---

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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON D.C. 20549

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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, 2001

Commission file number: 0-18188

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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
executive offices) |  | (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 December 7, 2001

Common
stock, no par value3,163,062 shares

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

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PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

|                                              |  | 9/30/01 |            | 12/31/00
(restated)
|--------------------------------------------- |  | ------- | ---------- | -------------------
|ASSETS                                        |  |         |            |                    
|CURRENT ASSETS                                |  |         |            |                    
|Cash and cash equivalents                     |  | $       | 47,581     |                    
|Receivable from clearing organizations        |  |         | 5,021,208  |                    
|Notes and other receivables                   |  |         | 1,191,993  |                    
|Trading securities, at market value           |  |         | 1,731,028  |                    
|Investment securities, at market value        |  |         | 17,094,371 |                    
|Underwriter warrants, at estimated fair value |  |         | 4,178,045  |                    
|Prepaid and deferred expenses                 |  |         | 261,758    |                    
|Income tax receivable                         |  |         | 1,099,254  |                    
|Deferred income taxes                         |  |         | 986,999    |                    
|                                              |  |         |            |                    
|Total current assets                          |  |         | 31,612,237 |                    
|                                              |  |         |            |                    
|Note Receivable                               |  |         | 109,116    |                    
|                                              |  |         |            |                    
|Furniture and Equipment, net                  |  |         | 382,049    |                    
|                                              |  |         |            |                    
|Investment in Real Estate                     |  |         | 169,900    |                    
|                                              |  |         |            |                    
|Total Assets                                  |  | $       | 32,273,302 |                    
|                                              |  |         |            |                    

The
accompanying notes are an integral part of these statements.

2

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PAULSON CAPITAL CORP. AND SUBSIDIARY  CONSOLIDATED BALANCE SHEETCONTINUED  (unaudited)

|                                                                                                                         |  | 9/30/01 |            | 12/31/00
(restated)
|------------------------------------------------------------------------------------------------------------------------ |  | ------- | ---------- | -------------------
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                     |  |         |            |                    
|CURRENT LIABILITIES                                                                                                      |  |         |            |                    
|Accounts payable and accrued liabilities                                                                                 |  | $       | 224,409    |                    
|Payable to broker-dealers and clearing organizations                                                                     |  |         | 1,939,829  |                    
|Compensation, employee benefits and payroll taxes                                                                        |  |         | 1,262,570  |                    
|Securities sold, not yet purchased                                                                                       |  |         | 147,587    |                    
|Income taxes payable                                                                                                     |  |         |           |                    
|                                                                                                                         |  |         |            |                    
|Total current liabilities                                                                                                |  |         | 3,574,395  |                    
|                                                                                                                         |  |         |            |                    
|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, 3,167,566 and 3,367,366, respectively |  |         | 1,063,509  |                    
|Retained earnings                                                                                                        |  |         | 27,596,298 |                    
|                                                                                                                         |  |         |            |                    
|Total shareholders' equity                                                                                               |  |         | 28,659,807 |                    
|                                                                                                                         |  |         |            |                    
|                                                                                                                         |  | $       | 32,273,302 |                    
|                                                                                                                         |  |         |            |                    

The
accompanying notes are an integral part of these statements.

3

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PAULSON CAPITAL CORP. AND SUBSIDIARY  CONSOLIDATED STATEMENTS OF OPERATIONS  for the three and nine month periods ended  September 30, 2001 and restated September 30, 2000  (unaudited)

|                                       |  | Three months ended |            | Nine months ended
|-------------------------------------- |  | ------------------ | ---------- | -----------------
|
|Revenues                               |  |                    |            |                  
|Commissions                            |  | $                  | 1,761,495  |                  
|Corporate finance                      |  |                    | 827,164    |                  
|Investment income                      |  |                    | (3,749,934 | )                
|Trading income (loss)                  |  |                    | (381,605   | )                
|Interest and dividends                 |  |                    | 11,926     |                  
|Other                                  |  |                    | 196        |                  
|                                       |  |                    |            |                  
|                                       |  |                    | (1,530,758 | )                
|Expenses                               |  |                    |            |                  
|Commissions and salaries               |  |                    | 1,776,680  |                  
|Underwriting expenses                  |  |                    | 108,399    |                  
|Rent, telephone and quotation services |  |                    | 222,546    |                  
|Interest expense                       |  |                    | 486        |                  
|Professional fees                      |  |                    | 180,055    |                  
|Bad debt expense                       |  |                    | 30,000     |                  
|Travel and entertainment               |  |                    | 36,895     |                  
|Settlements                            |  |                    | 26,000     |                  
|Other                                  |  |                    | 404,264    |                  
|                                       |  |                    |            |                  
|                                       |  |                    | 2,785,325  |                  
|                                       |  |                    |            |                  
|Earnings (loss) before income taxes    |  |                    | (4,316,083 | )                

The
accompanying notes are an integral part of these statements.

4

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PAULSON CAPITAL CORP. AND SUBSIDIARY  CONSOLIDATED STATEMENTS OF OPERATIONS  for the three and nine month periods ended  September 30, 2001 and restated September 30, 2000  (unaudited)
(continued)

|                                                       |          | Three months ended |            | Nine months ended |  
|------------------------------------------------------ | -------- | ------------------ | ---------- | ----------------- | -
|
|Provision for income taxes                             |          |                    |            |                   |  
|                                                       | Current  |                    |            | (1,381,000        | )
|                                                       | Deferred |                    |            | (301,000          | )
|                                                       |          |                    |            |                   |  
|Net Earnings (Loss)                                    |          | $                  | (2,634,083 | )                 | $
|                                                       |          |                    |            |                   |  
|Earnings (loss) per share, basic and diluted           |          | $                  | (0.82      | )                 | $
|                                                       |          |                    |            |                   |  
|Weighted average number of shares outstanding, basic   |          |                    | 3,202,080  |                   |  
|Weighted average number of shares outstanding, diluted |          |                    | 3,202,080  |                   |  

The
accompanying notes are an integral part of these statements

5

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PAULSON CAPITAL CORP. AND SUBSIDIARY  CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY  For the three year period ended December 31, 2000 (restated)  and the nine months ended September 30, 2001
(unaudited)

|                                                                 |  | 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 earnings (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 (loss) 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 (loss) for the year, as restated                    |  |             |   |   |         
|                                                                 |  |              |   |   |          
|Balance at December 31, 2000, as restated                        |  | 3,367,366    |   |   | 1,080,011
|Stock options exercised                                          |  | 7,000        |   |   | 31,063   
|Redemption of common stock                                       |  | (206,800     | ) |   | (47,565  
|Net earnings (loss) for year to date                             |  |             |   |   |         
|                                                                 |  |              |   |   |          
|Balance at September 30, 2001                                    |  | 3,167,566    |   | $ | 1,063,509
|                                                                 |  |              |   |   |          

The
accompanying notes are an integral part of these statements

6

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PAULSON CAPITAL CORP. AND SUBSIDIARY  CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)  for the nine month periods ended September 30, 2001 and restated September 30, 2000

|                                                 |                                                                                                     | 9/30/01                                                         |                                                     | 9/30/00     |           
|------------------------------------------------ | --------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------- | ----------- | ----------
|
|Increase (Decrease) in Cash and Cash Equivalents |                                                                                                     |                                                                 |                                                     |             |           
|Cash flows from operating activities             |                                                                                                     |                                                                 |                                                     |             |           
|                                                 | Net earnings (loss)                                                                                 |                                                                 | $                                                   | 2,540,460   |           
|                                                 | Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities |                                                                 |                                                     |             |           
|                                                 |                                                                                                     | Unrealized (appreciation) depreciation on investment securities |                                                     |             | (8,175,742
|                                                 |                                                                                                     | Realized (gain) loss on investment securities                   |                                                     |             | 1,250,081 
|                                                 |                                                                                                     | Depreciation and amortization                                   |                                                     |             | 149,219   
|                                                 |                                                                                                     | Deferred income taxes                                           |                                                     |             | 3,275,001 
|                                                 |                                                                                                     | Stock option grant                                              |                                                     |             |          
|                                                 |                                                                                                     | Change in assets and liabilities                                |                                                     |             |           
|                                                 |                                                                                                     |                                                                 | Receivables                                         |             |           
|                                                 |                                                                                                     |                                                                 | Trading securities                                  |             |           
|                                                 |                                                                                                     |                                                                 | Refundable income taxes                             |             |           
|                                                 |                                                                                                     |                                                                 | 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             |                                                     |             | (388,033  
|                                                 |                                                                                                     |                                                                 |                                                     |             |           
|Cash flows from investing activities             |                                                                                                     |                                                                 |                                                     |             |           
|                                                 | Purchases of investment securities                                                                  |                                                                 |                                                     | (26,755,958 | )         
|                                                 | Proceeds from sale of investment securities                                                         |                                                                 |                                                     | 28,174,338  |           
|                                                 | Additions to furniture and equipment                                                                |                                                                 |                                                     | (21,592     | )         
|                                                 | Proceeds from sale of furniture and equipment                                                       |                                                                 |                                                     |            |           
|                                                 |                                                                                                     |                                                                 |                                                     |             |           
|                                                 |                                                                                                     |                                                                 | Net cash provided by (used in) investing activities |             |           
|                                                 |                                                                                                     |                                                                 |                                                     |             |           

The
accompanying notes are an integral part of these statements

7

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PAULSON CAPITAL CORP. AND SUBSIDIARY  CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)

|                                                 |                                         | 9/30/01                                             |                                                      | 9/30/00    |           
|------------------------------------------------ | --------------------------------------- | --------------------------------------------------- | ---------------------------------------------------- | ---------- | ----------
|
|Cash flows from financing activities             |                                         |                                                     |                                                      |            |           
|                                                 | Proceeds from exercise of stock options |                                                     |                                                      | 31,063     |           
|                                                 | Payments to retire common stock         |                                                     |                                                      | (1,096,546 | )         
|                                                 | Decrease in bank overdraft payable      |                                                     |                                                      |           |           
|                                                 |                                         |                                                     |                                                      |            |           
|                                                 |                                         | Net cash provided by (used in) financing activities |                                                      |            | (1,065,483
|                                                 |                                         |                                                     |                                                      |            |           
|                                                 |                                         |                                                     | NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |            |           
|Cash and cash equivalents at beginning of period |                                         |                                                     | 104,309                                              |            |           
|                                                 |                                         |                                                     |                                                      |            |           
|Cash and cash equivalents at end of period       |                                         | $                                                   | 47,581                                               |            | $         
|                                                 |                                         |                                                     |                                                      |            |           
|Cash paid during the three months for            |                                         |                                                     |                                                      |            |           
|                                                 | Interest                                |                                                     | $                                                    | 41,285     |           
|                                                 |                                         |                                                     |                                                      |            |           
|                                                 | Income taxes                            |                                                     | $                                                    | 7,816      |           
|                                                 |                                         |                                                     |                                                      |            |           

The
accompanying notes are an integral part of these statements

8

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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 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.  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.

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. Prior to filing the complaint, plaintiff demanded payment of $250,000. The complaint sought damages in excess of $100,000 in connection with options and short
sales transactions beginning in 1996. Plaintiff had agreed to arbitrate the matter before the NASD but never did so. In July 2000, the California state court dismissed the case. The claimant
has now filed a request with the state court to reinstate the case, claiming that his attorney died and that he was never informed that the case was to be dismissed. 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 it is reinstated. This matter is scheduled for arbitration before the NASD on
March 7-8, 2002, in Los Angeles, California.

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. PIC has filed an answer denying any
liability. The matter was arbitrated in Philadelphia on November 8, 2001.

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

9

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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
May 2001, PIC received notice that Eugene V. Doty, a former PIC customer, made a complaint about the handling of his account at PIC. Mr. Doty alleges that his account
was traded excessively but has not identified what amount, if any, he seeks from PIC or its former broker. 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.

On
November 7, 2001, we were named as defendants in a lawsuit filed by Spirit Partners, L.P. and Tech-Trade Capital LLC. The lawsuit was filed in the Supreme Court
of the State of New York for the County of New York. The lawsuit alleges that PIC committed fraud and was unjustly enriched in connection with the redemption of warrants issued in the initial public
offering of audiohighway.com, for which PIC served as underwriter. According to plaintiffs, the warrant agreement and prospectus contain different provisions governing the redemption of the warrants.
This allegedly occurred because the redemption provisions were changed during the registration process, and the warrant agreement was not amended to reflect the change in provisions.
Audiohighway.com's redemption was proper under the terms of the prospectus, which contains the updated redemption provisions and allowed the issuer to redeem when the closing bid price of the common
stock was at least $13.50 for 10 calendar days. Plaintiffs allege that the redemption was improper under the terms of the warrant agreement, which they allege contains the original redemption
provisions and allows the issuer to redeem when the closing bid price of the common stock exceeded $13.50 for 20 consecutive trading days. Plaintiffs also allege that counsel for audiohighway.com and
PIC fraudulently concealed the alleged discrepancy between the prospectus and warrant agreement by amending the warrant agreement to be consistent with the prospectus. Plaintiffs claim unspecified
monetary damages and seek $3 million in punitive damages. The lawsuit is in a very early stage and we have not yet responded to the claims or conducted discovery. However, we believe we have
meritorious defenses to these claims and intend to defend the case vigorously.

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

10

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

Three Months Ended September 30, 2001 vs. Three Months Ended September 30, 2000



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

11

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

In
order to comply with SFAS 133, we have changed our method of estimating the value of our underwriter warrants from the "intrinsic value' method to the Black-Scholes Option
Pricing Model. We have stated our financial results for the period ending September 30, 2001 and restated our financial results for the nine months ending September 30, 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.

Results of Operations

Our revenues and operating results are influenced by fluctuations in the equity underwriting markets as well as general economic and market conditions,
particularly conditions in the over-the-counter market, where our investment account, trading inventory positions and underwriter warrants are heavily concentrated. Significant
fluctuations can occur in our revenues and operating results from one period to another. Our 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 our previous 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.

12

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Summary of Changes in Major Categories  of Revenues and Expenses

|                           |  | Quarter Ended Sept. 30
2001 vs. (restated) 2000 |            | Nine Months Ended Sept. 30
2001 vs. (restated) 2000 |       
|-------------------------- |  | ----------------------------------------------- | ---------- | --------------------------------------------------- | ------
|Revenues:                  |  |                                                 |            |                                                     |       
|Sales Commissions          |  | $                                               | (941,507   | )                                                   | (34.8 
|Corporate Finance          |  |                                                 | (1,000,486 | )                                                   | (54.7 
|Investment Income          |  |                                                 | 1,649,267  |                                                     | 30.6  
|Trading Income             |  |                                                 | (834,124   | )                                                   | N/A   
|Interest and Dividends     |  |                                                 | (11,845    | )                                                   | (49.8 
|Other                      |  |                                                 | (627       | )                                                   | (76.2 
|                           |  |                                                 |            |                                                     |       
|Total                      |  |                                                 | (1,139,322 | )                                                   | (291.1
|Expenses:                  |  |                                                 |            |                                                     |       
|Commissions and Salaries   |  |                                                 | (1,169,461 | )                                                   | (39.7 
|Underwriting Expenses      |  |                                                 | (38,847    | )                                                   | (26.4 
|Rent, Telephone and Quotes |  |                                                 | (9,467     | )                                                   | (4.1  
|Other                      |  |                                                 | 156,768    |                                                     | 30.1  
|                           |  |                                                 |            |                                                     |       
|Total                      |  | $                                               | (1,061,007 | )                                                   | (27.6 
|Pretax Income              |  | $                                               | (78,315    | )                                                   | (1.9  

Total
revenue for the third quarter of 2001 fell 291.1% from restated revenue for the third quarter of 2000, to $(1,530,758) from $(391,436). Total revenues for both periods were
negative due primarily to substantial investment losses. As shown in the table above, sales commissions fell $941,507, or 34.8% percent, to $1,761,495 in the third quarter of 2001 from $2,703,002 in
the comparable 2000 period. This decrease resulted primarily from the less favorable price movements and trading levels in smaller capitalization issues in the 2001 quarter, compared to more favorable
levels in 2000. Corporate finance revenues decreased 54.7% percent, or $1,000,486, in the third quarter of 2001 compared to the third quarter of 2000. One corporate finance transaction totaling
$12.7 million was completed in the third quarter of 2001 compared to two transactions totaling $25.2 million in the third quarter of 2000. Corporate finance revenue is directly related
to the amount of money raised in completed transactions. Investment income increased by $1,649,267, from a restated loss of $5,399,201 in the third quarter of 2000 to a loss of $3,749,934 in 2001.
Investment income included no gains or losses from the sale of previously exercised underwriter warrants, a decrease of $1,276,955 in value from underwriter warrants that had not yet been exercised,
and $2,926,222 gain in investment securities unrelated to underwriter warrants. There were no underwriter warrants exercised in either the 2000 or 2001 quarters. Trading income decreased $834,124,
from trading income of $452,519 in the 2000 quarter to a trading loss of $381,605 in the third quarter of 2001. The loss was primarily due to price decreases in the quarter in issues for which PIC had
acted as the managing underwriter in corporate finance transactions.

Total
expenses decreased $1,061,007 in the third quarter of 2001 from the comparable 2000 period, a decrease of 27.6 percent, to $2,785,325 from $3,846,332. Commissions and
salaries decreased $1,169,461, or 39.7 percent, to $1,776,680 in the 2001 quarter from $2,946,141 for the same period in 2000. This decrease was primarily because of the lower commission
revenues. Underwriting expenses fell by $38,847, or 26.4 percent, and rent, telephone and quote expenses fell 4.1% in the 2001 period. Other expenses increased 30.1 percent, or $156,768,
to $404,262 in the third quarter of 2001 from $367,006 in the third quarter of 2000. The largest factor in this increase was a $134,441 increase in professional fees.

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The Company had a restated pretax loss of $4,237,768 in the third quarter of 2000 compared to a pretax loss of $4,316,083 in the third quarter of 2001. The biggest factors in this
decline were decreases in trading income, corporate finance revenue, and sales commissions that were not completely offset by an increase in investment income during the third quarter of 2001.
Significant fluctuations can occur in PIC's revenues and operating results from one period to another.

The
Company also recorded an estimated tax benefit of $1,682,000 in the third quarter of 2001, compared to an estimated tax benefit in the third quarter of 2000 of $1,645,000.
Independent of investment income, the Company would have had a loss before income taxes in the 2001 quarter of $566,149 and a profit before income taxes in the restated 2000 quarter of $1,161,433.

Liquidity and Capital Resources

With the exception of warrants earned in connection with our underwriting activities, the majority of our assets are cash and assets readily convertible to
cash. Our securities inventory is stated at market value in the case of securities with a readily ascertainable market value and at estimated market value in the case of securities having no readily
ascertainable market value. The liquidity of the market for many of our securities holdings, however, varies with trends in the stock market. Since many of the securities that we hold are thinly
traded, and PIC is in many cases a primary market maker in the issues held, any significant sales of our positions could adversely affect the liquidity of the issues held. In general, falling prices
in OTC securities (which make up most of our 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 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.

The
recorded value of our underwriter's warrants is typically not readily realizable, either because the warrants are not currently exercisable or because their exercise price is more
than the price that we could realize if we exercised the warrant and sold the underlying securities. There is no public market for our underwriter warrants and the warrants themselves are transferable
only under very limited circumstances. Accordingly, their value cannot be realized by selling the underwriter warrants themselves. Underwriter's warrants exercisable to purchase securities having a
value in excess of the exercise price are liquid, subject to restrictions on liquidity applicable to OTC securities generally and discussed in the foregoing paragraph. The securities issuable on
exercise of our underwriter's warrants are registered under the Securities Act of 1933, as amended, and, in some cases, may also be resold under an exemption from registration. Accordingly, there is
no legal impediment to liquidity with
respect to these securities, except during the first year following a company's public offering, as described above.

We
borrow money from our clearing firm in the ordinary course of our business, pursuant to an understanding under which the clearing firm agrees to finance our trading accounts. As of
September 30, 2001, no net loans were outstanding pursuant to this arrangement. We are generally able to meet our compensation and other obligations out of current liquid assets.

In
the nine months ended September 30, 2001, $388,033 of net cash was used in operating activities of the Company. The major adjustments to reconcile this result to the
Company's net earnings of $2,540,460 include unrealized appreciation on investment securities of $8,175,742, a decrease in income taxes payable of $3,896,000, an increase in trading securities of
$425,039 and an increase in income taxes receivable of $1,099,254 more than offsetting a realized loss on investment securities of $1,250,081, a decrease in deferred taxes of $3,275,001, a decrease of
accounts receivable of $3,906,837

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and an increase in accounts payable of $1,366,085. For the nine months, $1,396,788 of net cash was provided to the Company by investing activities, the result of $28,174,338 in proceeds from the sale
of investment securities more than offsetting the purchase of $26,755,958 of investment securities and $21,592 of additions to furniture and equipment. Net cash of $1,065,483 was used in financing
activities in the nine months, with payments to retire common stock of $1,096,546 more than offsetting $31,063 proceeds from the exercise of stock options.

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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

0Item
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

No
Reports on Form 8-K were filed during the quarter ended September 30, 2001.

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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: December 11, 2001 |  | By:                  
|Date: December 11, 2001 |  | By:                  

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