<PAGE>


                      SECURITIES AND EXCHANGE COMMISSION

                           WASHINGTON D.C. 20549

                             -----------------

                                FORM 10-QSB

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

                    For the Quarter ended June 30, 2000

                      Commission file number: 0-18188

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


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


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

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

      Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

                          Yes   X        No
                              ----         ----

Number of shares outstanding of each of the issuer's classes of common stock,
as of August 3, 2000:

                 Common stock, no par value  - 3,462,276 shares

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


                                       1
<PAGE>


                         PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS


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


ASSETS                                6/30/00             12/31/99
CURRENT ASSETS

Cash and cash equivalents           $  110,348           $  48,210
Receivable from broker-dealers and
 clearing organizations             15,180,012           7,336,562
Notes and other receivables            607,580             671,514
Trading securities                   2,630,789           2,238,798
Investment securities               25,284,368          14,200,767
Underwriter warrants                        --          10,490,000
Refundable income taxes                     --                  --
Prepaid and deferred expenses          173,199             669,599
Deferred income taxes                       --                  --
                                    ----------          ----------
TOTAL CURRENT ASSETS                43,986,296          35,655,450
                                    ----------          ----------

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

FURNITURE AND EQUIPMENT, net           539,904             525,716
                                    ----------          ----------

INVESTMENT IN REAL ESTATE              169,900             169,900
                                    ----------          ----------
                                   $45,796,100         $37,451,066
                                   ===========         ===========


  The accompanying notes are an integral part of these statements.

                                       2
<PAGE>


                      PAULSON CAPITAL CORP. AND SUBSIDIARY
                     CONSOLIDATED BALANCE SHEET - CONTINUED
                                  (UNAUDITED)




                                               6/30/00       12/31/99

LIABILITIES AND
SHAREHOLDERS' EQUITY


CURRENT LIABILITIES
Accounts payable and accrued liabilities    $  934,130     $  814,935
Payable to broker-dealers and clearing
 organizations                               1,880,269      1,883,602
Compensation, employee benefits and
 payroll taxes                               2,985,354      3,312,829
Securities sold, not yet purchased             947,806         65,794
Income taxes payable                         5,869,250      1,116,800
Deferred income taxes                        1,200,000      4,842,500
                                            ----------     ----------
Total current liabilities                   13,816,809     12,036,460
                                            ----------     ----------

SHAREHOLDERS' EQUITY

Preferred stock, no par value;
 authorized, 500,000 shares; issued and
 outstanding, no shares                             --             --
Common stock, no par value; authorized,
 10,000,000 shares; issued and
 outstanding, 3,465,776 and 3,541,235,
 respectively                                1,034,247        732,343
Retained earnings                           30,945,044     24,682,263
                                            ----------     ----------
                                            31,979,291     25,414,606
                                            ----------     ----------
                                           $45,796,100    $37,451,066


   The accompanying notes are an integral part of these statements.


                                       3
<PAGE>


                        PAULSON CAPITAL CORP. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF OPERATIONS
                     FOR THE THREE AND SIX MONTH PERIODS ENDED
               JUNE 30, 2000 AND (RESTATED) JUNE 30, 1999 (UNAUDITED)
                                  (CONTINUED)


<TABLE>
<CAPTION>

                                    THREE MONTHS ENDED            SIX MONTHS ENDED
                                 6/30/00          6/30/99         6/30/00     6/30/99
                                                  RESTATED                    RESTATED
<S>                              <C>            <C>           <C>            <C>

REVENUES
Commissions                     $  3,693,646    $  3,999,207   $  10,042,081  $  7,536,432
Corporate finance                  1,544,545         985,839       1,560,289       988,313
Investment income (loss)          (5,352,843)      5,586,010      12,410,580     7,497,140
Trading income                       584,367         389,739       1,416,024       571,096
Interest and dividends                20,063          10,103         40,0871         2,422
Other                                    610           2,905           3,304         3,736
                                ------------    ------------   -------------  ------------
                                     490,388      10,973,803      25,472,365    16,609,139
                                ------------    ------------   -------------  ------------
EXPENSES
Commissions and salaries           3,131,254       3,845,031      11,150,830     7,024,081
Underwriting expenses                378,266         312,267         383,188       312,267
Rent, telephone and
  quotation services                 210,863         196,568         499,528       435,757
Interest expense                          30              --              30         1,244
Professional fees                     82,424         106,442         182,344       239,288
Bad debt expense                      30,000          30,800          60,155        60,800
Travel and entertainment              51,871          52,613         104,450       112,318
Settlements                           33,587           2,250          53,587        17,250
Other                                544,136         422,429       1,826,212       693,468
                                ------------    ------------   -------------  ------------
                                   4,462,431       4,968,400      14,260,324     8,896,473
Earnings (loss) before
  income taxes                    (3,972,043)      6,005,403      11,212,041     7,712,666

</TABLE>

                                       4
<PAGE>


                          PAULSON CAPITAL CORP. AND SUBSIDIARY
                         CONSOLIDATED STATEMENTS OF OPERATIONS
                       FOR THE THREE AND SIX MONTH PERIODS ENDED
                 JUNE 30, 2000 AND (RESTATED) JUNE 30, 1999 (UNAUDITED)
                                     (CONTINUED)

<TABLE>
<CAPTION>

<S>                            <C>             <C>             <C>           <C>
Provision for income taxes
  Current                           (843,000)        846,200       3,285,000       921,500
  Deferred                          (745,000)      1,492,000       1,200,000     2,075,000
                                ------------    ------------   -------------  ------------
NET EARNINGS (LOSS)              $(2,384,043)   $  3,667,203    $  6,727,041  $  4,716,166
                                ============    ============   =============  ============

Earnings (loss) per share,
basic and diluted                   $  (0.68)        $  0.97         $  1.91       $  1.25
                                ============    ============   =============  ============
Weighted average number
of shares outstanding,
basic                              3,503,012       3,763,186       3,522,333     3,758,135
Weighted average number
of shares outstanding,
diluted                            3,506,038             N/A       3,523,830           N/A


</TABLE>

             The accompanying notes are an integral part of these statements


                                       5
<PAGE>



                         PAULSON CAPITAL CORP. AND SUBSIDIARY
                    CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
       FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1999 AND THE SIX MONTHS
                            ENDED JUNE 30, 2000 (UNAUDITED)


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

Restatement                                --           --              671,000
                                   ----------    ---------        -------------

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

Exercise of stock options              87,140       89,283                   --

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

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

Net earnings for the year,
 as restated                               --           --            6,950,395
                                   ----------    ---------        -------------
Balance at December 31, 1997,
 as restated                        3,970,536      794,416           16,256,322

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

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

Net loss for the year, as restated         --           --          (1,768,640)
                                   ----------    ---------        -------------
Balance at December 31, 1998,
 as restated                        3,796,852      775,323          14,036,359

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

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

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

Balance at December 31, 1999        3,541,235      732,343           24,682,263

Redemption of common stock            (75,459)     (15,846)            (464,260)

Stock options granted                              317,750

Net earnings for year to date              --           --            6,727,041
                                   ----------    ---------        -------------
Balance at June 30, 2000            3,465,776   $1,034,247        $  30,945,044
                                   ==========   ==========        =============

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


                                       6
<PAGE>


                      PAULSON CAPITAL CORP. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
         FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND JUNE 30, 1999


<TABLE>
<CAPTION>

                                                      6/30/00           6/30/99
                                                   ------------     -------------

<S>                                               <C>               <C>
Increase (Decrease) in Cash and Cash Equivalents

Cash flows from operating activities
Net earnings (loss)                                $  6,727,041      $  4,716,166
Adjustments to reconcile net earnings (loss) to
  net cash used in operating activities
    Unrealized (appreciation) depreciation
     on investment securities                        (1,847,113)       (4,536,789)
Realized gain on investment securities              (10,563,467)       (2,960,351)
Depreciation and amortization                            86,706            62,541
Deferred income taxes                                (3,642,500)        2,075,000
Stock option grant                                      317,750                --
Change in assets and liabilities
  Receivables                                        (7,779,516)       (5,891,629)
  Trading securities                                 (1,750,103)       (2,573,111)
  Refundable income taxes                                    --           168,059
  Prepaid and deferred expenses                         496,400           261,767
  Accounts payable and accrued liabilities             (211,613)        4,546,384
  Securities sold, not yet purchased                    882,012           (19,912)
  Income taxes payable                                4,752,450                --
                                                   ------------     -------------
Net cash provided by (used in)
  operating activities                              (12,531,953)       (4,151,875)
                                                   ------------     -------------

Cash flows from investing activities
  Purchases of investment securities                (81,491,868)      (22,707,588)
  Proceeds from sale of investment securities        94,666,959        27,351,328
  Additions to furniture and equipment                 (100,894)         (234,765)
  Proceeds from sale of furniture and equipment              --                --
                                                   ------------     -------------
Net cash provided by (used in)
  investing activities                            $  13,074,197      $  4,408,975
                                                   ------------     -------------

</TABLE>


             The accompanying notes are an integral part of these statements

                                       7
<PAGE>


                      PAULSON CAPITAL CORP. AND SUBSIDIARY
          CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED

<TABLE>
<CAPTION>

                                                     6/30/00       6/30/99
                                                   -----------   -----------
<S>                                                <C>           <C>
Cash flows from financing activities
 Proceeds from exercise of stock options                    --            --
 Payments to retire common stock                      (480,106)     (303,874)
 Decrease in bank overdraft payable                         --            --
                                                   -----------   -----------

  Net cash provided by (used in) financing activities (480,106)     (303,874)
                                                   -----------   -----------

      NET INCREASE (DECREASE) IN CASH AND
        CASH EQUIVALENTS                                62,138       (46,774)

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

Cash and cash equivalents at June 30                $  110,348     $  53,571
                                                   ===========   ===========

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

 Interest                                                $  30        $  --
                                                   ===========   ===========

 Income taxes                                     $  2,596,650     $  10,200
                                                   ===========   ===========

</TABLE>

        The accompanying notes are an integral part of these statements

                                       8
<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 business of Paulson Capital Corp. ("Company")
through its operating subsidiary, Paulson Investment Company, Inc. ("PIC"),
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

     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 has agreed to arbitrate the matter before the
NASD.  The claim has been dismissed, but the plaintiff has an opportunity to
refile.  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 refiled.

     In October 1998, Masood Asif and Bobbie Sierra, former PIC customers,
filed an NASD arbitration claim against PIC, an officer and director of PIC,
and a former PIC registered representative alleging breach of fiduciary duty,
negligent misrepresentation, suppression of facts and churning.  Plaintiff
seeks damages of $100,000 and punitive damages of $100,000.  The arbitration
hearing in this matter has been scheduled for November 27, 2000.  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


                                       9
<PAGE>


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.  The arbitration hearing in this matter is
scheduled for October 23, 2000.  PIC has not fully investigated this claim,
but believes it has meritorious defenses and intends to defend this matter
vigorously.

     In January 2000, Paulson received notice that Paul Monka, as trustee for
the Urantia Corporation defined benefit pension plan, filed an arbitration
against PIC and a former PIC registered representative alleging violations of
NASD rules, misrepresentation, fraud, breach of contract, and breach of
fiduciary duty.  Claimant seeks compensatory damages in excess of $460,000
and punitive damages.  PIC has not had an opportunity to fully investigate
this claim, but believes it has meritorious defenses and intends to defend
this matter vigorously.

     In August 2000, PIC received a complaint from Charles Bradshaw, a former
PIC customer, alleging that a former PIC registered representative managed
his account improperly and seeking a payment of $93,614 as a result of such
mismanagement.  PIC has not had an opportunity to fully investigate this
matter but intends to defend this matter vigorously.

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


                                       10
<PAGE>


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


THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999

     RESULTS OF OPERATIONS

     The revenues and operating results of the Company's operating
subsidiary, Paulson Investment Company, Inc. ("PIC"), are influenced by
fluctuations in the equity underwriting markets as well as general economic
and market conditions, particularly conditions in the over-the-counter
market, where PIC's investment account, trading inventory positions and
underwriter warrants are heavily concentrated.  Significant fluctuations can
occur in PIC's revenues and operating results from one period to another.
PIC's financial results depend upon many factors, such as the number of
companies that are seeking public financing, the quality and financial
condition of those companies, market conditions in general, the performance
of previous PIC underwritings and interest in certain industries by
investors.  As a result, revenues and income derived from these activities
may vary significantly from period to period.  In the table below, "Trading
Income" is the net gain or loss from trading positions before commissions
paid to the representatives in the trading department.

                   SUMMARY OF CHANGES IN MAJOR CATEGORIES
                         OF REVENUES AND EXPENSES


<TABLE>
<CAPTION>


--------------------------------------------------------------------------------------------------
                                           Quarter Ended June 30       Six Months Ended June 30
--------------------------------------------------------------------------------------------------
                                          2000 vs. (restated) 1999     2000 vs. (restated) 1999

<S>                                   <C>               <C>           <C>             <C>
Revenues:
Sales Commissions                         $  (305,561)     ( 7.6 %)    $  2,505,649      33.2 %
Corporate Finance                             558,706       56.7 %          571,976      57.9 %
Investment Income                         (10,938,853)    (195.8 %)       4,913,440      65.5 %
Trading Income                                194,628       49.9 %          844,928     148.0 %
Other                                           7,665       58.9 %           27,233     168.5 %
                                                -----                        ------
Total                                   $ (10,483,415)     (95.5 %)    $  8,863,226      53.4 %

Expenses:
Commissions and Salaries                  $  (713,777)     (18.6 %)     $ 4,126,749      58.8 %
Underwriting Expenses                          65,999       21.1 %           70,921      22.7 %
Rent, Telephone and Quotes                     14,295        7.3 %           63,771      14.6 %
Other                                         127,514       20.8 %        1,102,410      98.0 %
                                              -------                     ---------
Total                                     $  (505,969)     (10.2 %)     $ 5,363,851      60.3 %

Pretax Income                           $  (9,977,446)    (166.1 %)    $  3,499,375      45.4 %
--------------------------------------------------------------------------------------------------
</TABLE>

                                       11
<PAGE>



      During the fourth quarter of 1999, the Company changed its method of
accounting for underwriter warrants.  Previously the Company recognized no
value for these warrants.  Upon reconsideration, it was determined that it is
appropriate under generally accepted accounting principles to carry these
securities at their estimated fair value.  Accordingly, the financial
statements for previous periods have been restated to reflect this change.
Any unrealized change in the value of the Company's underwriter warrants will
be reflected in the "underwriter warrants" line item on the Company's balance
sheet and in the "investment income" line item on the Company's statement of
operations.

      Total revenues for the second quarter of 2000 fell 95.5 percent from
the second quarter of 1999, to $490,388 from $10,973,803.  As shown in the
table above, sales commissions fell $305,561, or 7.6 percent, to $3,693,646
in the second quarter of 2000 from $3,999,207 in the comparable 1999 period.
This decrease resulted primarily from the less favorable price movements and
trading levels in the stock market, especially the market for the very small
capitalization issues (the primary focus of PIC's investment banking and
trading businesses) in the 2000 quarter compared to 1999.  The Nasdaq
Industrial Average fell 13.0 percent in the second quarter of 2000 compared
to a rise of 17.6 percent in the second quarter of 1999.  Corporate finance
revenues rose $558,706 in the second quarter of 2000 compared to the second
quarter of 1999. Two corporate finance transactions were completed in the
1999 quarter in which PIC acted as the managing underwriter, raising a total
of $23 million for the issuers.  Two transactions were also completed in the
2000 quarter, raising more than $38 million for the issuers.  Corporate
finance revenue is directly related to the amount of money raised in
completed transactions.  Investment income fell $10,938,853, or 195.8
percent, to a loss of $5,352,843 in the second quarter of 2000 from a
restated gain of $5,586,010 in the second quarter of 1999.  Investment income
included $8,647,530 of gain from the sale of securities previously acquired
on exercise of an underwriter warrant, a loss in value of $809,269 from
underwriter warrants that had not yet been exercised, and $13,191,105 of net
loss in investment securities unrelated to underwriter warrants. There was
one underwriter warrant exercised in the 1999 quarter, while none were
exercised in 2000.  Trading income rose $194,628, or 49.9 percent, from
$389,739 in the second quarter of 1999 to $584,367 in the comparable 2000
period.  This increase was in spite of the decreased prices and trading in
the market for very small capitalization companies described above and was
primarily the result of very active trading in two corporate finance issues
for which PIC had previously completed transactions.

      Total expenses fell $505,969 from the second quarter of 1999 to the
comparable 2000 period, a decrease of 10.2 percent, to $4,462,431 from
$4,968,400.  Commissions and salaries fell $713,777, or 18.6 percent, to
$3,131,254 in the 2000 period from $3,845,031 in 1999.  This decrease was
primarily due to bonus and compensation arrangements related to investment
and trading profits, which decreased in the 2000 period, and decreased
commission revenues resulting in a lower level of commissions paid.  (Higher
percentage commission levels are generally paid to employee registered
representatives at higher production levels.)  Underwriting expenses rose
$65,999, or 21.1 percent, from $312,267 in the second quarter of 1999 to
$378,266 in the second quarter of 2000, due to increased expenses relating to
the larger transactions completed in the recent


                                       12
<PAGE>


quarter.  Rent, telephone and quote expenses increased to $210,863 in the
2000 period from $196,568 in 1999, an increase of 7.3 percent, primarily due
to expenses related to improvements in quotation and phone systems.  The
aggregate of all other expenses rose 20.8 percent, to $742,048 in the second
quarter of 2000 from $614,534 in the second quarter of 1999.  This increase
was primarily due to the recognition of expense related to stock options
previously granted but approved by the Company's shareholders in the quarter
and expenses related to a conference sponsored by the Company more than
offsetting a decrease in the accrual for PIC's profit sharing plan.

      The Company had a pretax loss of $3,972,043 in the second quarter of
2000 compared to a restated pretax profit of $6,005,403 in the comparable
1999 period, primarily due to the decrease in investment income.  Significant
fluctuations can occur in PIC's revenues and operating results from one
period to another.

      The Company also recorded a tax benefit for income taxes of $1,588,000
in the second quarter of 2000, compared to an accrual for income taxes in the
second quarter of 1999 of $2,338,200. Independent of investment income, the
Company would have had a profit before income taxes in both quarters.

LIQUIDITY AND CAPITAL RESOURCES

      The majority of PIC's assets are cash and assets readily convertible to
cash.  PIC's securities inventory is stated at market value.  The liquidity
of the market for many of PIC's securities holdings, however, varies with
trends in the stock market.  Since many of the securities held by PIC are
thinly traded, and PIC is in many cases a primary market maker in the issues
held, any significant sales of PIC's positions could adversely affect the
liquidity of the issues held.  In general, falling prices in OTC securities
(which make up most of PIC's trading positions) lead to decreased liquidity
in the market for these issues, while rising prices in OTC issues tend to
increase the liquidity of the market for these securities.  The overall
increase in prices for the OTC securities traded by PIC in both early 2000
and 1998 was combined with a general increase in the liquidity of the markets
for these securities.  The decline in prices for the OTC securities traded by
PIC in the second quarter of 2000 and early 1999 was combined with a general
decrease in the liquidity of the markets for these securities.  PIC's
investment account and trading inventory accounts are stated at fair market
value, which is at or below quoted market price.

      PIC borrows money from its clearing firm in the ordinary course of its
business, pursuant to an understanding under which the clearing firm agrees
to finance PIC's trading accounts.  As of June 30, 2000, no net loans were
outstanding pursuant to this arrangement.  PIC and the Company are generally
able to meet their compensation and other obligations out of current liquid
assets.

      Another source of capital to PIC and the Company has been the
underwriter warrants issued to PIC in connection with its corporate finance
activities and the sale of the underlying securities. These warrants are
reflected on the balance sheet of PIC or the Company at their estimated fair
value, with estimated discounts for lack of marketability.  While the
warrants and the securities


                                       13
<PAGE>


issuable upon exercise of the warrants are not immediately saleable, PIC
receives the right to require the issuer to register the underlying
securities for resale to the public.  Profits, if any, from the warrants are
recognized based upon the difference between the market price and the
exercise price less discounts, if any, for trading volume, the remaining
warrant exercise period and other factors.  Further profits or losses are
subsequently realized when the underlying securities are sold. Profits and
losses recognized from the warrants are recorded as "Investment Income."
There is no public market for the underwriter warrants. The securities
receivable upon exercise of the underwriter warrants cannot be resold unless
the issuer has registered these securities with the SEC and the states in
which the securities will be sold or exemptions are available.  Any delay or
other 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 June
30, 2000, PIC owned 24 underwriter warrants (from 23 issuers), of which 19
were currently exercisable and four had an exercise price below the market
price at that date 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 six months ended June 30, 2000, $12,531,953 of net cash was used
in operating activities of the Company.  The major adjustments to reconcile
this result to the Company's net profit of $6,727,041 include a realized gain
on investment securities of $10,563,467, an increase in receivables of
$7,779,516, a decrease in deferred income taxes of $3,642,500, unrealized
appreciation in investment securities of $1,847,113 and an increase in
trading securities of $1,750,103 more than offsetting the increase in income
taxes payable of $4,752,450, an increase in securities sold but not yet
purchased of $882,012, a decrease in prepaid and deferred expenses of
$496,400 and a stock option grant of $317,750.  In the six months,
$13,074,197 of net cash was provided to the Company by investing activities,
the result of $94,666,959 in proceeds from the sale of investment securities
more than offsetting the purchase of $81,491,868 of investment securities and
$100,894 of additions to furniture and equipment.  Net cash of $480,106 was
used in financing activities in the six months for payments to retire common
stock.  See "Financial Statements --Consolidated Statements of Cash Flows."

      As a securities broker-dealer, the Company's wholly owned subsidiary,
PIC, is required by SEC regulations to meet certain liquidity and capital
standards.  At June 30, 2000, the Company had no material commitments for
capital expenditures.

      In general, the primary ongoing sources of PIC's, and therefore the
Company's, liquidity, including PIC's trading positions, borrowings on those
positions and profits recognized from underwriter warrants, all depend in
large part on the trend in the general markets for OTC securities.  Rising
OTC price levels will tend to increase the value and liquidity of PIC's
trading positions, the amount that can be borrowed from its clearing firm
based upon those positions, and the value of PIC's underwriter warrants.  The
Company believes its liquidity is sufficient to meet its needs for the
foreseeable future.


                                       14
<PAGE>


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.

                                   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.

The Company held its annual meeting on June 20, 2000.  The six Company
directors (Chester L.F. Paulson, Jacqueline M. Paulson, Glen Davis, Shannon
P. Pratt, Paul Shoen and John Westergaard) were elected for additional one
year terms.  For each director 3,440,071 shares were voted for and 2,000
shares were withheld.  In addition, the Company's shareholders approved the
adoption of the Company's 1999 Stock Option Plan, with 3,394,337 shares
voting for the proposal,  29,054 shares voting against the proposal, and
18,680 shares abstaining.  Under the proposal, options to purchase up to
500,000 shares of the Company's common stock may be granted to provide
incentive for the employees and directors of the Company and PIC.

Item 5. Other Information.

        None

                                       15
<PAGE>

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 June 30, 1999.


                                       16
<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: August 7, 2000                     By: /s/ CHESTER L.F. PAULSON
      ------------------------           ----------------------------------
                                               Chester L.F. Paulson
                                               President


Date: August 7, 2000                     By: /s/ CAROL RICE
      ------------------------           ----------------------------------
                                               Carol Rice
                                               Principal Accounting Officer


                                       17
<PAGE>


                                EXHIBIT INDEX

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

             27            Financial Data Schedule






                                       18