RECENT HISTORY AND DEVELOPMENTS

Prior to November 1, 1999, we were a closed-end management investment company, which was regulated as a business development company under the Investment Company Act of 1940 (the "1940 Act"), and had three primary business focuses: (1) investing in start-up and early stage development companies, (2) operating an investment vehicle that specialized in bridge financing to small and medium-sized companies, and (3) providing accounts receivable-based commercial financing, or factoring, and related services.

On November 1, 1999, we acquired Tower Hill Securities, Inc. ("Tower Hill"), a New York corporation, and we changed our name from Walnut Financial Services, Inc. ("Walnut") to THCG, Inc. Tower Hill is a registered broker-dealer and a member of the National Association of Securities Dealers. Prior to the acquisition of Tower Hill, Walnut invested in start-up and early stage development companies involved in various industries with the objective of assisting in the management and financing of these companies. We continue to hold investment securities in these companies (the "Walnut Financial Portfolio"). In addition, our executive officers and most of our directors were changed. Furthermore, we withdrew our election to be regulated as a business development company under the 1940 Act.

Soon after the acquisition of Tower Hill, we embarked on a new business strategy to provide venture banking, venture development and venture funding services to our partner companies. On December 29, 1999, we acquired Mercury Coast Inc., a Delaware corporation ("Mercury Coast"). Mercury Coast provided business acceleration services, including strategic planning, operations and marketing consulting services to Internet and technology related businesses and was the entity through which we would provide our venture development services. Larry W. Smith, the co-founder and president of Mercury Coast and co-founder and former chief executive officer of U.S. Interactive, became our president on December 29, 1999.

In December 1999, we established THCG Venture Partners I LLC ("THCG Venture Partners I") and THCG Partners LLC ("THCG Partners"), which raised commitments of more than $20 million of capital to be available to support our venture funding business. From December 1999 through November 2000, THCG Venture Partners I purchased equity securities in eight companies. In addition, since November 1, 1999, Tower Hill acquired equity securities in a number of these companies in partial payment for investment banking services Tower Hill provided in connection with the funding of those companies, and we purchased equity securities in two of these companies for cash or shares of our Common Stock.

In September 2000 we completed our acquisition of the investment banking and equity research businesses of the Giza Group ("Giza"), a private financial advisory and equity research firm in Israel that specialized in the Internet and related technologies, and we changed the name of the business to Zinook Ltd. ("Zinook"). Our plan was to expand Zinook's operations to provide to technology-related companies in Israel the same venture banking, venture funding and venture development services as we provided in the United States.

Commencing in late March 2000, Internet and other technology related companies experienced dramatic declines in market value and it became increasingly difficult for these companies to raise needed additional capital. As a result, we experienced a material decline in the demand for our venture development services, significant difficulty in successfully completing private placements for companies that had retained Tower Hill to render investment banking services and a precipitous decline in the market value of our Common Stock, thereby precluding us from raising meaningful amounts of equity capital on reasonable terms.

In response to these market conditions, in January 2001 we restructured our operations and reduced the number of personnel by approximately 35%. Larry Smith and the two other senior executives of Mercury Coast resigned and we substantially curtailed our venture development services. This restructuring required us to write down the value of certain assets, including Mercury Coast. Commencing in the middle of October 2000, market conditions in Israel worsened materially due to the outbreak of hostilities in the region, and, in February 2001, we determined to cease funding the operations of Zinook and wrote down the value of those assets. The wind down of Zinook resulted in additional personnel reductions in Israel which, combined with the reductions in January 2001, reduced our overall personnel by approximately 70%. As a result of these write-downs, the fair value of our investment securities as of December 31, 2000 exceeds 40% of the fair value of our total assets.

We have been exploring potential business combinations or other strategic opportunities that could have the effect of increasing the value of our operating assets and the income attributable to those assets, but have not been successful in reaching any agreement with respect to any of these opportunities. It is not certain that we will be able to do so. Unless we can effect a business combination with a significant operating company or complete a strategic alternative in the near future, we will be required to register under the 1940 Act. See "Government Regulation - Investment Company Act of 1940" below.

Our Board of Directors believes that registration under the 1940 Act is not in our best interests or the best interests of our stockholders and on February 27, 2001, adopted a resolution that we be engaged primarily in a business other than investing, reinvesting, owning, holding or trading securities as soon as reasonably possible, and in any event by January 1, 2002, thus allowing us to take advantage of the one-year grace period for avoiding registration under the 1940 Act available to companies that inadvertently become subject to regulation under the 1940 Act. In order to execute and carry forward this change in our strategy, management is assessing the feasibility of establishing a liquidating trust for the benefit of our stockholders of record as of the date the trust is established and transferring to the trust substantially all the investment securities we own directly or indirectly. The sole purpose of the liquidating trust would be to hold, conserve and protect the trust's assets until they could be liquidated and the proceeds distributed to the owners of the beneficial interests in the liquidating trust. See "Liquidating Trust" below. If the liquidating trust is established, the amount of the assets reflected on our balance sheet as of December 31, 2000 will be substantially reduced and we will not have to register as an investment company under the 1940 Act. Any management proposal to establish such a liquidating trust will be presented to our Board of Directors. If the Board approves a proposal, it will be submitted to our stockholders for approval at our next annual meeting of stockholders.

If the liquidating trust is established, our business will consist of providing a limited level of investment banking and other financial advisory services through Tower Hill. See "Future Banking Services" below. Management does not believe that this business is likely to generate any significant revenue or profit for the foreseeable future. Consequently, management intends to continue to seek potential strategic opportunities. These opportunities might involve the acquisition of or merger with an operating business involved in investment banking, financial services or a related industry. However, no such opportunities are presently under serious discussion, and there can be no assurance that we will be able to identify, successfully negotiate or consummate any business combination or other strategic opportunity. If we cannot do so, we may be required to cease operations.

In the event we do not establish the liquidating trust and we are unable to consummate a business combination or other strategic opportunity, it is likely that we will be required to register under the 1940 Act. See "Liquidating Trust - Failure to Establish Liquidating Trust" below.

We are a Delaware corporation formerly known as Walnut Financial Services, Inc. Our executive offices are located at 512 Seventh Avenue, 17th Floor, New York, New York 10018. Our phone number is (212) 223-0440. References in this Annual Report to "THCG" or "us" or "our" or "we" mean THCG and its subsidiaries on a consolidated basis, unless the context otherwise requires.

OUR BUSINESS

During 2000, we provided a combination of venture funding, venture development and venture banking services to our partner companies, comprised of Internet and technology companies in which we acquired direct or indirect equity interests as well as to third parties to which we provided services for fees. See "Venture Services" below. Due to market conditions, we substantially curtailed our venture funding and our venture development services in January and February 2001. See "Recent History and Developments" above. We are currently providing a limited level of investment banking and other financial advisory services through Tower Hill, although these services are not likely to generate any significant revenue or profit for the foreseeable future. See "Future Banking Services" below.

VENTURE SERVICES

The following is a description of the venture funding, venture development and venture banking services we provided to our partner companies during 2000 as well as a brief description of the limited level of investment banking and other financial advisory services we intend to provide in the future.

Venture Funding Services. Our venture funding activities consisted primarily of the acquisition of equity interests in our partner companies through THCG Venture Partners I. On certain occasions, we acquired equity interests in our partner companies directly. Our venture funding activities were primarily focused on global Internet-based businesses, established "brick and mortar" companies implementing an Internet-based strategy and advanced technology and service companies.

We presently own 9.9% of THCG Venture Partners I through THCG, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Tower Hill ("THCG, LLC"). In addition, THCG Ventures LLC, a wholly-owned subsidiary of Tower Hill ("THCG Ventures"), is the non-member manager of THCG Venture Partners I, with the sole authority to manage and operate THCG Venture Partners I.

THCG Venture Partners I was formed in December 1999. As of March 31, 2001, THCG Venture Partners I had $20 million of committed capital, of which approximately $18.6 million has been called and contributed to THCG Venture Partners I. THCG Venture Partners I has three members as follows:

o Greenwich Street Capital Partners II, L.P. ("GSCP") and certain of its affiliates, directly own 75% of THCG Venture Partners I, representing a capital commitment of $15 million. GSCP and these affiliates are major stockholders of ours, and one of their designees is a member of our Board of Directors.

o THCG Partners directly owns 15.1% of THCG Venture Partners I, representing a capital commitment of $3.02 million. THCG Partners was formed in December 1999 and has $5.51 million of committed capital. THCG Partners has 29 members as follows:

|_| Joseph D. Mark, Adi Raviv and Evan M. Marks, directors and executive officers of ours and persons associated with them, collectively own 23.6% of THCG Partners, representing an aggregate capital commitment of $1.3 million.

|_| THCG Ventures owns 0.45% of THCG Partners, representing a capital commitment of $25,000.

|_| All other members collectively own 75.95% of THCG Partners, representing an aggregate capital contribution of $3.8 million.

o THCG, LLC owns 9.9% of THCG Venture Partners I, representing a capital commitment of $1.98 million.

To date, in exchange for cash investments totaling approximately $18.6 million, THCG Venture Partners I has acquired equity interests in our partner companies consisting of common stock or convertible preferred stock. Whenever possible, THCG Venture Partners I has obtained the right to designate at least one director on the boards

of our partner companies and has obtained rights of participation in, or control over, a number of material decisions affecting our partner companies. THCG Venture Partners I has also generally negotiated for additional rights, including registration rights, rights of first refusal, co-sale rights, anti-dilution protection and preemptive rights relating to our partner companies' issuances of additional equity. THCG Venture Partners I has also generally required our partner companies to appoint designated directors to the executive, audit and compensation committees of their boards of directors. On certain occasions, we acquired an equity interest directly in our partner companies.

The convertible preferred stock that THCG Venture Partners I acquired in our partner companies generally votes as if it were converted into common stock. Conversion is at the holder's option or is automatic upon an initial public offering of the common stock of our partner company that meets criteria generally relating to the total offering size and offering price per share.

For the year ended December 31, 2000, we had revenues of $6,942,000 attributable to our venture funding services.

We substantially curtailed our venture funding services in the first quarter of 2001. See "Recent History and Developments" above.

Venture Development Services. In addition to our venture funding services, during 2000 we provided venture development services to our partner companies. The services we provided were dictated by the stage of development of our partner companies. The venture development services we provided included the following:

o strategic guidance regarding market positioning, business model development and market trends;

o technology and operations planning;

o sales, marketing, product positioning and branding;

o market launch programs and implementation consulting;

o e-commerce consulting; and

o interim management.

For our venture development services, we negotiated fees with our partner companies based on the scope of venture development services we were engaged to provide. Our fees were generally paid in cash, securities or a combination of both. In addition, we were typically reimbursed for the expenses we incurred in providing our venture development services.

For the year ended December 31, 2000, we had revenues of $3,999,000 attributable to our venture development services.

We substantially curtailed our venture development services in the first quarter of 2001. See "Recent History and Developments" above.

Venture Banking Services. In addition to our venture funding and venture development services, during 2000 we provided our partner companies with venture banking services through Tower Hill. Our venture banking services encompassed four principal areas:

o General financial advisory services. We assisted three parties in planning and developing their capital structures.

o Capital raising. We helped our partner companies implement private placements of equity and debt securities. Typically, we sought to effect private placements of equity ranging in amounts from approximately $2 million to $15 million. Our capital raising activities included preparing private offering documents, identifying potential strategic and financial investors, assessing

commitment offers, negotiating the terms of commitments and managing all phases of documentation and transaction execution.

o Mergers and acquisitions. We assisted our partner companies in evaluating, structuring and negotiating acquisitions and other transactions on terms and conditions consistent with our partner company's overall strategic and financial objectives. Our services included identifying and negotiating with potential purchasers and acquisition targets, assisting in due diligence reviews, preparing financial analyses and valuations of a purchaser or target, determining the appropriate capital structure for the transaction and managing all phases of the transaction.

For our venture banking services, we generally received a nominal retainer payment, with the majority of our project-related fees payable only upon the successful conclusion of an engagement. Generally, our fees were paid in a combination of cash and securities. Because we were engaged in a capital intensive business, we paid certain fixed costs before we received payment for our services, which payment may or may not have been in cash.

The success fees we received upon completion of an engagement depended upon the type of engagement. Descriptions of the success fees that we generally received are as follows:

o Capital raising. Upon the closing of an equity capital raising transaction, we generally received cash success fees of up to 6% of the amount of capital raised. In addition, we generally received additional success fees in the form of warrants to purchase the securities issued by our partner company in the transaction. Such warrants were generally in a dollar amount equal to 8% to 10% of the amount of securities sold in the transaction and were exercisable for five years at a price equal to the price for the securities paid by the investors in the transaction.

o Mergers and acquisitions. In connection with engagements in which we provided strategic and other advisory services to a company involved in a sale, purchase or exchange of assets, a merger or consolidation, a leveraged buyout, the formation of a joint venture, a minority investment or partnership, a leveraged recapitalization, spin-off or any similar transaction, we generally received a prescribed success fee at the time that the transaction was concluded. While the amount of this fee was dependent to some extent upon the anticipated nature, complexity and duration of the specific engagement, these fees generally ranged from $250,000 to $500,000 and were paid in cash or marketable securities.

For the year ended December 31, 2000, we had revenues of $3,448,000 attributable to our venture banking services.

Future Banking Services. Our business going forward will be to provide a limited level of investment banking and other financial advisory services through our wholly-owned subsidiary Tower Hill. The services we intend to provide should be substantially similar to the venture banking services we provided in 2000. See "Venture Banking Services" above. However, the services we provide will not be rendered exclusively to our partner companies and furthermore, will not be focused on any particular industry or technology.

Management does not believe that this business is likely to generate any significant revenue or profit for the foreseeable future. Consequently, management intends to continue to seek potential strategic opportunities. These opportunities might involve the acquisition of or merger with an operating business involved in investment banking, financial services or a related industry. However, no such opportunities are presently under serious discussion, and there can be no assurance that we will be able to identify, successfully negotiate or consummate any business combination or other strategic opportunity. If we cannot do so, we may be required to cease operations.

ACCOUNTS RECEIVABLE FACTORING BUSINESS

We were formerly engaged in the accounts receivable factoring business through our wholly owned subsidiaries, Pacific Financial Services Corporation, a Washington corporation based in Bellevue, Washington, and Inland Financial Corporation, a Washington corporation based in Spokane, Washington. In the first quarter of 2000, we completed a strategic review and concluded that the factoring business was not consistent with our then focus

and corporate objectives. Accordingly, we wound down operations of these two subsidiaries and have accounted for their business as discontinued operations. However, we are a party to several lawsuits relating to our former factoring business. See "Item 3. Legal Proceedings - Factoring Business Litigation" below.

LIQUIDATING TRUST

Description of Trust. Management is assessing the feasibility of a plan of liquidation to completely liquidate our subsidiary, THCG, LLC, through a liquidating trust for the benefit of our stockholders. If management determines that a plan is feasible, it will propose the plan to our Board of Directors for adoption. If the Board adopts it, the plan will be submitted to our stockholders for approval at our next annual meeting. The holder of our outstanding preferred stock has the right to consent to the establishment of the liquidating trust. Management is presently in discussions with them, but no agreements have been concluded as of March 30, 2001. Thus, the following brief summary of the material aspects of the plan of liquidation presently being considered by management is subject to change, perhaps in significant ways:

o The liquidating trust will be for the benefit of our stockholders on the date the trust is established. Joseph D. Mark and Adi Raviv, both executive officers and directors of THCG, are expected to be the initial trustees of the liquidating trust.

o The sole purpose of the liquidating trust will be to hold, conserve and protect the trust's assets until they can be liquidated and the proceeds distributed to the owners of beneficial interests in the liquidating trust. The actual nature, amount and timing of these distributions will be determined by the trustees of the trust pursuant to an agreement establishing the trust and will depend in part upon the ability of the trustees to convert the assets of the trust into cash and pay the liabilities and expenses of the liquidating trust.

o We, and our subsidiaries, will contribute to THCG, LLC substantially all of our rights and interests in any security acquired for investment or in connection with the provision of venture banking or venture development services, including the Walnut Financial Portfolio, and any related contracts, agreements or instruments.

o The liquidating trust will be admitted as a new member of THCG, LLC and will own substantially all of the interests in THCG, LLC.

o Holders of our Common Stock will receive one unit of beneficial interest in the liquidating trust in respect of each share of our Common Stock held on the record date for this distribution. The holder of our series A convertible participating preferred stock will also receive units of beneficial interests in the liquidating trust in respect of its shares of this preferred stock held on the record date for the distribution.

o Each unit of beneficial interest in the liquidating trust will entitle its holder to receive a pro rata portion of the proceeds collected from the liquidation of the assets held by the liquidating trust. The distribution of proceeds will be made in as prompt and orderly a manner as possible.

o The units of beneficial interests of the liquidating trust will not be represented by certificates and will not be transferable except upon death or by operation of law. There will be no market for these units. The units of the beneficial interests of the liquidating trust will constitute a dividend and may be taxable to our stockholders.

o Our stockholders who receive units of beneficial interests of the liquidating trust will retain their shares of our Common Stock or preferred stock, as the case may be, and will continue to be our stockholders.

Reason for Liquidating Trust. Due to our write down of the value of certain assets, the fair value of our investment securities, as of December 31, 2000, exceeds 40% of the fair value of our total assets. See "Recent History and Developments" above. As a result, we will be required to register under the 1940 Act unless the fair

value of our investment securities is reduced below 40% of our total assets. See "Government Regulation - Investment Company Act of 1940."

Our Board of Directors believes that registration under the 1940 Act is not in our best interests or the best interests of our stockholders. Therefore, in order to avoid registration under the 1940 Act, on February 27, 2001, our Board adopted a resolution declaring our intent to be engaged primarily, as soon as reasonably possible, and in any event by January 1, 2002, in a business other than investing, reinvesting, owning, holding or trading securities, thus allowing us to take advantage of the one-year grace period for avoiding registration under the 1940 Act available to companies that inadvertently become subject to regulation under the 1940 Act. Management believes that the establishment of a liquidating trust, as generally described above, would reduce the value of our interests in investment securities to less than 40% of our total assets and that, as a result, we would not have to register under the 1940 Act.

Consequences of Failure to Establish the Liquidating Trust. If a liquidating trust is not established, or a significant amount of our investment securities are not sold, we will continue to own, directly or indirectly, all of our equity interests in our partner and portfolio companies and the fair value of those equity interests will continue to exceed 40% of our total assets. As a result, unless we can effect a business combination with a significant operating company or complete another strategic alternative, we will be required to register under the 1940 Act. See "Government Regulation - Investment Company Act of 1940" below.

While we have been exploring potential business combinations or other strategic opportunities, no such opportunities are presently under serious discussion, and there can be no assurance that we will be able to identify, successfully negotiate or consummate any business combination or other strategic opportunity. In addition, even though we intend to continue to provide a limited level of investment banking and other financial advisory services, management does not believe that this business is likely to generate any significant revenue or profit for the foreseeable future. See "Future Banking Services" above.

Therefore, if the plan of liquidation is not approved and we are not successful in finding a business combination or other strategic opportunity, we will be required to register under the 1940 Act and may be required to cease operations.

COMPETITION

In providing investment banking and other financial advisory services, we compete directly with other investment banking and merchant banking firms which vary in size from small, privately-owned firms to very large, publicly-held corporations. We also face competition from other sources, such as commercial banks, insurance companies and consulting firms offering financial services. The principal competitive factors in the investment banking and financial services industry include transaction experience, breadth of services offered, innovation, reputation and price. Many of our competitors in investment banking services have longer operating histories, larger client bases, greater name recognition, more experience and have significantly greater financial, technical, marketing and other resources than we do. As a result, our competitors may be more attractive partners to our potential clients. In addition, our competitors may be able to respond more quickly to changes in the needs of our potential clients, service more needs of our potential clients simultaneously and undertake more extensive marketing campaigns. We cannot assure that we will be able to compete successfully against our competitors or that competitive pressures will not have a material adverse effect on our business, operating results and financial condition.

GOVERNMENT REGULATION

Investment Company Act of 1940. In response to adverse market conditions here and abroad, in January 2001, we restructured our operations and in February 2001, we determined to cease funding the operations of Zinook in Israel. As a result, we were required to write down the value of certain assets, including Mercury Coast and Zinook, our subsidiaries. As a result, as of December 31, 2000, the fair value of our interests in our partner and portfolio companies exceeded 40% of the fair value of our total assets. Generally, a company must register under the 1940 Act and comply with significant restrictions on operations and transactions if: (1) its investment securities exceed 40% of its total assets, or (2) it holds itself out as being "primarily engaged" in the business of investing,

owning or holding securities. If we are required to register as an investment company, we will be forced to comply with the numerous and burdensome substantive requirements of the 1940 Act, including:

o limitations on our ability to borrow;

o limitations on our capital structure (including prohibitions on the issuance of senior securities, such as preferred stock);

o restrictions on acquisition of equity interests in partner companies; o prohibitions on transactions with affiliates;

o restrictions on specific investments; and

o compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations.

Our Board of Directors believes that registration under the 1940 Act is not in our best interests or the best interests of our stockholders. On February 27, 2001, our Board of Directors adopted a resolution declaring our intent to be engaged in a business other than investing, reinvesting, owning, holding or trading securities as soon as reasonably possible, and in any event by January 1, 2002, thus allowing us to take advantage of the one-year grace period for avoiding registration under the 1940 Act available to companies that inadvertently become subject to regulation under the 1940 Act. To achieve the foregoing, management is assessing the feasibility of establishing a liquidating trust for the benefit of our stockholders and transferring to it substantially all of the investment securities we own directly or indirectly in our partner and portfolio companies. See "Liquidating Trust" above.

If the liquidating trust is established, our investment securities will no longer exceed 40% of our total assets as reflected on our balance sheet as of December 31, 2000 and we will not be required to register under the 1940 Act. There can be no assurance, however, that the liquidating trust will be established. If it is not, we will be required to register under the 1940 Act unless we consummate a business combination or other strategic opportunity.

NASD Regulation. Tower Hill is a registered broker-dealer and a member of the National Association of Security Dealers, or NASD. As a registered broker-dealer and NASD member, Tower Hill and its principals, registered representatives and other associated persons must comply with applicable federal and state securities laws, rules and regulations and with the rules of the NASD.

Broker-dealers are subject to regulations which cover all aspects of the securities business including: sales methods and supervisions; trade practices; capital structure; use and safekeeping of customer's funds and securities; recordkeeping; and the conduct of directors, officers and employees.

As a registered broker-dealer and NASD member, Tower Hill is subject to the Net Capital Rule, or Rule 15(c)3-1, under the Securities Exchange Act of 1934 which requires the maintenance of minimum regulatory net capital and a specified ratio of aggregate indebtedness to net capital, both as defined in that rule, which shall not exceed 15 to 1. The Net Capital Rule is designed to measure the general financial integrity and liquidity of a broker-dealer and requires that at least a minimal portion of its assets be kept in relatively liquid form. Failure to maintain the required net capital may subject a firm to suspension or expulsion by the NASD, the Securities and Exchange Commission (the "SEC") and other regulatory bodies and may ultimately require its liquidation.

Additional legislation, changes in rules promulgated by the SEC and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the mode of operation and profitability of broker-dealers. The SEC, self-regulatory organizations and state securities commissions may conduct administrative proceedings which can result in censure, fine, the issuance of cease and desist orders or the suspension or expulsion of a broker-dealer, its officers or employees.

EMPLOYEES

On March 31, 2001, we had 20 employees in New York. No employees are represented by a collective bargaining agreement, and we believe that our relationship with our employees is satisfactory. On March 31, 2001, our subsidiary, Zinook, had fifteen employees, all but one of whom will cease to be employed by Zinook by April 30, 2001.