---

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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON D.C. 20549

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FORM 10-QSB/A(Amendment No. 2)

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

For the Quarter ended March 31, 2001

Commission file number: 0-18188

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

Oregon(State of incorporation)

93-0589534(I.R.S. Employer Identification)811 S.W. Naito Parkway
Portland, OR(Address of principal executive offices)

97204(Zip Code)


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, 2001:

Common stock, no par value3,263,866 shares

Transitional
Small Business Disclosure Format Yes / /  No /x/

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---

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PART IFINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

PAULSON CAPITAL CORP. AND SUBSIDIARY        CONSOLIDATED BALANCE SHEETS        (unaudited)

|                                                                                                                                  |  | 3/31/01 |            | 12/31/00
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------- | ---------- | --------
|
|ASSETS                                                                                                                            |  |         |            |         
|CURRENT ASSETS                                                                                                                    |  |         |            |         
|Cash and cash equivalents                                                                                                         |  | $       | 127,940    |         
|Receivable from clearing organization                                                                                             |  |         | 4,175,585  |         
|Notes and other receivables                                                                                                       |  |         | 813,884    |         
|Trading securities, at market value                                                                                               |  |         | 1,103,954  |         
|Investment securities, at market value                                                                                            |  |         | 13,828,651 |         
|Underwriter warrants, at estimated fair Value                                                                                     |  |         | 2,986,000  |         
|Prepaid and deferred expenses                                                                                                     |  |         | 273,292    |         
|Deferred income taxes                                                                                                             |  |         | 4,153,000  |         
|                                                                                                                                  |  |         |            |         
|Total Current Assets                                                                                                              |  |         | 27,462,306 |         
|                                                                                                                                  |  |         |            |         
|NOTE RECEIVABLE                                                                                                                   |  |         | 105,374    |         
|                                                                                                                                  |  |         |            |         
|FURNITURE AND EQUIPMENT, net                                                                                                      |  |         | 467,611    |         
|                                                                                                                                  |  |         |            |         
|INVESTMENT IN REAL ESTATE                                                                                                         |  |         | 169,900    |         
|                                                                                                                                  |  |         |            |         
|                                                                                                                                  |  | $       | 28,205,191 |         
|                                                                                                                                  |  |         |            |         
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                              |  |         |            |         
|CURRENT LIABILITIES                                                                                                               |  |         |            |         
|Accounts payable and accrued liabilities                                                                                          |  | $       | 185,827    |         
|Payable to clearing organization                                                                                                  |  |         | 713,122    |         
|Compensation, employee benefits and payroll taxes                                                                                 |  |         | 370,658    |         
|Securities sold, not yet purchased, at market value                                                                               |  |         | 93,749     |         
|Income taxes payable                                                                                                              |  |         | 719,251    |         
|                                                                                                                                  |  |         |            |         
|Total current liabilities                                                                                                         |  |         | 2,082,607  |         
|                                                                                                                                  |  |         |            |         
|Deferred income taxes                                                                                                             |  |         | 39,100     |         
|SHAREHOLDERS' EQUITY                                                                                                              |  |         |            |         
|Preferred stock, no par value; authorized, 500,000 shares; issued and outstanding, no shares                                      |  |         |           |         
|Common stock, no par value; authorized, 10,000,000 shares; issued and outstanding, 3,276,866 at 3-31-01 and 3,367,366 at 12-31-00 |  |         | 1,059,196  |         
|Retained earnings                                                                                                                 |  |         | 25,024,288 |         
|                                                                                                                                  |  |         |            |         
|Total shareholders' equity                                                                                                        |  |         | 26,083,484 |         
|                                                                                                                                  |  |         |            |         
|                                                                                                                                  |  | $       | 28,205,191 |         
|                                                                                                                                  |  |         |            |         

The
accompanying notes are an integral part of these statements.

2

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PAULSON CAPITAL CORP. AND SUBSIDIARY        CONSOLIDATED STATEMENTS OF OPERATIONS        for the three month periods ended March 31, 2001  and March 31, 2000
(unaudited) (restated)

|                                                       |  | 3/31/01 |            | 3/31/00
|------------------------------------------------------ |  | ------- | ---------- | -------
|
|Revenues                                               |  |         |            |        
|Commissions                                            |  | $       | 1,931,901  |        
|Corporate finance                                      |  |         | 1,588,482  |        
|Investment income                                      |  |         | (1,787,666 | )      
|Trading income                                         |  |         | 215,977    |        
|Interest and dividends                                 |  |         | 10,864     |        
|Other                                                  |  |         | 673        |        
|                                                       |  |         |            |        
|                                                       |  |         | 1,960,231  |        
|                                                       |  |         |            |        
|Expenses                                               |  |         |            |        
|Commissions and salaries                               |  |         | 2,016,889  |        
|Underwriting expenses                                  |  |         | 217,397    |        
|Rent, telephone and quotation services                 |  |         | 255,104    |        
|Interest expense                                       |  |         | 3          |        
|Professional fees                                      |  |         | 71,599     |        
|Bad debt expense                                       |  |         | 30,000     |        
|Travel and entertainment                               |  |         | 62,201     |        
|Settlements                                            |  |         | 1,050      |        
|Other                                                  |  |         | 338,816    |        
|                                                       |  |         |            |        
|                                                       |  |         | 2,993,059  |        
|                                                       |  |         |            |        
|Earnings (loss) before income taxes                    |  |         | (1,032,828 | )      
|Provision for income taxes                             |  |         |            |        
|Current                                                |  |         | (526,730   | )      
|Deferred                                               |  |         | 109,000    |        
|                                                       |  |         |            |        
|Net Earnings (Loss)                                    |  | $       | (615,098   | )      
|                                                       |  |         |            |        
|Earnings (loss) per share, Basic and Diluted           |  | $       | (0.18      | )      
|                                                       |  |         |            |        
|Weighted Average number of shares Outstanding, basic   |  |         | 3,325,833  |        
|Weighted Average number of shares Outstanding, diluted |  |         | 3,328,349  |        

The
accompanying notes are an integral part of these statements

3

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PAULSON CAPITAL CORP. AND SUBSIDIARY        CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY        For the three year period ended December 31, 2000  and the three
months ended March 31, 2001 (unaudited) (restated)

|                                                                 |  | Common Stock |   |   |          
|---------------------------------------------------------------- |  | ------------ | - | - | ---------
|
|
|Balance at December 31, 1997, as restated                        |  | 3,970,536    |   |   | 794,416  
|Issuance of common stock in lieu of directors' cash compensation |  | 4,283        |   |   | 16,500   
|Redemption of common stock                                       |  | (177,967     | ) |   | (35,593  
|Net loss for the year, as restated                               |  |             |   |   |         
|                                                                 |  |              |   |   |          
|Balance at December 31, 1998, as restated                        |  | 3,796,852    |   |   | 775,323  
|Issuance of common stock in lieu of directors' cash compensation |  | 1,783        |   |   | 8,500    
|Redemption of common stock                                       |  | (257,400     | ) |   | (51,480  
|Net earnings for the year, as restated                           |  |             |   |   |         
|                                                                 |  |              |   |   |          
|Balance at December 31, 1999, as restated                        |  | 3,541,235    |   |   | 732,343  
|Stock option grants                                              |  |             |   |   | 317,750  
|Stock options exercised                                          |  | 16,000       |   |   | 71,000   
|Redemption of common stock                                       |  | (189,869     | ) |   | (41,082  
|Net earnings for the year, as restated                           |  |             |   |   |         
|                                                                 |  |              |   |   |          
|Balance at December 31, 2000, as restated                        |  | 3,367,366    |   |   | 1,080,011
|Redemption of common stock                                       |  | (90,500      | ) |   | (20,815  
|Net loss for year to date, as restated                           |  |             |   |   |         
|                                                                 |  |              |   |   |          
|Balance at March 31, 2001, as restated                           |  | 3,276,866    |   | $ | 1,059,196
|                                                                 |  |              |   |   |          

The
accompanying notes are an integral part of these statements

4

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PAULSON CAPITAL CORP. AND SUBSIDIARY        CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (restated)        for the three month periods ended March 31, 2001 and
March 31, 2000

|                                                 |                                                                                                     | 3/31/01 |                                                                 | 3/31/00                                              |  
|------------------------------------------------ | --------------------------------------------------------------------------------------------------- | ------- | --------------------------------------------------------------- | ---------------------------------------------------- | -
|
|Increase (Decrease) in Cash and Cash Equivalents |                                                                                                     |         |                                                                 |                                                      |  
|Cash flows from operating activities             |                                                                                                     |         |                                                                 |                                                      |  
|                                                 | Net earnings (loss)                                                                                 |         | $                                                               | (615,098                                             | )
|                                                 | Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities |         |                                                                 |                                                      |  
|                                                 |                                                                                                     |         | Unrealized (appreciation) depreciation on investment securities |                                                      |  
|                                                 |                                                                                                     |         | Realized gain on investment securities                          |                                                      |  
|                                                 |                                                                                                     |         | Depreciation and amortization                                   |                                                      |  
|                                                 |                                                                                                     |         | Deferred income taxes                                           |                                                      |  
|                                                 |                                                                                                     |         | Change in assets and liabilities                                |                                                      |  
|                                                 |                                                                                                     |         |                                                                 | Receivables                                          |  
|                                                 |                                                                                                     |         |                                                                 | Trading securities                                   |  
|                                                 |                                                                                                     |         |                                                                 | Prepaid and deferred expenses                        |  
|                                                 |                                                                                                     |         |                                                                 | Accounts payable and accrued liabilities             |  
|                                                 |                                                                                                     |         |                                                                 | Securities sold, not yet purchased                   |  
|                                                 |                                                                                                     |         |                                                                 | Income taxes payable                                 |  
|                                                 |                                                                                                     |         |                                                                 |                                                      |  
|                                                 |                                                                                                     |         | Net cash provided by (used in) operating activities             |                                                      |  
|                                                 |                                                                                                     |         |                                                                 |                                                      |  
|Cash flows from investing activities             |                                                                                                     |         |                                                                 |                                                      |  
|                                                 | Purchases of investment securities                                                                  |         |                                                                 | (10,890,701                                          | )
|                                                 | Proceeds from sale of investment securities                                                         |         |                                                                 | 9,270,619                                            |  
|                                                 | Additions to furniture and equipment                                                                |         |                                                                 | (8,538                                               | )
|                                                 | Proceeds from sale of furniture and equipment                                                       |         |                                                                 |                                                     |  
|                                                 |                                                                                                     |         |                                                                 |                                                      |  
|                                                 |                                                                                                     |         | Net cash provided by (used in) investing activities             |                                                      | $
|                                                 |                                                                                                     |         |                                                                 |                                                      |  
|Cash flows from financing activities             |                                                                                                     |         |                                                                 |                                                      |  
|                                                 | Proceeds from exercise of stock options                                                             |         |                                                                 |                                                     |  
|                                                 | Payments to retire common stock                                                                     |         |                                                                 | (486,248                                             | )
|                                                 | Decrease in bank overdraft payable                                                                  |         |                                                                 |                                                     |  
|                                                 |                                                                                                     |         |                                                                 |                                                      |  
|                                                 |                                                                                                     |         | Net cash provided by (used in) financing activities             |                                                      |  
|                                                 |                                                                                                     |         |                                                                 |                                                      |  
|                                                 |                                                                                                     |         |                                                                 | NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |  
|Cash and cash equivalents at beginning of period |                                                                                                     |         | 104,309                                                         |                                                      |  
|                                                 |                                                                                                     |         |                                                                 |                                                      |  
|Cash and cash equivalents at March 31            |                                                                                                     | $       | 127,940                                                         |                                                      | $
|                                                 |                                                                                                     |         |                                                                 |                                                      |  
|Cash paid during the three months for            |                                                                                                     |         |                                                                 |                                                      |  
|                                                 | Interest                                                                                            |         | $                                                               | 3                                                    |  
|                                                 |                                                                                                     |         |                                                                 |                                                      |  
|                                                 | Income taxes                                                                                        |         | $                                                               | 2,650,019                                            |  
|                                                 |                                                                                                     |         |                                                                 |                                                      |  

The
accompanying notes are an integral part of these statements

5

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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 Item
310(b) of Regulation S-B 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. Restatement

During the fourth quarter of 2001, we changed our method of accounting for underwriter warrants. Previously we carried these securities at their estimated fair
value, based solely on intrinsic value, once the restriction periods has lapsed. Upon reconsideration, it was determined that it is appropriate under generally accepted accounting principles to carry
these securities at their estimated fair value, using the Black-Scholes Option Pricing Model, as soon as the securities are received. Accordingly, the financial statements for previous periods have
been restated to correct these errors in previously issued financial statements that were not in compliance with existing accounting principles generally accepted in the United States. The effect of
this restatement for the three month periods ended March 31, 2001 and 2000 was to increase corporate finance revenue by $1,217,100 and $1,116,000, increase (decrease) investment income by
$(933,100) and $3,889,730, increase earnings before income taxes by $284,000
and $5,005,730, increase income tax expense by $109,000 and $1,921,000, increase net earnings by $175,000 and $3,084,730, and increase earnings per share by $0.06 and $0.87.

4. Commitments and Contingencies

In October 1998, Russell W. Cummings, a former PIC customer, filed a lawsuit in California state court asserting claims against PIC and a former PIC
registered representative alleging violations of the California Consumers Legal Remedies Act, fraud, negligent misrepresentation, breach of contract, tortious breach of the implied covenant of good
faith and fair dealing, breach of fiduciary duty and negligence. Plaintiff had agreed to arbitrate the matter before the NASD but never did so. Consequently, in July 2000, the California state
court dismissed the case. In November 2000, the California state court reinstated the case and, in January 2001, Cummings filed an arbitration claim against PIC and its former registered
representative. The complaint seeks $250,000 in actual damages and $1,500,000 in punitive damages. PIC has not had an opportunity to fully investigate this claim, but believes it has meritorious
defenses and intends to defend this matter vigorously.

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

6

---

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

In
April 2001, Michael Swan, a PIC customer, complained that a PIC broker failed to place a stop loss order on a stock that Swan held in one of his PIC accounts. The price of
the stock subsequently declined significantly and Swan now claims that PIC and its broker failed to place the stop loss, resulting in a loss of $125,000. Swan has demanded that PIC pay this amount to
him. PIC has not had an opportunity to fully investigate this claim.

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.

7

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

Three Months Ended March 31, 2001 vs. Three Months Ended March 31, 2000

Overview

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



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

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

A
substantial portion of our investment banking business consists of acting as managing underwriter of initial and follow-on public offerings for microcap companies. As a
part of our underwriter compensation for this activity, we typically receive warrants exercisable to purchase securities identical to those that we offer and sell to the public. The warrants are not
exercisable for the first year after the offering in which they are earned and are thereafter exercisable for four years, after which they expire. The exercise price is typically 120% of the price at
which we initially sold the securities to the public. Accordingly, unless there is at least a 20% increase in the price of these securities at some time more than one and less than five years after
the offering, the warrants will remain "under water" and will ultimately expire unexercised.

Under
Statement of Financial Accounting Standards No. 133, as amended by SFAS 137 and 138, we are required to estimate the value of all derivative securities that we
hold at the date of any financial statements and to include that value, and changes in such value, in those financial statements. The warrants described above are derivative securities for the purpose
of SFAS 133. Accordingly, the aggregate estimated value of our warrants as of the date of any balance sheet is recorded as an asset

8

---

on that balance sheet. When a new warrant is earned as a result of our investment banking activity, its estimated value is included in corporate finance revenue for the period in which it is earned.
In subsequent periods, any change in estimated value is recorded as investment income or loss for the period. If, and when, a warrant is exercised the book value is adjusted to reflect the value of
the securities purchased, net of the exercise price, and the adjustment amount is recorded as income or loss for the relevant period. If the warrant expires unexercised, the book value is adjusted to
zero and the decrease is recorded as a loss in the relevant period.

In
order to comply with SFAS 133, we have changed our method of estimating the value of our underwriter warrants from the "intrinsic value' method to the Black-Scholes Option
Pricing Model. We
have restated our financial results for the three months ending March 31, 2001 using this new model. The model requires us to use historical price data combined with various assumptions and
judgments to develop the inputs for the model. In particular, we have calculated a volatility factor for each company's warrants that is based on its own stock price movements as well as an index: as
our warrants get closer to their expiration date their volatility factor is almost entirely based on historical prices. We cannot assure you that we will ultimately be able to exercise any of our
warrants in a way that will realize the value that we attribute to them in our financial statements based on this model.

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



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.

9

---

Summary of Changes in Major Categories
of Revenues and Expenses

Quarters Ended
3/31/01 vs. 3/31/00Revenues:Sales Commissions

$
(4,416,534
)
(69.6
)%Corporate Finance


456,738

40.4
%Investment Income


(23,440,819
)
(108.3
)%Trading Income


(615,680
)
(74.0
)%Other


(11,181
)
(49.2
)%Total

$
(28,027,476
)
(93.5
)%Expenses:Commissions and Salaries

$
(6,002,687
)
(74.9
)%Underwriting Expenses


212,475

4,316.8
%Rent, Telephone and Quotes


(33,561
)
(11.6
)%Other


(981,061
)
(66.1
)%Total

$
(6,804,834
)
(69.5
)%Pretax Income

$
(21,222,642
)
(105.1
)%


Total
revenues for the first quarter of 2001 fell 93.5 percent from the first quarter of 2000, from $29,987,707 to $1,960,231. As shown in the table above, sales commissions
fell $4,416,534, from $6,348,435 in the first quarter of 2000 to $1,931,901 in the comparable 2001 period. This decrease resulted primarily from the less 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 2001 quarter compared to 2000. The
Nasdaq Industrial Average
rose 8.09 percent in the first quarter of 2000 but fell 17.05 percent in the first quarter of 2001. Corporate finance revenue rose to $1,588,482 for the first quarter of 2001, up
40.4 percent from $1,131,744 for the first quarter of 2000. One corporate finance transaction for $10 million was completed in the first quarter of 2001: no transactions were closed in
the 2000 quarter. However, the corporate finance revenue for the first quarter of 2000 did reflect the value on the effective date (just prior to the end of the quarter) for underwriter warrants
received on a transaction that did not settle until early in the second quarter of 2000. Corporate finance revenue is directly related to the amount of money raised in completed transactions.
Investment income fell from $21,653,153 in the first quarter of 2000 to a loss of $1,787,666 in the first quarter of 2001. There were no underwriter warrant exercises in the 2001 quarter, while four
were exercised in the first quarter of 2000. There was a small gain in underwriter warrant value, but this gain was more than offset by net losses in other investment securities in the first quarter
of 2001. Trading income fell $615,680, or 74.0 percent, to $215,977 in the first quarter of 2001 from $831,657 in the comparable 2000 period. This decrease was also due to decreased prices and
trading in the market for very small capitalization companies described above. Other income declined $11,181, from $22,718 in the first quarter of 2000 to $11,537 in the 2001 quarter, due primarily to
a decline in interest and dividend income.

Total
expenses fell $6,804,834 in the first quarter of 2001 from the comparable 2000 period, a decrease of 69.5 percent, from $9,797,893 to $2,993,059. Commissions and salaries
fell $6,002,687 or 74.9 percent, from $8,019,576 in the 2000 period to $2,016,889 in 2001. This decrease was primarily due to lower bonus and compensation arrangements related to reduced
investment and trading profits and decreased commission revenues resulting in a lower level of commissions paid. (Higher percentage commission levels are generally paid to employee registered
representatives at higher production levels.) Underwriting expenses rose $212,475, from $4,922 in the 2000 quarter to $217,397 in the first

10

---

quarter of 2001. No transactions were completed in the 2000 period, while one transaction was completed in 2001. Rent, telephone and quote expenses decreased from $288,665 in the 2000 period to
$255,104 in 2001, a decrease of 11.6 percent, primarily due to expenses related to improvements in quotation and phone systems in the 2000 quarter. The aggregate of all other expenses fell
66.1 percent, from $1,484,730 in the first quarter of 2000 to $503,669 in the first quarter of 2001, primarily due to decreased accrual for PIC's profit sharing.

The
Company had a pretax profit of $20,189,814 in the first quarter of 2000 compared to a pretax loss of $1,032,828 in the comparable 2001 period, primarily due to the decrease in
investment income and, to a lesser extent, decreased 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 $7,994,000 in income taxes for the first quarter of 2000, compared to an estimated tax benefit for income taxes in the first quarter of 2001 of $417,730.
Independent of investment income, the Company would have had a pre-tax profit of $754,838 for the first quarter of 2001 and a pre-tax loss of $1,463,339 for the first quarter
of 2000.

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 early 2000 and 1999 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 to date in 2001 and late 2000 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, 2001, 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 underwriter warrants are not exercisable for the first year after the offerings in which they are earned and are thereafter exercisable for four years, after which they expire. The
exercise price is typically 120% of the price at which we initially sold the securities to the public. Accordingly, unless there is at least a 20% increase in the price of these securities at some
time more than one and less than five years after the offering, the warrants will remain "under water" and will ultimately expire unexercised. 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 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, 2001, PIC owned 24 underwriter warrants (from 23 issuers), of which 20 were currently exercisable; none had an exercise price
below the current market price of the securities receivable upon exercise. 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. The prices of the securities underlying the

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underwriter warrants are very volatile, and substantial fluctuations in the Company's estimate of their value can be expected in the future.

In
the three months ended March 31, 2001, $2,138,499 of net cash was provided by operating activities of the Company. The major adjustments to reconcile this result to the
Company's net loss of $615,098 include a decrease in receivables of $5,134,311, an unrealized depreciation in investment securities of $1,423,537, a decrease in trading securities of $202,035, and a
decrease in pre-paid expenses of $592,694 more than offsetting a decrease in income taxes payable of $3,176,749, a realized gain on investment securities of $852,971, a decrease in
accounts payable and accrued liabilities of $791,115. In the quarter, $1,628,620 of net cash was used by the Company in investing activities, the result of $9,270,619 in proceeds from the sale of
investment securities being more than offset by the purchase of $10,890,701 of investment securities and $8,538 of additions to furniture and equipment. $486,248 in cash was used in financing
activities by the Company in the quarter, the result of payments to retire 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. At March 31, 2001,
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.

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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

ExhibitsNone

No
Reports on Form 8-K were filed during the quarter ended March 31, 2001.

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SIGNATURES

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

|      |                  |  | PAULSON CAPITAL CORP.
|----- | ---------------- |  | ---------------------
|Date: | December 7, 2001 |  | By:                  

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EXHIBIT INDEX

None

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