By most accounts, 2002 was an awful year in investment banking. Corporate scandals and the sagging stock market severely limited mergers and acquisitions. Large investment banks laid off more than 10,000 employees.

But many boutique shops are coming off one of their best years ever and are expanding.

"Take a look at the investment banking community and what has happened to it," said Marshall Graham at Focus Enterprises Inc. of Washington. "This is a perfect opportunity to put a stake in the ground."

Focus had record revenue in 2002 and today is adding three partners, doubling its professional staff and naming a new managing partner, Doug Rodgers.

Boutique investment banks such as Focus work primarily with private companies whose revenue is less than $100 million. Their transactions are a far cry from the multibillion-dollar, headline-grabbing deals managed by big-name investment banks. But the big deals are just a small part of the broad national market in mergers and acquisitions.

"They are just the tiny tip of the triangle of an enormous pyramid," said Mark L. Capaldini, who with Ed Stevens and Manan K. Shah is joining Focus today.

Boutique investment banking firms in the Washington area that manage smaller transactions all increased their staffs in 2002 and reported strong business and revenue despite the economic downturn.

"It's been a great year. Last year was the best in our 10-year history," said John Kulter, chief executive of Quarterdeck Investment Partners LLC of Los Angeles, half of whose 26-member staff is in the District.

Because the smaller firms deal with private companies, falling stock prices haven't been a great concern to them. Large public companies often use their own stock to finance acquisitions. So when stock prices go up, they are able to buy other companies more cheaply. Private companies, on the other hand, often use cash, so their acquisition activity hasn't been curtailed by stock market woes.

"When the market is rising, public companies are dealing with cheap currency," Rodgers said. "In the private market, the currency has always been dollars."

Smaller investment banks have also benefited from the nature of their investment activity. There are only so many billion-dollar acquisitions that large firms can compete for each year, while there can be scores of smaller companies on the market. Activity among those companies is more stable during economic downturns.

"It's the difference between trying to sell $250,000 homes and $10 million homes," Kulter said. "In good times and bad times it's always a good market to sell $250,000 homes."

An emphasis on smaller government contractors will also boost profits. All the local firms have government or defense practices, and Shah, one of the new Focus partners, will devote his time exclusively to government contractors.

"It's one of the few areas in the economy that has been working," said J. Richard Knop of the Windsor Group LLC, which grew by six bankers to a total of 30 last year.

The boutique bankers are also bullish on this year. Many companies that held back on acquisitions last year because they expected prices to continue falling now believe that valuations have hit bottom.

"Almost everyone we've talked to is either buying or selling," said Braun Jones III, managing director of the McLean Group LLC, which added four bankers to a staff of 12 last year. "We expect 2003 to be a record year."