<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON D.C. 20549

                                   ----------
                                   FORM 10-QSB

   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
                                   Act of 1934

                      For the Quarter ended March 31, 2000

                         Commission file number: 0-18188

                              PAULSON CAPITAL CORP.
                              ---------------------
              Exact name of registrant as specified in its charter


                     Oregon                              93-0589534
                     ------                              ----------
              (State of incorporation)    (I.R.S. Employer Identification)


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

       Registrant's telephone number, including area code: (503) 243-6000
                                                          ---------------

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

     Number of shares outstanding of each of the issuer's classes of common
                           stock, as of May 10, 2000:

                  Common stock, no par value - 3,541,235 shares

           Transitional Small Business Disclosure Format Yes     No X
                                                            ----   ----

                                       1
<PAGE>

                         PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                      PAULSON CAPITAL CORP. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                              3/31/00           12/31/99
ASSETS

CURRENT ASSETS
<S>                                       <C>                <C>
Cash and cash equivalents                 $   261,579        $    48,210
Receivable from broker-dealers and
 clearing organizations                    24,902,468          7,336,562
Notes and other receivables                   476,446            671,514
Trading securities                          1,748,858          2,238,798
Investment securities                      29,957,958         14,200,767
Underwriter warrants                          809,270         10,490,000
Refundable income taxes                          --                 --
Prepaid and deferred expenses                 586,440            669,599
Deferred income taxes                            --                 --
                                          -----------        -----------

TOTAL CURRENT ASSETS                       58,743,019         35,655,450
                                          -----------        -----------

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

FURNITURE AND EQUIPMENT, net                  534,965            525,716
                                          -----------        -----------

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

                                          $60,547,884        $37,451,066
                                          ===========        ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       2
<PAGE>

                      PAULSON CAPITAL CORP. AND SUBSIDIARY

                     CONSOLIDATED BALANCE SHEETS - CONTINUED
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                    3/31/00           12/31/99
LIABILITIES AND
SHAREHOLDERS' EQUITY


CURRENT LIABILITIES
<S>                                             <C>                <C>
Accounts payable and accrued liabilities        $ 1,022,386        $   814,935
Payable to broker-dealers and clearing
 organizations                                    8,833,138          1,883,602
Compensation, employee benefits and
 payroll taxes                                    4,847,446          3,312,829
Securities sold, not yet purchased                   65,324             65,794
Income taxes payable                              4,466,400          1,116,800
Deferred income taxes                             6,787,500          4,842,500
                                                -----------        -----------

TOTAL CURRENT LIABILITIES                        26,022,194         12,036,460
                                                -----------        -----------

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
 3,541,235, respectively                            732,343            732,343
Retained earnings                                33,793,347         24,682,263
                                                -----------        -----------

Total shareholders' equity                       34,525,690         25,414,606
                                                -----------        -----------

                                                $60,547,884        $37,451,066
                                                ===========        ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       3
<PAGE>

                      PAULSON CAPITAL CORP. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000
                         AND MARCH 31, 1999 (UNAUDITED)

<TABLE>
<CAPTION>
                                                  3/31/00            3/31/99
REVENUES                                                          (Restated)
<S>                                           <C>                <C>
Commissions                                   $ 6,348,435        $ 3,537,225
Corporate finance                                  15,744              2,474
Investment income                              17,763,423          1,911,130
Trading income (loss)                             831,657            181,357
Interest and dividends                             20,024              2,319
Other                                               2,694                831
                                              -----------        -----------

                                               24,981,977          5,635,336
                                              -----------        -----------
EXPENSES

Commissions and salaries                        8,019,576          3,179,050
Underwriting expenses                               4,922               --
Rent, telephone and quotation services            288,665            239,189
Interest expense                                     --                1,244
Professional fees                                  99,920            132,846
Bad debt expense                                   30,155             30,000
Travel and entertainment                           52,579             59,705
Settlements                                        20,000             15,000
Other                                           1,282,076            271,039
                                              -----------        -----------

                                                9,797,893          3,928,073
                                              -----------        -----------

Earnings (loss) before income taxes            15,184,084          1,707,263

Provision for income taxes
Current                                         4,128,000             75,300
Deferred                                        1,945,000            583,000
                                              -----------        -----------

NET EARNINGS (LOSS)                           $ 9,111,084        $ 1,048,963
                                              ===========        ===========

Earnings (loss) per share                     $      2.57        $       .28
                                              ===========        ===========
</TABLE>

         The accompanying notes are an integral part of these statements

                                       4
<PAGE>

                      PAULSON CAPITAL CORP. AND SUBSIDIARY
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1999
              AND THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)

<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                                                         --                   --                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

Net earnings for year to date                                                                            9,111,084
                                                            ------------         ------------         ------------

Balance at March 31, 2000                                      3,541,235         $    732,343         $ 33,793,347
                                                            ============         ============         ============
</TABLE>

         The accompanying notes are an integral part of these statements

                                       5
<PAGE>

                      PAULSON CAPITAL CORP. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
      FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND MARCH 31, 1999

<TABLE>
<CAPTION>
                                                                       3/31/00              3/31/99
                                                                  ------------         ------------
Increase (Decrease) in Cash and Cash Equivalents                                          (Restated)
<S>                                                               <C>                  <C>
Cash flows from operating activities
    Net earnings (loss)                                           $  9,111,084         $  1,048,963
    Adjustments to reconcile net earnings (loss) to
       net cash used in operating activities
          Unrealized (appreciation) depreciation
              on investment securities                              (5,118,960)            (407,824)
          Realized gain on investment securities                   (12,644,464)          (1,503,306)
          Depreciation and amortization                                 42,222               26,117
          Deferred income taxes                                      1,945,000              583,000
          Change in assets and liabilities
              Receivables                                          (17,370,838)          (3,554,625)
              Trading securities                                      (868,172)             572,615
              Refundable income taxes                                     --                 75,050
              Prepaid and deferred expenses                             83,159              414,493
              Accounts payable and accrued liabilities               8,691,604              228,734
              Securities sold, not yet purchased                          (470)             (12,418)
              Income taxes payable                                   3,349,600                 --
                                                                  ------------         ------------

       Net cash provided by (used in) operating activities         (12,780,235)          (2,529,201)
                                                                  ------------         ------------


Cash flows from investing activities
    Purchases of investment securities                             (46,977,794)         (11,071,970)
    Proceeds from sale of investment securities                     60,022,869           13,966,117
    Additions to furniture and equipment                               (51,471)            (226,215)
    Proceeds from sale of furniture and equipment                         --                   --
                                                                  ------------         ------------

       Net cash provided by (used in) investing activities        $ 12,993,604         $  2,667,932
                                                                  ============         ============
</TABLE>


         The accompanying notes are an integral part of these statements

                                       6
<PAGE>

          CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED

<TABLE>
<CAPTION>
                                                                    3/31/00          3/31/99
                                                                  ---------        ---------
<S>                                                               <C>              <C>
Cash flows from financing activities
    Proceeds from exercise of stock options                            --               --
    Payments to retire common stock                                    --           (184,750)
    Decrease in bank overdraft payable                                 --               --
                                                                  ---------        ---------

       Net cash provided by (used in) financing activities             --           (184,750)
                                                                  ---------        ---------


              NET INCREASE (DECREASE) IN CASH AND
                  CASH EQUIVALENTS                                  213,369          (46,019)

Cash and cash equivalents at beginning of period                     48,210          100,345
                                                                  ---------        ---------

Cash and cash equivalents at March 31                             $ 261,579        $  54,326
                                                                  =========        =========


CASH PAID DURING THE THREE MONTHS FOR

    Interest                                                      $    --          $   1,244
                                                                  =========        =========

    Income taxes                                                  $ 778,400        $     250
                                                                  =========        =========

</TABLE>


         The accompanying notes are an integral part of these statements

                                       7
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
1. Basis of Presentation

         The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for interim financial statements in
Article 10 of Regulation S-X and, therefore, do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the interim financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary to state fairly the information shown therein. The nature
of the Company's business is such that the results of any interim period are not
necessarily indicative of results for a full fiscal year.

2. Securities Owned

         Any losses from the disposition of securities are reflected in trading
revenues on the income statement for the period.

3. Commitments and Contingencies

         The Company and its operating subsidiary, Paulson Investment Company
("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 alleged
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 sought rescission of
the offering as well as actual damages, interest, attorney fees and punitive
damages. ^ PIC and plaintiffs have reached a settlement of this matter. The
settlement received final court approval on May 2, 2000. The total payment by
PIC under the settlement depends upon the number of purchasers in the public
offering who filed valid claims prior to an April 24, 2000 deadline. 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.

                                       8
<PAGE>

         In October 1998, Masood Asif and Bobbie Sierra, former PIC customers,
filed an NASD arbitration claim 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 ^
fully investigated this claim, but believes it has meritorious defenses and
intends to defend this matter vigorously.

         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 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.

                                       9
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED MARCH 31, 1999

         RESULTS OF OPERATIONS

         The revenues and operating results of the Company's operating
subsidiary, Paulson Investment Company, Inc. ("PIC"), are influenced by
fluctuations in the equity underwriting markets as well as general economic and
market conditions, particularly conditions in the over-the-counter market, where
PIC's investment account, trading inventory positions and underwriter warrants
are heavily concentrated. Significant fluctuations can occur in PIC's revenues
and operating results from one period to another. PIC's financial results 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 period to period. In
the table below, "Trading Income" is the net gain or loss from trading positions
before commissions paid to the representatives in the trading department.

                     SUMMARY OF CHANGES IN MAJOR CATEGORIES
                            OF REVENUES AND EXPENSES

<TABLE>
<CAPTION>
                                                         QUARTERS ENDED
                                                 3/31/00 VS. (RESTATED) 3/31/99
                 REVENUES:
                 <S>                               <C>                <C>
                 Sales Commissions                 $ 2,811,210         79.5%
                 Corporate Finance                      13,270        536.4%
                 Investment Income                  15,852,293        829.5%
                 Trading Income                        650,300        358.6%
                 Other                                  19,568        621.2%
                                                   -----------        ------

                 Total                             $19,346,641        343.3%

                 EXPENSES:
                 Commissions and Salaries          $ 4,840,526        152.3%
                 Underwriting Expenses                   4,922          N/A
                 Rent, Telephone and Quotes             49,476         20.7%
                 Other                                 974,896        191.2%
                                                   -----------        ------

                 Total                             $ 5,869,820        149.4%

                 Pretax Income                     $13,476,821        789.4%
</TABLE>

                                       10
<PAGE>

         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. Any unrealized
change in the value of the Company's underwriter warrants will be reflected in
the "underwriter warrants" line item on the Company's balance sheet and in the
"investment income" line item on the Company's statement of operations.

         Total revenues for the first quarter of 2000 rose 343.3 percent from
the first quarter of 1999, to $24,981,977 from $5,635,336. As shown in the table
above, sales commissions rose $2,811,210, or 79.5 percent, to $6,348,435 in the
first quarter of 2000 from $3,537,225 in the comparable 1999 period. This
increase resulted primarily from the more favorable price movements and trading
levels in the stock market, especially the market for the very small
capitalization issues (the primary focus of PIC's investment banking and trading
businesses) in the 2000 quarter compared to 1999. The Nasdaq Industrial Average
rose 8.09 percent in the first quarter of 2000 compared to 6.32 percent in the
first quarter of 1999. Corporate finance revenues rose $13,270 in the first
quarter of 2000 compared to the first quarter of 1999. No transactions were
completed in either quarter. Corporate finance revenue is directly related to
the amount of money raised in completed transactions. Investment income rose
$15,852,293, or 829.5 percent, to $17,763,423 in the first quarter of 2000 from
$1,911,130 in the first quarter of 1999. Investment income included $10,920,900
of gain from the exercise of underwriter warrants and the sale of the securities
obtained, $1,640,217 of increased value of securities obtained but not yet sold
upon the exercise of underwriter warrants, a loss in value of $364,415 from
underwriter warrants that had not yet been exercised, and $6,166,721 of net
profits in investment securities unrelated to underwriter warrants. There were
no underwriter warrant exercises in the 1999 quarter, while four were exercised
in 2000. Trading income rose $650,300, or 358.6 percent, from $181,357 in the
first quarter of 1999 to $831,657 in the comparable 2000 period. This increase
was also due to increased prices and trading in the market for very small
capitalization companies described above.

         Total expenses rose $5,869,820 from the first quarter of 1999 to the
comparable 2000 period, an increase of 149.4 percent, to $9,797,893 from
$3,928,073. Commissions and salaries rose $4,840,526, or 152.3 percent, to
$8,019,576 in the 2000 period from $3,179,050 in 1999. This increase was
primarily due to bonus and compensation arrangements related to investment and
trading profits and increased commission revenues resulting in a higher level of
commissions paid. (Higher percentage commission levels are generally paid to
employee registered representatives at higher production levels.) Underwriting
expenses were $4,922 in 2000 while no underwriting expenses were incurred in
1999; no transactions were completed in either quarter. Rent, telephone and
quote expenses increased to $286,665 in the 2000 period from $239,189 in 1999,
an increase of 20.7 percent, primarily due to expenses related to improvements
in quotation and phone systems. The aggregate of all other expenses rose 191.2
percent, to $1,484,730 in the first quarter of 2000 from $509,834 in the first
quarter of 1999. This increase was primarily due to increased accrual for PIC's
profit sharing.

                                       11
<PAGE>

         The Company had a pretax profit of $15,184,084 in the first quarter of
2000 compared to a pretax profit of $1,707,263 in the comparable 1999 period,
primarily due to the increase in investment income and, to a lesser extent,
increased sales commissions and trading income. Significant fluctuations can
occur in PIC's revenues and operating results from one period to another.

         The Company also accrued $6,073,000 in income taxes for the first
quarter of 2000, compared to an accrual for income taxes in the first quarter of
1999 of $658,300. Independent of investment income, the Company would have had a
loss before income taxes in both quarters.

LIQUIDITY AND CAPITAL RESOURCES

         The majority of PIC's assets are cash and assets readily convertible to
cash. 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 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 tend to increase the liquidity of the market
for these securities. The overall increase in prices for the OTC securities
traded by PIC in both 2000 and 1998 was combined with a general increase in the
liquidity of the markets for these securities. The decline in prices for the OTC
securities traded by PIC in early 1999 was combined with a general decrease in
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.

         PIC borrows money from its clearing firm in the ordinary course of its
business, pursuant to an understanding under which the clearing firm agrees to
finance PIC's trading accounts. As of March 31, 2000, no net loans were
outstanding 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
underwriter warrants issued to PIC in connection with its corporate finance
activities and the sale of the underlying securities. These warrants are
reflected on the balance sheet of PIC or the Company at their estimated fair
value, with estimated discounts for lack of marketability. 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 recognized based upon the difference between the market price and
the exercise price less discounts, if any, for trading volume, the remaining
warrant exercise period and other factors. Further profits or losses are
subsequently realized when the underlying securities are sold. Profits and
losses recognized from the warrants are recorded as "Investment Income." There
is no public market for the 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

                                       12
<PAGE>

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 March 31, 2000, PIC owned 24
underwriter warrants (from 23 issuers), of which 19 were currently exercisable
and six 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.

         In the three months ended March 31, 2000, $12,780,235 of net cash was
used in operating activities of the Company. The major adjustments to reconcile
this result to the Company's net profit of $9,111,084 include an increase in
receivables of $17,370,838, unrealized appreciation in investment securities of
$5,118,960 and a realized gain on investment securities of $12,644,464 more than
offsetting an increase in accounts payable and accrued liabilities of
$8,691,604, income taxes payable of $3,349,600 and deferred income taxes of
$1,945,000. In the quarter, $12,993,604 of net cash was provided to the Company
by investing activities, the result of $60,022,869 in proceeds from the sale of
investment securities more than offsetting the purchase of $46,977,794 of
investment securities and $51,471 of additions to furniture and equipment. No
net cash was used in or provided by financing activities in the quarter. 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. At March 31, 2000, the Company had no material commitments for
capital expenditures.

         In general, the primary ongoing sources of PIC's, and therefore the
Company's, liquidity, including PIC's trading positions, borrowings on those
positions and profits recognized from 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 its clearing firm based upon those
positions, and the value of PIC's underwriter warrants. The Company believes its
liquidity is sufficient to meet its needs for the foreseeable future.

INFLATION

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

                                       13
<PAGE>

                                     PART II
                                OTHER INFORMATION

Item 1. Legal Proceedings.

         See Note 3 of Notes to Condensed Consolidated Financial Statements in
Item 1.

Item 2. Changes in Securities.

         None

Item 3. Defaults upon Senior Securities.

         None

Item 4. Submission of Matters to a Vote of Security Holders.

         None

Item 5. Other Information.

         None

Item 6. Exhibits and Reports on Form 8-K

<TABLE>
<CAPTION>
         Exhibit
           No.           Description
         -------         -----------
         <S>             <C>
           27            Financial Data Schedule
</TABLE>

No Reports on Form 8-K were filed during the quarter ended March 31, 2000.

                                       14
<PAGE>

                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                            PAULSON CAPITAL CORP.



Date: May 10, 2000                          By:  CHESTER L.F. PAULSON
      ----------------------------               ------------------------------
                                                 Chester L.F. Paulson
                                                 President



Date: May 10, 2000                          By:  CAROL RICE
      ----------------------------               ------------------------------
                                                 Carol Rice
                                                 Principal Accounting Officer

                                       15
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>

      Exhibit                                                   Sequential
        No.                Description                           Page No.
      -------              -----------                           --------
      <S>                  <C>                                  <C>
        27                 Financial Data Schedule

</TABLE>






                                       16