There has been no Form 8-K filed within 24 months prior to the date of
the most recent consolidated financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.

                                    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 2000
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.



<PAGE>

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, 1999 are set forth below.
The year each person became a director follows his or her name.

<TABLE>
<CAPTION>
                                                                      PRINCIPAL OCCUPATION(S) DURING PAST FIVE
             NAME                AGE    POSITION(S) WITH COMPANY                      YEARS
<S>                              <C>    <C>                           <C>
Chester L.F. Paulson (1970)       63    President and Director        Director of Corporate Finance of PIC

Jacqueline M. Paulson (1976)      60    Secretary-Treasurer and       Secretary-Treasurer of PIC
                                        Director

Glen Davis                        43    Director                      President of PIC since February 1998 (Senior
(1999)                                                                Vice President of PIC until February 1998

Kenneth T. LaMear (1985)          65    Director                      Senior Vice President of PIC since February
                                                                      1998, Chief Executive Officer of PIC  until
                                                                      February 1998

Shannon P. Pratt                  66    Director                      Managing Director, Founder - Willamette
(1998)                                                                Management Associates, a business valuation
                                                                      firm

Paul Shoen                        43    Director                      Chairman of the Board of Directors and Chief
(1998)                                                                Executive Officer of Panetechnicon Aviation,
                                                                      an operator and lessor of aircraft; private
                                                                      investor; Director -- AMERCO, the parent
                                                                      company of U-Haul Trucking Rental and
                                                                      Telepartner A/S, a long distance telephone
                                                                      provider

John Westergaard                  68    Director                      Publisher/Editor of Westergaard Online
(1998)                                                                Systems, Inc., an Internet publisher of
                                                                      financial "webzines"


         Chester L.F. Paulson and Jacqueline M. Paulson are husband and wife.
</TABLE>



<PAGE>

(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

         21.1     Subsidiaries - The Company's only subsidiary is Paulson
                  Investment Company, Inc., an Oregon corporation.

         27.1     Financial Data Schedule



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






<PAGE>

                                   SIGNATURES

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


                                                PAULSON CAPITAL CORP.


Date:  April 13, 2000                      By:  /s/ CHESTER L.F. PAULSON
     -----------------------                    ------------------------
                                                Chester L.F. Paulson
                                                President


                                        23
<PAGE>


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

                 SIGNATURE                                    TITLE                       DATE
<S>                                            <C>                                   <C>

(1) PRINCIPAL EXECUTIVE AND FINANCIAL
OFFICER

/s/ CHESTER L.F. PAULSON                                                              April 13, 2000
-------------------------------------          Chairman of the Board and President   ---------------
Chester L.F. Paulson

(2) PRINCIPAL ACCOUNTING OFFICER

/s/ CAROL RICE                                                                        April 12, 2000
-------------------------------------          Principal Accounting Officer          ---------------
Carol Rice

(3) DIRECTORS

/s/ JACQUELINE M. PAULSON                                                             April 13, 2000
-------------------------------------          Secretary, Treasurer and Director     ---------------
Jacqueline M. Paulson

/s/ GLEN DAVIS                                                                        April 13, 2000
-------------------------------------                    Director                    ---------------
Glen Davis


-------------------------------------                    Director                    ---------------
Kenneth T. LaMear

/s/ SHANNON PRATT                                                                     April 13, 2000
-------------------------------------                    Director                    ---------------
Shannon Pratt

/s/ PAUL SHOEN                                                                        April 13, 2000
-------------------------------------                    Director                    ---------------
Paul Shoen

/s/ JOHN WESTERGAARD                                                                  April 13, 2000
-------------------------------------                    Director                    ---------------
John Westergaard

</TABLE>


                                     24
<PAGE>

<TABLE>
<CAPTION>
   EXHIBIT                                                                                 PAGE
    NUMBER                               DESCRIPTION                                      NUMBER
   -------                               -----------                                      ------
<S>             <C>                                                                       <C>
     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

     21.1       Subsidiaries - The Company's only subsidiary is Paulson
                Investment Company, Inc., an Oregon corporation.

     27.1       Financial Data Schedule

</TABLE>