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 September 30, 1999

                         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 November 3, 1999:

                  Common stock, no par value - 3,619,852 shares

          Transitional Small Business Disclosure Format: Yes [ ] No [X]

                                       1
<PAGE>
                         PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                                   (unaudited)

                                                          9/30/99              12/31/98
                                                      -----------           -----------
<S>                                                   <C>                   <C>
ASSETS

CURRENT ASSETS

Cash and cash equivalents                             $    73,244           $   100,345
Receivables from broker-dealers and
  clearing organizations                                3,289,094             1,430,586
Notes and other receivables                               454,025               439,967
Trading securities                                      4,993,316             2,119,737
Investment securities                                   7,630,469             9,697,387
Refundable income taxes                                   704,072               168,059
Prepaid and deferred expenses                             433,785               578,556
Deferred income taxes                                   1,007,373             1,007,373
                                                      -----------           -----------

Total Current Assets                                   18,585,378            15,542,010
                                                      -----------           -----------

FURNITURE AND EQUIPMENT, net                              502,104               359,329
                                                      -----------           -----------

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

DEFERRED INCOME TAXES                                          --                    --
                                                      -----------           -----------

                                                      $19,257,382           $16,071,239
                                                      ===========           ===========

        The accompanying notes are an integral part of these statements.
</TABLE>

                                       2
<PAGE>
<TABLE>
<CAPTION>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY

                     CONSOLIDATED BALANCE SHEET - CONTINUED
                                   (unaudited)


                                                          9/30/99               12/31/98
                                                      -----------            -----------
<S>                                                   <C>                    <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES

Accounts payable and accrued liabilities              $   889,148            $   738,155
Payable to broker-dealers and clearing
  organizations                                         3,770,699                753,413
Compensation, employee benefits and payroll
  taxes                                                   738,588              1,240,510
Securities sold, not yet purchased                         96,794                 61,479
                                                      -----------            -----------

Total current liabilities                               5,495,229              2,793,557
                                                      -----------            -----------

SHAREHOLDERS' EQUITY

Preferred stock, no par value;
  authorized, 500,000 shares; issued and
  outstanding, no shares                                       --                     --
Common stock, no par value; authorized,
  10,000,000 shares; issued and
  outstanding, 3,681,352 and
  3,796,852, respectively                                 752,223                775,323
Retained earnings                                      13,009,930             12,502,359
                                                      -----------            -----------

                                                       13,762,153             13,277,682
                                                      -----------            -----------

                                                      $19,257,382            $16,071,239
                                                      ===========            ===========

        The accompanying notes are an integral part of these statements.
</TABLE>

                                       3
<PAGE>
<TABLE>
<CAPTION>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                   for the three and nine month periods ended
              September 30, 1999 and September 30, 1998 (unaudited)


                                               Three months ended                    Nine months ended
                                            9/30/99            9/30/98            9/30/99             9/30/98
                                        -----------        -----------        -----------         -----------
<S>                                     <C>                <C>                <C>                 <C>
Revenues
Commissions                             $ 3,143,260        $ 2,406,274        $10,679,692         $ 7,901,728
Corporate finance                           589,626            672,582          1,577,939             944,273
Investment income                          (677,569)        (1,837,097)         1,410,571          (2,299,264)
Trading income (loss)                       (30,502)          (112,489)           540,594             253,600
Interest and dividends                        1,205              3,427             13,627               5,429
Other                                         3,896              6,532              7,632              16,875
                                        -----------        -----------        -----------         -----------

                                          3,029,916          1,139,229         14,230,055           6,822,641
                                        -----------        -----------        -----------         -----------
Expenses
Commissions and salaries                  2,784,389          2,197,909          9,808,470           6,918,946
Underwriting expenses                       152,070            314,780            464,337             475,522
Rent, telephone and
     quotation services                     233,380            192,901            669,137             614,930
Interest expense                                221                 --              1,465               2,561
Professional fees                            78,873            113,428            318,161             325,624
Bad debt expense                             30,000             30,471             90,800              90,471
Travel and entertainment                     58,464             50,279            170,782             190,135
Settlements                                  18,500             19,005             35,750              22,698
Other                                       385,265            322,019          1,078,733             989,203
                                        -----------        -----------        -----------         -----------

                                          3,741,162          3,240,792         12,637,635           9,630,090
                                        -----------        -----------        -----------         -----------

Earnings (loss) before income taxes        (711,246)        (2,101,563)         1,592,420          (2,807,449)

Provision for income taxes
  Current                                  (284,500)                --            637,000                  --
  Deferred                                       --                 --                 --                  --
                                        -----------        -----------        -----------         -----------

Net Earnings (Loss)                     $  (426,746)       $(2,101,563)       $   955,420         $(2,807,449)
                                        ===========        ===========        ===========         ===========

Earnings (loss) per share               $     (0.12)       $     (0.55)       $      0.26         $     (0.73)
                                        ===========        ===========        ===========         ===========

         The accompanying notes are an integral part of these statements
</TABLE>

                                       4
<PAGE>
<TABLE>
<CAPTION>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                For the three year period ended December 31, 1998
             and the nine months ended September 30, 1999(unaudited)


                                                    Common Stock Retained
                                                -------------------------------             Retained
                                                     Shares             Amount              Earnings
                                                -----------         -----------          -----------
<S>                                               <C>                   <C>                <C>
Balance at December 31, 1995                      4,324,539             735,889            4,150,076

Exercise of stock options                            38,570              40,892                    -

Issuance of common stock in lieu
    of directors' cash compensation                   3,432               7,500                    -

Redemption of common stock                         (285,300)            (50,580)            (712,432)

Net earnings for the year                                 -                   -            5,727,202
                                                -----------         -----------          -----------

Balance at December 31, 1996                      4,081,241         $   733,701          $ 9,164,846

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                                 -                   -            4,354,395
                                                -----------         -----------          -----------

Balance at December 31, 1997                      3,970,536         $   794,416          $12,989,322

Exercise of stock options                                 -                   -                    -

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                                     -                   -              (35,640)
                                                -----------         -----------          -----------

Balance at December 31, 1998                      3,796,852         $   775,323          $12,502,359

Redemption of common stock                         (115,500)            (23,100)            (447,849)

Net earnings for the year to date                         -                   -              955,420
                                                -----------         -----------          -----------

Balance at September 30, 1999                     3,681,352         $   752,223          $13,009,930
                                                ===========         ===========          ===========

                The accompanying notes are an integral part of these statements
</TABLE>

                                       5
<PAGE>
<TABLE>
<CAPTION>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
   for the nine month periods ended September 30, 1999 and September 30, 1998

                                                                                 9/30/99                9/30/98
                                                                            ------------           ------------
<S>                                                                         <C>                    <C>
Increase (Decrease) in Cash and Cash Equivalents

Cash flows from operating activities
    Net earnings (loss)                                                     $    955,420           $ (2,807,449)
    Adjustments to reconcile net earnings (loss) to
       Net cash used in operating activities
          Unrealized (appreciation) depreciation
              on investment securities                                         1,209,602              2,032,453
          Realized (gain) loss on investment securities                       (2,620,173)               266,812
          Depreciation and amortization                                           97,911                 58,330
          Gain from sale of furniture and equipment                                   --                   (300)
          Change in assets and liabilities
              Receivables                                                     (1,872,566)             2,893,478
              Trading securities                                              (2,873,579)             7,466,491
              Refundable income taxes                                           (536,013)              (829,281)
              Prepaid and deferred expenses                                      144,771                187,073
              Accounts payable and accrued liabilities                         2,666,357             (6,061,131)
              Securities sold, not yet purchased                                  35,315                (40,375)
              Bank overdraft                                                          --                     --
              Income taxes payable                                                    --                     --
                                                                            ------------           ------------

       Net cash provided by (used in) operating activities                   (2,792,955)              3,166,101
                                                                            ------------           ------------
Cash flows from investing activities
    Purchases of investment securities                                       (31,894,946)           (19,159,011)
    Proceeds from sale of investment securities                               35,372,435             16,416,332
    Additions to furniture and equipment                                        (240,686)              (128,045)
    Proceeds from sale of furniture and equipment                                     --                    300
                                                                            ------------           ------------

       Net cash provided by (used in) investing activities                  $  3,236,803           $ (2,870,424)
                                                                            ------------           ------------

         The accompanying notes are an integral part of these statements
</TABLE>

                                       6
<PAGE>
<TABLE>
<CAPTION>
          CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - CONTINUED


                                                                                 9/30/99                9/30/98
                                                                            ------------           ------------
<S>                                                                         <C>                    <C>
Cash flows from financing activities
    Proceeds from exercise of stock options                                            -                      -
    Payments to retire common stock                                             (470,949)              (308,222)
    Decrease in bank overdraft payable                                                 -                      -
                                                                            ------------           ------------

       Net cash provided by (used in) financing activities                      (470,949)              (308,222)
                                                                            ------------           ------------


              NET INCREASE (DECREASE) IN CASH AND
                  CASH EQUIVALENTS                                               (27,101)               (12,545)

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

Cash and cash equivalents at September 30                                   $     73,244           $     60,675
                                                                            ============           ============



Cash paid during the three months for
-------------------------------------

    Interest                                                                $        221           $         --
                                                                            ============           ============

    Income taxes                                                            $  1,188,078           $      6,481
                                                                            ============           ============

         The accompanying notes are an integral part of these statements
</TABLE>

                                       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
accruals) 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 Paulson Investment Company, Inc. ("PIC") are defendants in
Holly Millar and Bertram Ostrau v. Pearce Systems International, Inc., et al.,
filed in San Francisco Superior Court, State of California, in March 1996. An
asserted class action, plaintiffs allege violations of the California securities
law, deceit, negligent misrepresentation and unfair business practices relating
to alleged misstatements in the prospectus used in connection with a February
1994, $5 million public offering in which PIC acted as the managing underwriter.
Plaintiffs seek rescission of the offering as well as actual damages, interest,
attorney fees and punitive damages. No class has been certified. No date for a
trial has been set. Pursuant to a tolling agreement with the plaintiff, the
Company (but not PIC) expects to be dismissed without prejudice from the
lawsuit. PIC and plaintiffs have reached a settlement of this matter. The
settlement is subject to court approval. The total payment by PIC under the
settlement would depend upon the number of purchasers in the public offering who
file valid claims. PIC believes the maximum total payment by PIC under the
settlement would be approximately $920,000, 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

                                       8
<PAGE>
connection with options and short sales transactions beginning in 1996.
Plaintiff has agreed to arbitrate the matter before the NASD. PIC has not had an
opportunity to fully investigate this claim, but believes it has meritorious
defenses and intends to defend this matter vigorously. Discovery has not yet
commenced.

     In October 1998, Masood Asif, a former PIC customer, filed a lawsuit in
California state court 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. Subsequently, the former customer has
agreed to arbitrate his claims and to have his state court case stayed until the
arbitration is completed. PIC has not had an opportunity to fully investigate
this claim, but believes it has meritorious defenses and intends to defend this
matter vigorously.

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

     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.

     In February 1999, Thane Roberts, a former PIC customer, contacted PIC
alleging unauthorized trading and unsuitable investments in his accounts,
claiming damages of approximately $300,000. PIC and the former customer
presented this matter to mediation in September 1999, but no settlement has been
reached. PIC 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 deems 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 September 30, 1999 vs. Three Months Ended September 30, 1998

     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 operations depend upon many factors,
such as the number of companies that are seeking public financing, the quality
and financial condition of those companies, market conditions in general, the
performance of previous PIC underwritings and interest in certain industries by
investors. As a result, revenues and income derived from these activities may
vary significantly from 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. "Investment Income" includes amounts
received, if any, from the exercise of PIC's underwriter warrants.

<TABLE>
<CAPTION>
                     Summary of Changes in Major Categories
                            of Revenues and Expenses

                                                   Quarter Ended Sept. 30               Nine Months Ended Sept. 30
                                                    1999    vs.     1998                   1999    vs.     1998
                                                ---------------------------            ---------------------------
<S>                                             <C>                   <C>              <C>                   <C>
Revenues:
Sales Commissions                               $   736,986           30.6%            $ 2,777,964           35.2%
Corporate Finance                                   (82,956)         (12.3%)               633,666           67.1%
Investment Income                                 1,159,528              NA              3,709,835              NA
Trading Income                                       81,987              NA                286,994          113.2%
Other                                                (4,858)         (48.8%)                (1,045)          (4.7%)
                                                -----------     -----------            -----------     -----------

Total                                           $ 1,890,687          166.0%            $ 7,407,414          108.6%

Expenses:
Commissions and Salaries                        $   586,480           26.7%            $ 2,889,524           41.8%
Underwriting Expenses                              (162,710)         (51.7%)               (11,185)          (2.4%)
Rent, Telephone and Quotes                           40,479           21.0%                 54,207            8.8%
Other                                                36,121            6.8%                 74,999            4.6%
                                                -----------     -----------            -----------     -----------

Total                                           $   500,370           15.4%            $ 3,007,545           31.2%

Pretax Income                                   $ 1,390,317              NA            $ 4,399,869              NA
</TABLE>

                                       10
<PAGE>
     Total revenues for the third quarter of 1999 rose 166.0 percent from the
third quarter of 1998, to $3,029,916 from $1,139,229. As shown in the table
above, sales commissions rose $736,986, or 30.6 percent, from $2,406,274 in the
third quarter of 1998 to $3,143,260 in the comparable 1999 period. This increase
resulted primarily from the more favorable price movements and trading levels in
smaller capitalization issues in the 1999 quarter, compared to substantially
less favorable levels in 1998. (The Nasdaq Industrial Index fell 1.3 percent in
the third quarter of 1999 compared to a fall of 22.7 percent in the 1998
quarter.) Corporate finance revenues fell 12.3 percent, or $82,956, in the third
quarter of 1999 compared to the third quarter of 1998. One corporate finance
transaction totaling $13.2 million was completed in the 1999 quarter and two
transactions totaling $16.4 million were completed in the 1998 quarter.
Investment losses decreased $1,159,528, from a loss of $1,837,097 in the third
quarter of 1998 to a loss of $677,569 in the third quarter of 1999. This decline
was due to lower realized losses on several positions in the investment account
in 1999 compared to the realized losses in the investment account in the 1998
quarter. Trading losses fell $81,987, or 73.9 percent, to $30,502 in the third
quarter of 1999 from a loss of $112,489 in the comparable 1998 period. These
losses were primarily due to price declines in the quarter in issues for which
PIC had acted as the managing underwriter in corporate finance transactions.

     Total expenses rose $500,370 in the third quarter of 1999 from the
comparable 1998 period, an increase of 15.4 percent, from $3,240,792 to
$3,741,162. Commissions and salaries rose $586,480, or 26.7 percent, from
$2,197,909 in the 1998 quarter to $2,784,389 in 1999. This increase was
primarily due to 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 fell by $162,710, or 51.7 percent, due primarily to the 1998 write-off
of certain expenses relating to corporate finance transactions that were
terminated. Rent, telephone and quote expenses increased to $233,380 in the 1999
period from $192,901 in 1998, an increase of 21.0 percent, primarily due to
increased transaction-related quotation charges and increased long-distance
charges related to the overall increase in commission business. Other expenses
increased 6.8 percent, or $36,121, from $535,202 in the third quarter of 1998 to
$571,323 in the third quarter of 1999. The largest factors in this increase were
a $168,731 increase in miscellaneous expenses and a $34,555 increase in
professional fees more than offsetting a $66,237 decrease in taxes, license and
insurance costs and a $42,700 decreased accrual for employee profit sharing.

     The Company had pretax loss of $711,246 in the third quarter of 1999
compared to a pretax loss of $2,101,563 in the third quarter of 1998. The
biggest factor in the decreased losses were the substantial decline in
investment losses income in the 1999 quarter and the increase in PIC's general
securities activities. Significant fluctuations can occur in PIC's revenues and
operating results from one period to another.

                                       11
<PAGE>
     The Company did not accrue any income taxes in the 1998 quarter, compared
to a decrease in accrual of $284,500 for income taxes owed for the third quarter
of 1999. Independent of investment losses, the Company would have had a loss
before income taxes of $264,466 in the third quarter of 1998 compared to a loss
before income taxes of $33,677 in the third quarter of 1999.

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 1995-1997 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 in 1998 and in 1994 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 September 30, 1999, PIC owed its clearing
firm $481,605 pursuant to this arrangement. PIC and the Company are generally
able to meet their compensation and other obligations out of current liquid
assets.

     Another source of capital to PIC and the Company has been the exercise of
underwriter warrants issued to PIC in connection with its corporate finance
activities and the sale of the underlying securities. These warrants are not
reflected on the balance sheet of PIC or Paulson Capital. While the warrants and
the securities issuable upon exercise of the warrants are not immediately
saleable, PIC receives the right to require the issuer to register the
underlying securities for resale to the public. Profits, if any, from the
warrants are realized based upon the difference between the market price and the
exercise price on the date of exercise. Further profits or losses are
subsequently realized when the underlying securities are sold. Profits and
losses realized from the warrants are recorded as "Investment Income." There is
no public market for the 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 September 30, 1999, PIC owned 30 underwriter
warrants (from 29 issuers), of which 25 were currently

                                       12
<PAGE>
exercisable. Seven of the exercisable warrants 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 nine months ended September 30, 1999, $2,792,955 of net cash was
used by the Company in operating activities. The major adjustments to reconcile
this result to the Company's net loss included an increase in accounts payable
and accrued liabilities of $2,666,357, unrealized depreciation on investment
securities of $1,209,602 and a decrease in prepaid and deferred expenses of
$144,771 being more than offset by an increase in trading securities of
$2,873,579, a realized gain on investment securities of $2,620,173, an increase
in receivables of $1,872,566 and an increase in refundable income taxes of
$536,013. In the first nine months of 1999, $3,236,803 of net cash was provided
to the Company by investing activities, primarily resulting from $35,372,435 of
proceeds from the sale of short-term investment securities more than offseting
the purchase of $31,894,946 of short-term investment securities and the purchase
of $240,686 in furniture and equipment. In the first nine months of 1999,
$470,949 of net cash was used in financing activities to retire common stock.
The net decrease in cash and cash equivalents for the nine month period totaled
$27,101. 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 September 30, 1999, 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 realized upon the exercise of underwriter warrants, all
depend in large part on the trend in the general markets for OTC securities.
Rising OTC price levels will tend to increase the value and liquidity of PIC's
trading positions, the amount that can be borrowed from 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>
Matters Subsequent to September 30, 1999

     On October 21, 1999, PIC and AdStar.com, Inc. ("AdStar") entered into a
settlement agreement and mutual release relating to a terminated offering of
AdStar securities for which PIC was acting as the managing underwriter. Pursuant
to this agreement, PIC agreed to pay AdStar $500,000 as reimbursement for
expenses incurred by AdStar in connection with the terminated offering. In
addition, PIC agreed to purchase from AdStar 275,000 shares of common stock for
$1,100,000. Neither the expense reimbursement nor the AdStar investment are
reflected in the financial statements above. The $500,000 reimbursement will be
an expense in the Company's fourth quarter.


                                Year 2000 Efforts

     The Company has been addressing the issue of computer programs and embedded
computer chips being unable to distinguish between the year 1900 and the year
2000 (the "Y2K" issue). The Company has no proprietary operating system or
applications software, nor do any of its operations use mainframe or
mini-computer systems. Therefore, the Company's focus with respect to the Y2K
issue is (1) its PC hardware and software purchased from third parties and (2)
external suppliers and service providers.

     The general phases of the Company's Y2K efforts are: (1) inventorying
computer hardware and software and other items which may be affected by the Y2K
issue; (2) assigning priorities to identified items; (3) assessing the Y2K
compliance of items determined to be material to the Company; (4) repairing or
replacing material items that are determined not to be Y2K compliant; (5)
testing material items; and (6) designing and implementing contingency and
business continuation plans for the Company.

     The Company has been conducting a comprehensive review and analysis of its
information systems since early 1998 and completed an inventory of its computer
technology and a determination of material items in the third quarter of 1998.
Material items are those believed by the Company to have a risk involving
property damage or affecting revenues. During the first three quarters of 1999,
the Company upgraded and replaced certain components of its computer technology.
The Company replaced a large number of its desktop personal computers with newer
Y2K compliant models and is upgrading server and wide area networking hardware
and software for certain of its systems. The Company is also conducting further
hardware and software testing through the end of 1999. All testing of hardware
and software will be performed by the Company in conjunction with certain of its
external suppliers. The Company also expects to upgrade or convert operating
system and applications software that is not Y2K compliant. The Company believes
the upgrade or conversion of its desktop hardware and applications and operating
system software was substantially completed by September 30, 1999. Contingency
planning for

                                       14
<PAGE>
the desktop computers and related software began in the third quarter of 1998
and was substantially completed by September 30, 1999.

     The Company's efforts with respect to external suppliers and service
providers involves identifying and prioritizing critical suppliers and
communicating with them about their plans and progress in addressing the Y2K
issue. Detailed evaluations of the most critical third parties have been
initiated. These evaluations have been followed by the development of
contingency plans, which were updated during the third quarter of 1999. The
Company believes these efforts were on schedule as of September 30, 1999. The
most critical service provider to PIC, the Company's operating subsidiary, is
its clearing firm, Correspondent Services Corporation ("CSC") and CSC's parent
company, PaineWebber, which serves as the custodian for PIC's brokerage
customers. CSC has established a plan to thoroughly address the Y2K issue, which
the Company has reviewed. PIC has worked with CSC to upgrade certain of PIC's
computer systems. CSC provided PIC with newer, Y2K compliant networking hardware
and software for its home office in Portland, Oregon and its branch office in
Salem, Oregon. CSC also provided PIC with newer, faster circuits for its
computer systems. PIC has incurred a nominal net monthly increase in its ongoing
fee to CSC for these and related services.

     The total cost associated with required modifications to become Y2K
compliant is not expected to be material to the Company's financial position.
The estimated total cost of the Company's Y2K efforts is estimated to be between
$250,000 and $280,000. The total amount expended on the Y2K issue by the Company
through September 30, 1999 was approximately $240,000. Of these expenditures,
approximately $213,000 related to the cost to repair or replace software and
related hardware problems and approximately $27,000 related to the cost of
identifying and communicating with external suppliers and working with them on
the Y2K issue. The estimated future cost of completing the Company's Y2K efforts
is estimated to be between $10,000 and $40,000, which is comprised of $8,000 to
$28,000 to repair or replace software and related hardware and $2,000 to $12,000
to identify and communicate with external suppliers. Funds for these costs are
provided from PIC's operating budget.

     PIC's network of independent contractor branch offices ("branch offices")
has also been upgrading computer hardware and software and other items which may
be affected by the Y2K issue. PIC has required its branch offices, at their
expense, to inventory, upgrade, and/or replace assets that are not Y2K
compliant. PIC mandated that any branch offices that were not Y2K compliant by
August 30, 1999 would be subject to fines and/or other disciplinary actions.
Paulson believes its branch offices are substantially Y2K compliant based on
correspondence with its branch offices and operational compatibility with CSC's
computer systems.

     The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. These failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Y2K problem, resulting in part from the uncertainty
of the

                                       15
<PAGE>
Y2K readiness of third-party suppliers, the Company is unable to determine at
this time whether the consequences of Y2K failures will have a material impact
on the Company's results of operations, liquidity or financial condition. The
Company's Y2K efforts are expected to significantly reduce the Company's level
of uncertainty about the Y2K problem and, in particular, about the Y2K
compliance and readiness of its material external suppliers. The Company
believes that, with the implementation of new business systems and completion of
the project as scheduled, the possibility of significant interruptions of normal
operations should be reduced.

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

     The Company is including the following cautionary statement to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statement made by, or on behalf of,
the Company. The factors identified in this cautionary statement are important
factors (but not necessarily all important factors) that could cause actual
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company. Where any forward-looking
statement includes a statement of the assumptions or bases underlying the
forward-looking statement, the Company cautions that, while it believes the
assumptions or bases to be reasonable and makes them in good faith, assumed
facts or bases almost always vary from actual results, and the differences
between assumed facts or bases and actual results can be material, depending on
the circumstances. Where, in any forward-looking statement, the Company
expresses an expectation or belief as to future results, that expectation or
belief is expressed in good faith and believed to have a reasonable basis, but
there is no assurance that the statement of expectation or belief will result or
be achieved or accomplished. Taking into account the foregoing, the following
are identified as important risk factors that could cause actual results to
differ materially from those expressed in any forward-looking statement made by,
or on behalf of, the Company.

     The Company's ability to complete its Y2K Compliance efforts prior to
December 31, 1999 is dependent on certain future events, including the continued
availability of certain resources, third-party modification plans and other
factors. However, there is no guarantee that Y2K Compliance by year-end will be
achieved or that there will not be a delay in, or increased costs associated
with, the implementation of the Y2K efforts described above. A delay in the Y2K
corrections by CSC could also impact the Company's readiness. Specific factors
that might cause differences between the anticipated date of completion and
actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer code, timely responses to and corrections by third-parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the Y2K problem, resulting in part from the uncertainty
of the Y2K readiness of third-parties, the Company cannot ensure its ability to
timely and cost-effectively resolve problems associated with the Y2K issue that
may affect its operations and business, or expose it to third-party liability.

                                       16
<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

        Exhibit
           No.                     Description
        -------                    -----------

           27                      Financial Data Schedule

No Reports on Form 8-K were filed during the quarter ended September 30, 1999.

                                       17
<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: November 5, 1999                 By: CHESTER L.F. PAULSON
      ----------------                     -------------------------------------
                                           Chester L.F. Paulson
                                           President



Date: November 9, 1999                 By: CAROL RICE
      ----------------                     -------------------------------------
                                           Carol Rice
                                           Principal Accounting Officer

                                       18
<PAGE>
                                  EXHIBIT INDEX

Exhibit                                                               Sequential
   No.              Description                                        Page No.
-------             -----------                                       ----------

  27                Financial Data Schedule

                                       19