General

          Detwiler, Mitchell & Co. (the “Company”) is the holding company for its three principal operating subsidiaries: Fechtor, Detwiler & Co., Inc., (“Fechtor Detwiler” or the “Firm”) a channel research, institutional sales and private client group headquartered in Boston, MA; James Mitchell & Co., a financial services company headquartered in San Diego, CA and Detwiler, Mitchell & Co. (UK) Limited (“DMC UK”), the Company’s institutional sales firm headquartered in London, England.  K. & S., Inc., the Company’s specialist firm, was sold on September 30, 2002 (see Note 15) and is included in the Company’s operating results through that date.

Fechtor, Detwiler & Co., Inc.

          Fechtor, Detwiler & Co., Inc. is a channel research, institutional sales and private client group firm headquartered in Boston, Massachusetts.  The Firm was founded in 1962 as a sole proprietorship and was incorporated in 1971.  The Firm’s business activities include focused equity research and institutional and retail securities brokerage activities.  Institutional sales are conducted from the Boston office.  Retail sales are conducted through registered private client representatives in the northeastern United States.

Institutional Business & Channel Research

          The Firm’s institutional brokerage business is driven by highly focused “Channel Research.”  Channel Research refers to the in-depth analysis of business conditions, demand and pricing throughout the supply and sales chain of certain high-technology industry segments, including semi-conductor devices, electronic production equipment, electronics manufacturing, wireless communications, and enterprise software.  

          Fechtor Detwiler’s research analysts gather information and data from numerous sources within a distribution “channel”.  These include business partners, systems integrators, distributors, retailers, and sales reps, as well as chief information officers of other companies and other buyers of technology.  The Company believes the Firm’s research products are particularly valuable in light of recently adopted SEC regulations that bar selective disclosure and other SEC initiatives that are reshaping the research environment.  The Company obtained a trademark of the name “Channel Notes” in December 2002 and has other trademark applications pending. 

          Several additional characteristics that the Company believes distinguishes the Firm’s research from other “sell-side” Wall Street firms include the following:

• Focused on pertinent and proprietary information gathering - The Firm’s analysts do not rate companies or publish earnings models.  The Company believes its analysts can provide greater value gathering proprietary information and communicating this information swiftly to institutional investors.

• Independence of research - The objectivity and independence of Fechtor Detwiler’s analysts are not compromised by investment banking relationships or corporate investments.  The Firm does not underwrite public offerings or engage in investment banking relationships for the firms it follows.  Nor does the Firm make investments in these companies through asset management units or principal trading activities.  The Firm’s analysts and sales representatives generate high-quality, “actionable” ideas (whether bullish or bearish) that prompt trading decisions by investors.  Fechtor Detwiler believes that its institutional clients place a high value on the objectivity of its research.

• Pre-existing and deep industry relationships - Technical knowledge and industry contacts are important differentiating characteristics of the Firm’s Channel Research model.  The Firm’s analysts have professional experiences and relationships in the industries they follow.  Fechtor Detwiler’s institutional sales representatives typically have backgrounds as traditional research analysts or investment bankers.  The Firm’s Capital Markets team is capable of understanding, distilling and communicating technical information.  They have access to an extensive network of knowledgeable and influential industry contacts.

          Fechtor Detwiler’s research, sales and trading professionals operate as a highly cohesive, focused team of professionals in the Boston headquarters.  At December 31, 2002, the Firm serviced approximately 140 domestic and international accounts. 

Private Client Group

          Revenues from retail brokerage activities are generated primarily through customer purchases and sales of equity securities on behalf of its customers.  The Firm also processes orders for bonds, mutual funds, other securities and insurance products.  Commissions are charged on both listed and over-the-counter agency transactions.

          Fechtor Detwiler provides a “broker-centric” environment for its traditional retail representatives characterized by superior payouts, a lack of bureaucracy, account pricing flexibility, and leading-edge technology and tools.  The Firm’s Private Client Group conducts its traditional retail operations through its registered private client representatives in three offices, one in Massachusetts and two in Connecticut.

          Retail commissions are charged in accordance with a commission schedule comparable to full-service retail brokerage firms.  The Firm does not attempt to compete with the commission rates charged by brokerage firms generally referred to as ‘‘discount brokers.’’  The largest portion of Fechtor Detwiler’s retail clients are individuals who reside in the Northeastern United States.  The Firm is not dependent on any single client for a significant portion of its revenues. 

          In addition to securities brokerage services, the Firm also provides its retail clients specialized financial services including equity research, margin lending, individual retirement accounts and money market products.

DMC Financial Services

          In October 2001, the Firm augmented its traditional retail business by establishing an independent financial advisory program through DMC Financial Services.  DMC Financial Services, a division of Fechtor Detwiler, allows independent representatives to process securities, mutual funds and insurance products through the Company’s brokerage and insurance subsidiaries in exchange for a percentage of commission revenues and other fees.

Change from a Self-Clearing to a Fully Disclosed Broker Dealer

          In April 2002, Fechtor Detwiler began introducing customer transactions on a fully disclosed basis to National Financial Services LLC (“NFS”), a wholly owned subsidiary of Fidelity Investments as clearing broker.  Accordingly, Fechtor Detwiler is no longer a self-clearing broker dealer and no longer holds funds on behalf of its customers. 

          The decision to change from a self-clearing broker dealer to a fully disclosed broker dealer was based upon several factors.  Most significant among these were the competitive environment of the securities industry, expanded products and services Fechtor Detwiler will be able to offer its customers through its relationship with NFS, business risks associated with remaining a self-clearing broker dealer, increased insurance coverage for customer accounts, and the increased ability to retain and hire retail broker and financial planning sales professionals because of enhanced products, services and technology offered by NFS. 

James Mitchell & Co.

          James Mitchell & Co. and its subsidiaries, JMC Financial Corporation and JMC Insurance Services Corporation (collectively, “JMC”) were founded in 1983 and are located in San Diego, California.  JMC provides annuity, insurance and mutual fund sales and support services for certain financial institutions and life insurance companies and the related servicing of tax-advantaged annuities, insurance products and mutual funds.

          JMC earns commissions and service fees from new product sales and the accumulated asset value of the accounts being serviced.

Detwiler, Mitchell & Co. (UK) Limited

          Detwiler, Mitchell & Co. (UK) Limited (“DMC UK”) is a wholly owned institutional sales firm located in London, UK.  DMC UK provides Fechtor Detwiler research on U.S. companies to European hedge funds.

K. & S., Inc.

          On September 30, 2002, Detwiler, Mitchell & Co. sold K. & S., Inc. (“K&S”), its wholly owned specialist business which operated on the Boston Stock Exchange.  The Company recorded a $213,000 loss from the sale which was recorded in the third quarter of 2002  (see Note 15).

Competition

          The Company is engaged in the highly competitive securities brokerage and financial services businesses competing with regional securities brokerage firms, large national and international securities firms, and discount brokerage firms.  To an increasing degree, the Company also competes for various segments of the financial services business with other institutions such as commercial banks, mutual fund companies, and investment advisory and financial planning firms.  In addition to the competition for retail investment business, there is substantial competition among firms in the securities industry to attract and retain experienced client representatives. 

          Additionally, large competitors are able to advertise their products and services on a national or regional basis and have a far greater number and variety of distribution outlets for their products.  Discount brokerage firms market their services through aggressive pricing and promotional efforts.

Regulation

          The securities industry in the United States is subject to extensive regulation under Federal and state laws.  The Securities and Exchange Commission (‘‘SEC’’) is the Federal agency charged with administration of the Federal securities laws.  Much of the regulation of broker-dealers, however, has been delegated to self-regulatory organizations, principally the NASD and the national and regional securities exchanges.  These self-regulatory organizations adopt rules (which are subject to approval by the SEC) which govern the industry.

          Additional legislation, changes in rules promulgated by the SEC and by self-regulatory organizations, or changes in interpretations or enforcement of existing laws and rules, often affect directly the method of operation and profitability of broker-dealers.  The SEC and the self-regulatory organizations may conduct administrative proceedings which can result in censure, fines, suspension or expulsion of a broker-dealer, its officers and its employees.  The principal purpose of regulation and discipline of broker-dealers is the protection of clients and the securities markets rather than the protection of creditors or stockholders of broker-dealers. 

          One of the most important regulations with which the broker-dealer subsidiaries of the Company must continually comply is SEC Rule 15c3-1, which requires all broker-dealers to maintain a minimum amount of net capital.  The Company’s principal broker dealer subsidiary, Fechtor Detwiler, is subject to Rule 15c3-1.  Fechtor Detwiler computes its net capital under the alternative method permitted by the Rule, which requires its minimum net capital to be $100,000.

          At December 31, 2002, Fechtor Detwiler’s regulatory net capital was $959,000, which is $859,000 in excess of its $100,000 minimum net capital requirement.

          In April 2002, Fechtor Detwiler changed from a self-clearing to a fully disclosed broker dealer (see Note 5) with NFS as clearing broker.  Fechtor Detwiler has agreed with NFS to maintain minimum net capital of $500,000 through December 31, 2002, $750,000 through June 30, 2003, and $1,000,000 thereafter.  Fechtor Detwiler also has a $250,000 clearing deposit with NFS which will be reduced to $100,000 in July 2003.

          The laws, rules and regulations of the various Federal, state and other regulatory bodies to which the businesses of the Company are subject to are constantly changing.  While the management believes that it is

currently in compliance in all material respects with the laws, rules and regulations applicable to its businesses, it cannot predict what effect any changes of such laws or regulations might have.

Strategic Outlook

          Management has been and will continue to take aggressive steps to establish and maintain profitability and is investigating other opportunities to increase stockholder value.  There can be no assurance, however, that revenues can be increased or even sustained, that costs can be reduced or additional capital can be secured during these uncertain financial market conditions. 

          Throughout 2002, management has met with many portfolio managers and hedge fund analysts to present Fechtor Detwiler, its Capital Markets staff and its Channel Research information and capabilities.  Institutional clients engage Fechtor Detwiler to provide research information and analysis unencumbered by investment banking relationships.  Since December 2001, approximately 140 new clients have been added to the Firm’s customer base.  Management believes this accomplishment, especially in view of the world economy, unpredictable trading volumes and market volatility, validates the quality of the research which the Firm provides to investors and investment managers.  Management is hopeful that its research model will continue to be well received and in demand.

          Retail commission revenues have been negatively impacted by the continued market uncertainty, now almost three years in length, and the reduced number of retail sales professionals.  The Company has repositioned the retail sales group with the development of an attractive compensation plan for highly skilled top brokers and financial advisors to join Fechtor Detwiler.  The Firm’s compensation plan provides retail sales professionals the opportunity for greater participation in the success of their efforts.  Additionally, their efforts will include other compensation in the form of stock option awards.  Most importantly, Fechtor Detwiler allows for the independence of the customer representatives to manage the accounts of their customers as they believe are appropriate for each client, as opposed to the financial requirements of their employer, as is common in many large financial services companies. 

Employees

          At December 31, 2002, the Company had 44 employees, none of whom are covered by, or parties to, a collective bargaining agreement.  The success of Detwiler, Mitchell & Co. is highly dependent upon its continuing ability to hire, train and retain qualified staff.  Management considers relations with its employees to be good.