BKF CAPITAL GROUP INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NO. 1-10024
BKF CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 36-0767530
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

ONE ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020
(Address of principal executive offices)

TELEPHONE NUMBER: (212) 332-8400
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 28, 2002 was $168,930,359 (based on the closing sale
price of $28.50 on June 28, 2002 as reported by the New York Stock
Exchange-Composite Transactions). For this computation, the registrant has
excluded the market value of all shares of its Common Stock reported as
beneficially owned by named executive officers and directors of the registrant;
such exclusion shall not be deemed to constitute an admission that any such
person is an "affiliate" of the registrant.

At March 27, 2003, 6,644,112 shares of BKF Capital Group, Inc. common
stock, par value $1.00 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Items 10, 11, 12 and 13 of Part III of this Form 10-K incorporate by
reference portions of an amendment to this Form 10-K or portions of the
definitive Proxy Statement (the "Proxy Statement") of the registrant for its
2003 Annual Meeting of Stockholders to be held on May 21, 2003, which in either
case will be filed with the Securities and Exchange Commission within 120 days
after the end of its fiscal year ended December 31, 2002.
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PART I

ITEM 1. BUSINESS

INTRODUCTION

BKF Capital Group, Inc. ("BKF" or the "Company", formerly Baker, Fentress &
Company) was formerly a non-diversified, closed-end management investment
company under the Investment Company Act of 1940, as amended. Pursuant to a Plan
for Distribution of Assets adopted on August 19, 1999, BKF sold substantially
all of its investment securities and distributed the cash proceeds, along with
shares of Consolidated-Tomoka Land Company, to its stockholders. These
distributions were completed by January 7, 2000. On April 18, 2000, BKF received
a deregistration order from the Securities and Exchange Commission, which
completed BKF's transformation from an investment company to an operating
company.

BKF operates entirely through John A. Levin & Co., Inc. ("John A. Levin &
Co."), an asset management business acquired by BKF in June 1996, and its
related entities. As part of the acquisition, BKF formed Levin Management Co.,
Inc. ("Levin Management"), to provide administrative and management services to
John A. Levin & Co. and its related companies. Levin Management and all its
subsidiaries are referred to collectively herein as "Levco". John A. Levin & Co.
owns 100% of LEVCO Securities, Inc. ("LEVCO Securities"), a registered
broker-dealer, and Levco GP, Inc. ("Levco GP"), which is the general partner of
several investment partnerships managed by Levco, which are referred to as the
"Levco Partnerships."

BKF was incorporated in Delaware in 1954. Its executives offices are
located at One Rockefeller Plaza, New York, New York 10020. Its telephone number
is (212) 332-8400, and its website address is www.bkfcapital.com. BKF makes its
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to such reports, available, free of charge, on its
website as soon as reasonably practicable after such reports are electronically
filed with, or furnished to, the Securities and Exchange Commission.

(BKF STRUCTURE FLOW CHART)

PRODUCTS AND SERVICES

Levco is an investment adviser registered under the Investment Advisers Act
of 1940, as amended, that specializes in managing equity portfolios for
institutional and individual investors primarily in the United States. Most
accounts are managed pursuant to value equity strategies; Levco also offers a
range of alternative investment products and other more specialized investment
programs. As of December 31, 2002, assets under management were approximately
$11.3 billion.

Through Levco GP, Levco acts as the managing general partner of several
private investment partnerships, and through John A. Levin & Co. serves directly
as an adviser to private investment vehicles organized outside the United
States. For managing these vehicles, John A. Levin & Co. and Levco GP are
entitled to receive both a fixed management fee based on a percentage of the
assets managed and a share of the net profits of the investment vehicles.

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In July 1996, Levco began participating in its first wrap fee program with
a major financial institution. Since then, it has joined other such programs. In
wrap fee programs, clients pay the sponsoring broker an asset-based fee that
covers brokerage commissions, advisory services, custodial fees and other
reporting and administrative services. Investors are able to select Levco from
among a limited number of managers participating in the program, and Levco
receives a portion of the wrap fee paid by the clients who select Levco to
manage their accounts through the program.

LEVCO Securities clears through Correspondent Services Corporation, a
UBS/PaineWebber affiliated company ("CSC"), on a fully disclosed basis.
Generally, LEVCO Securities' clients are advisory clients of John A. Levin &
Co., and the trades executed through it are generally placed by John A. Levin &
Co. in its capacity as investment adviser.

The following chart summarizes the assets under management of Levco as of
December 31, 2002.
[PIE CHART]

Institutional and Individual Separate Accounts. As of December 31, 2002,
directly managed institutional accounts represented approximately 22.7% of
Levco's total assets under management, with a total market value of
approximately $2.6 billion. As of such date, Levco served as investment adviser
to in excess of 150 separate institutional accounts. The average institutional
account value at December 31, 2002 was approximately $16.3 million.

Levco also directly manages accounts for individuals, which comprised
approximately 13.2% of Levco's total assets under management as of December 31,
2002, with a total market value of approximately $1.5 billion. As of December
31, 2002, Levco's individual client base represented approximately 470 accounts,
the average value of which was approximately $3.2 million.

Sub-Advisory Relationships. Levco has established a number of
relationships in which it acts as a sub-adviser to a financial intermediary.
These financial intermediaries include defined contribution plan platform
providers, sponsors of registered investment fund complexes and sponsors of
other commingled vehicles. As of December 31, 2002, assets managed pursuant to
such sub-advisory relationships totaled approximately $1.9 billion, representing
approximately 16.5% of Levco's total assets under management. The single largest
sub-advisory relationship totaled approximately $1.1 billion, representing
approximately 10% of Levco's total assets under management. Registered
investment funds to which Levco acted as an adviser or sub-adviser as

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of December 31, 2002 accounted for approximately $460 million, or approximately
4%, of assets under management.

Wrap Fee Accounts. With approximately $3.0 billion of managed assets as of
December 31, 2002, wrap fee accounts represented approximately 26.4% of Levco's
total assets under management. Of this total, approximately $2.4 billion, or
approximately 21% of Levco's total assets under management, were with a single
sponsor. As of December 31, 2002, Levco had approximately 19,000 wrap fee
accounts, the average value of which was approximately $158,000.

Event-Driven Accounts. As of December 31, 2002, event-driven accounts,
with a total market value of approximately $1.8 billion, represented
approximately 16.4% of Levco's total assets under management. These accounts
invest in event-driven situations, such as merger arbitrage and distressed
companies.

Short-Biased Accounts. As of December 31, 2002, short-biased accounts,
with a total market value of approximately $452 million, represented
approximately 4.0% of Levco's total assets under management. These accounts
comprise a number of proprietary unregistered investment funds that employ a
short-biased alternative investment strategy.

Other Private Investment Funds. As of December 31, 2002, proprietary
unregistered investment funds following a variety of alternative investment
strategies, with a total market value of approximately $90 million (including
BKF seed capital investments of approximately $17.7 million and excluding the
event driven and short-biased vehicles), represented approximately 0.8% of
Levco's total assets under management.

The table below shows the assets under management of Levco at the dates
indicated:

ASSETS UNDER MANAGEMENT

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(a) Includes $505 million in BKF assets managed by Levco at December 31, 1998.
The BKF portfolio managed by Levco was liquidated during the period between
August 19, 1999 and December 31, 1999.

The growth in assets under management between 1998 and 2001 was generated
by maintaining a relatively stable client base, attracting new clients, entering
the wrap fee business, and developing the event-driven product, as well as
through market appreciation of assets under management. The decline experienced
in 2002 resulted from a decline in the market value of the value equity
portfolios as well as net outflows with regard to the value equity strategies.

DISTRIBUTION

As of December 31, 2002, Levco employed 37 marketing and client service
professionals. This group includes field forces focused on attracting assets
through wrap fee programs and institutional accounts, internal

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marketing personnel, a client servicing team, a private client group and
additional marketing support and information resource staff. These groups are
responsible for communications with clients, consultants and financial
intermediaries, as well as for the production of marketing materials. Senior
investment professionals assist in the marketing effort by taking part in client
presentations or meetings.

Levco also has solicitation arrangements with third parties whereby such
third parties, in accordance with applicable laws and regulations, solicit
clients for Levco investment products (primarily alternative investment
strategies) and are compensated by Levco for such services.

With respect to the large cap value product, distribution efforts are
focused mainly in the United States. With respect to the event driven product
and alternative investment strategies generally, extensive marketing efforts are
directed towards U.S. and non-U.S. clients.

PORTFOLIO PERFORMANCE INFORMATION

Success in the investment management industry depends in large part on
performance. Shown below is historical information relating to the performance
of accounts managed by Levco in its large cap value style as compared to the S&P
500 Index and the Russell 1000 Value Index. The S&P 500 Index is a broad-based,
unmanaged market-weighted index of 500 U.S. companies. The Russell 1000 Value
Index measures the performance of those companies in the Russell 1000 Index
(which include the 1,000 largest U.S. companies based on market capitalization)
with lower price/book ratios and lower forecasted growth rates.

COMPARISON OF ANNUAL RETURNS

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE PERFORMANCE.

NOTES TO COMPARISON OF ANNUAL RETURNS

Basis of Presentation: Eisner LLP examined the investment performance
results for the Levco composite for the years 1986 through 1995 and 1998 through
2001. Ernst & Young LLP examined the investment performance results for the
period January 1, 1996 through December 31, 1997. Performance for 2002 will be
examined by Eisner LLP.

The investment performance results have been prepared in compliance with
the Association for Investment Management and Research ("AIMR") Performance
Presentation Standards from January 1, 1993 through December 31, 2002. The full
period is not in compliance because, for periods prior to January 1, 1993,
size-weighted composite returns were calculated using end-of-period market
values rather than the beginning-of-period market values required by AIMR. AIMR
has not been involved with the preparation or review of this Annual Report on
Form 10-K.

Managed Accounts: Levco's composite includes all fee paying accounts
managed on a fully discretionary basis, including taxable and tax-exempt
accounts, except: accounts managed for immediate family of employees, accounts
with assets under $1,000,000, one account for which only the equity portion of
the portfolio is managed, accounts for pooled vehicles and similarly managed
accounts utilizing investment

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strategies different from the strategy utilized by the accounts included in the
composite, and accounts managed under a broker-sponsored wrap-fee program.

Calculation of Performance: For the period from January 1, 1986 through
December 31, 1989, the results reflect the deduction of a 1% investment
management fee payable quarterly at a rate of 0.25% of ending market value. This
is the maximum investment management fee charged by Levco. These results do not
reflect actual fees charged. For the periods beginning January 1, 1990 and
thereafter, the net results reflect the deduction of the actual dollar-weighted
fee rate paid by all accounts in the composite. Levco has calculated the
dollar-weighted rate by dividing the quarterly investment management fees paid
by the accounts in the composite by the total composite asset value. This
dollar-weighted fee rate also included the performance fees paid by certain
accounts. Inclusion of the performance-based fee does not materially affect the
dollar-weighted fee rate.

CONTRACTUAL ARRANGEMENTS

Levco enters into investment advisory and management agreements with, or
for the benefit of, each of its clients. Levco bases its management fees, other
than incentive allocations from the Levco Partnerships, performance-based fees
and certain fixed dollar amount arrangements (generally with family members of
employees), on a percentage of assets under management and scales these fees
according to the size of each account. Generally, either party may terminate
these agreements at any time upon written notice. In cases in which Levco serves
as an adviser or sub-adviser for a mutual fund client, the mutual fund client or
the investment adviser generally may terminate the relevant advisory or
sub-advisory agreement on relatively short notice.

In connection with Levco's activities as a broker-dealer, Levco maintains a
contractual relationship with CSC for clearance services. The agreement is a
standard clearing agreement that either party may terminate upon 60 days prior
written notice (or immediately for cause). The agreement assigns account
supervisory responsibility to Levco and grants CSC the authority to execute and
report securities transactions for Levco's clients.

EMPLOYEES

As of December 31, 2002, BKF and its subsidiaries employed 141 people,
including 38 investment professionals, of whom 15 were primarily portfolio
managers, 15 were primarily securities analysts and 8 were traders or trading
associates.

BUSINESS STRATEGY

The achievement of strong performance returns is the foundation on which
Levco's business strategy is based. Levco seeks to capitalize on the strength of
its long-term performance record and its experienced investment and professional
staff to increase its assets under management. Its business strategy contains
the following key elements:

Attracting and Retaining Experienced Professionals. As an investment
management firm focused on active portfolio management, fundamental research and
superior client service, Levco's goal is to attract and retain the talent
necessary to implement its investment strategies and service its clients. Each
of the other elements of its business strategy is highly dependent on the
attraction and retention of qualified personnel. Management believes that the
ongoing implementation of Levco's compensation guidelines and equity award
program, whereby employees will continue to develop an important stake in the
success of BKF, will be a key factor in the achievement of its business
objectives.

Development of Alternative Investment Strategies. The event driven product
has significantly increased its assets under management over the past five years
and, since it receives incentive fees, BKF has seen its revenues increase
dramatically. Levco's short biased alternative investment strategy also enjoyed
significant growth in assets and revenues in 2001 and 2002. Alternative
investment strategies, however, do face capacity constraints. Levco is seeking
to increase its ability to manage assets in alternative investment strategies

5

through the addition of skilled investment personnel, increased marketing of
existing alternative investment strategies that have significant unused
capacity, and the development of new alternative investment products. In 2001,
Levco hired personnel to manage portfolios focused on distressed debt, and in
July 2001 two private investment vehicles were launched to pursue this strategy
(whose assets are included within our event-driven product). In 2002, Levco
hired personnel to manage a long/short trading oriented alternative investment
strategy, and two private investment vehicles were launched to pursue this
strategy.

Development of Complementary Value Strategies. Over the past two years,
Levco increased its distribution of its "traditional" large cap value strategy
(which has a greater income orientation than the large cap value strategy
pursuant to which most accounts are managed) and its all cap value strategy.
Management believes the continued development of these products will make Levco
more attractive to existing and potential clients by enabling it to offer a
wider range of products in the value equity area.

Development of Institutional Marketing. The majority of Levco's
institutional separate account business has been developed without the benefit
of a sales force in the field dedicated to the solicitation of institutional
investors. In 2001 and 2002, Levco added marketing and client service personnel
and increased its level of contact with pension plan sponsors, corporations,
industry consultants and financial intermediaries in marketing its value equity
and alternative investment strategies.

Increasing Distribution Through Financial Intermediaries. Clients obtained
through wrap fee programs have made a significant contribution to assets under
management since Levco joined its first such program in 1996. Levco is also
managing a significant amount of assets for mutual funds and through a 401(k)
platform sponsored by a major insurance company. Levco intends to devote
sufficient resources to maintain its existing relationships with financial
intermediaries and to develop new relationships with major financial
institutions.

COMPETITION

Levco competes with investment management firms, mutual fund complexes,
insurance companies, banks, brokerage firms and other financial institutions
that offer products that are similar to, or are alternatives to, those offered
by Levco. Many of the investment management firms with which Levco competes are
subsidiaries of larger financial institutions or are significantly larger in
terms of assets under management or revenues. Levco has historically competed on
the basis of its long-term investment record and the quality of its personnel,
investment process and level of client service. In order to stay competitive,
Levco will need to increase its assets under management and revenues so that it
can attract and retain quality personnel and devote the required resources to
its distribution efforts.

REGULATION

Virtually all aspects of Levco's business are subject to various federal
and state laws and regulations. Levco is registered with the Securities and
Exchange Commission under the Investment Advisers Act of 1940, as amended. The
Investment Advisers Act imposes numerous obligations on registered investment
advisers, including fiduciary, recordkeeping, operational and disclosure
obligations. Levco is also registered with the Commodity Futures Trading
Commission as a commodity trading advisor and a commodity pool operator, and
Levco GP is registered with that agency as a commodity pool operator. Levco and
Levco GP are members of the National Futures Association. LEVCO Securities is
registered as a broker-dealer under the Securities Exchange Act of 1934, is a
member of the National Association of Securities Dealers, Inc. and is a member
of the Municipal Securities Rulemaking Board. In addition, Levco is subject to
the Employee Retirement Income Security Act of 1974 and its regulations insofar
as it is a "fiduciary" with respect to certain clients.

The regulations to which Levco is subject are primarily designed to protect
investment advisory clients, and the agencies implementing such regulations have
broad administrative powers, including the power to limit, restrict or even
prohibit entities from carrying on their business in the event of a failure to
comply. Possible sanctions for significant failures include the suspension of
individual employees, limitations on engaging in certain lines of business for
specified periods of time, revocation of investment adviser, broker-dealer or
other registrations, censures and fines.

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RISK FACTORS

In addition to the risks referred to elsewhere in this Annual Report on
Form 10-K, the following risks, among others, sometimes have affected, and in
the future could affect BKF's business, financial condition or results of
operations. The risks described below are not the only ones facing BKF.
Additional risks not presently known to BKF or that BKF currently deems
immaterial may also impact its business.

LEVCO IS DEPENDENT ON KEY PERSONNEL

Levco is largely dependent on the efforts of its senior investment
professionals managing the value equity strategies and the event driven and
short-biased products. Levco is also dependent on the efforts of Mr. John A.
Levin, the chairman and chief executive officer of BKF. The loss of the services
of key investment personnel, including Mr. Levin, could have a material adverse
effect on Levco because it could jeopardize its relationships with clients and
result in the loss of those accounts. Levco's key investment personnel,
including Mr. Levin, are not subject to employment contracts.

Levco's future success depends on its ability to retain and attract
qualified personnel to conduct its investment management business. To the extent
that Levco further diversifies its products and strategies, BKF anticipates that
it will be necessary for Levco to add portfolio managers and investment
analysts. No assurance can be given that Levco will succeed in its efforts to
recruit and retain the required personnel. Because of its relatively smaller
size, Levco may have relatively fewer resources with which to recruit and retain
personnel. The loss of key personnel or the inability to recruit and retain
qualified portfolio managers, business and marketing personnel could have a
material adverse effect on Levco's business.

In December 1998, BKF adopted an incentive compensation plan to give Levco
the ability to attract and retain talented professionals with equity-based and
cash compensation. Determinations with regard to the implementation of this plan
are made by the Compensation Committee of the board of directors of BKF on a
regular basis. Because BKF is a relatively small public company, the value of
the equity awards that may be offered to professionals may be limited relative
to what competitors may offer. If the price of BKF stock decreases, no assurance
can be given that the equity-based compensation will serve its purpose to
attract and retain talented professionals.

LEVCO IS DEPENDENT ON A LIMITED NUMBER OF INVESTMENT PRODUCTS

Levco currently derives most of its revenues from three particular
investment products -- a large cap value strategy, an event-driven alternative
investment product and a short-biased alternative investment product. While the
large cap value strategy and the short-biased alternative investment products
may often perform differently in a given investment environment, adverse
developments with regard to any of these products could have a material adverse
effect on Levco's business.

A DECLINE IN THE PERFORMANCE OF THE SECURITIES MARKETS COULD HAVE AN ADVERSE
EFFECT ON LEVCO'S REVENUES

Levco's operations are affected by many economic factors, including the
performance of the securities markets. Declines in the securities markets, in
general, and the equity markets, in particular, would likely reduce Levco's
assets under management and consequently reduce its revenues. In addition, any
continuing decline in the equity markets, failure of these markets to sustain
their prior rates of growth, or continued volatility in these markets could
result in investors' withdrawing from the equity markets or decreasing their
rate of investment, either of which would likely adversely affect Levco. Levco's
rates of growth in assets under management and revenues have varied from year to
year, and there can be no assurance that the growth rates sustained in the past
will continue. Levco is generally a "value" manager, and a general decline in
the performance of "value" securities could have an adverse effect on Levco's
revenues. Since April 2000, the equity markets have been in the midst of their
longest and most significant decline since the 1973-1974 period.

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POOR INVESTMENT PERFORMANCE COULD ADVERSELY AFFECT LEVCO'S FINANCIAL CONDITION

Success in the investment management industry depends largely on investment
performance. Good performance generally stimulates sales of services and
investment products and tends to keep withdrawals and redemptions low. This
generates higher management fees, which are based on the amount of assets under
management and sometimes on investment performance. If Levco experiences poor
performance, this will likely result in decreased sales, decreased assets under
management and the loss of accounts, with corresponding decreases in revenue.

Levco also offers event-driven and short-biased products and other
alternative investment strategies. The failure to implement these strategies
effectively could likewise impact Levco's revenues.

ADVERSE DEVELOPMENTS WITH REGARD TO SIGNIFICANT CUSTOMERS OR RELATIONSHIPS
COULD ADVERSELY AFFECT LEVCO'S REVENUES

As of December 31, 2002, Levco had approximately 334 customers (counting as
single customers each wrap fee program and related family and institutional
accounts and excluding proprietary pooled investment vehicles and other accounts
following alternative investment strategies), of which the ten largest customers
generated approximately $24.3 million of revenues for Levco in 2002 (including
incentive fees), or approximately 27% of BKF's total revenues.

The five largest customers accounted for approximately 46% of all
asset-based investment advisory fees (excluding proprietary pooled investment
vehicles and other accounts following alternative investment strategies) earned
in 2002. The loss of any of these customers could have an adverse effect on
BKF's revenues.

In the institutional marketplace, consultants play a key role in selecting
investment managers for their clients. In the event that a consultant advising
current clients of Levco takes a negative view of Levco, Levco could lose a
number of accounts related to that consultant.

A DECREASE IN LEVCO'S MANAGEMENT FEES, THE CANCELLATION OF INVESTMENT
MANAGEMENT AGREEMENTS OR POOR INVESTMENT PERFORMANCE BY THE LEVCO PRIVATE
INVESTMENT FUNDS COULD ADVERSELY AFFECT LEVCO'S PROFITS

Management Fees. Some segments of the investment management industry have
experienced a trend toward lower management fees. Levco must maintain a level of
investment returns and service that is acceptable to clients given the fees they
pay. No assurance can be given that Levco will be able to maintain its current
fee structure or client base. Reduction of the fees for new or existing clients
could have an adverse impact on Levco's profits.

Cancellation of Investment Management Agreements. It is expected that
Levco will derive almost all of its revenue from investment management
agreements. For investment companies, a majority of the disinterested members of
each fund's board must approve these agreements at least annually and the
agreements are terminable without penalty on 60 days' notice. The agreements
with Levco's separately-managed account clients generally are terminable by the
client without penalty and with little or no notice. Any failure to renew, or
termination of, a significant number of these agreements could have an adverse
effect on Levco.

Poor Investment Performance of the Private Investment Funds. BKF derives
revenue from incentive fees and general partner incentive allocations earned
with respect to its proprietary unregistered investment funds. Stronger positive
performance by these funds generates higher incentive fees and incentive
allocations because those fees and allocations are based on the performance of
the assets under management. On the other hand, relatively poor performance will
result in lower or no incentive fees or allocations, and will tend to lead to
decreased assets under management and the loss of accounts, with corresponding
decreases in revenue.

LEVCO IS A RELATIVELY SMALL PUBLIC COMPANY IN A HIGHLY COMPETITIVE BUSINESS

Levco competes with a large number of domestic and foreign investment
management firms, commercial banks, insurance companies, broker-dealers and
other firms offering comparable investment services. Many of

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the financial services companies with which Levco competes have greater
resources and assets under management than Levco does and offer a broader array
of investment products and services.

Management believes that the most important factors affecting Levco's
ability to attract and retain clients are the abilities, performance records and
reputations of its portfolio managers, the ability to hire and retain key
investment personnel, the attractiveness of investment strategies to potential
investors and competitive fees and investor service. Levco's ability to increase
and retain client assets could be adversely affected if client accounts
underperform client expectations or if key investment personnel leave Levco.
Levco's ability to compete with other investment management firms also depends,
in part, on the relative attractiveness of its investment philosophies and
methods under prevailing market conditions. The absence of significant barriers
to entry by new investment management firms in the institutional managed
accounts business increases competitive pressure. Since Levco is a relatively
smaller asset management company, changes in customers, personnel and products
and other business developments may have a greater impact on Levco they would
have on larger, more diversified asset management companies.

LEVCO IS DEPENDENT ON INFORMATION SYSTEMS AND ADMINISTRATIVE, BACK-OFFICE AND
TRADE EXECUTION FUNCTIONS

Levco is highly dependent on information systems and technology and
depends, to a great extent, on third parties who are responsible for managing,
maintaining and updating these systems. No assurance can be given that Levco's
current systems will continue to be able to accommodate its growth or that the
costs of its outsourcing arrangements will not increase. The failure to
accommodate growth or an increase in costs could have an adverse effect on
Levco.

Success in the investment management industry also depends on the ability
of an investment manager, and third parties with whom the investment manager
contracts, to successfully perform administrative, back-office and trade
execution functions. A failure by Levco or a third party contracted by Levco to
perform such functions could adversely impact Levco's revenues.

CONFLICTS OF INTEREST MAY ARISE AND ADVERSELY AFFECT LEVCO

From time to time, Levco's officers, directors and employees may own
securities which one or more of its clients also own. Although Levco maintains
internal policies regarding individual investments by its officers, directors
and employees which require them to report securities transactions and restrict
certain transactions so as to minimize possible conflicts of interest, possible
conflicts of interest may arise that could have adverse effects on Levco.
Similarly, conflicting investment positions may develop among various investment
strategies managed by Levco. Although Levco has internal policies in place to
address such situations, such conflicts could have adverse effects on Levco.

GOVERNMENT REGULATIONS MAY ADVERSELY AFFECT LEVCO'S BUSINESS

Virtually all aspects of Levco's business are subject to various federal
and state laws and regulations. Levco is registered with the Securities and
Exchange Commission under the Investment Advisers Act of 1940, as amended. The
Investment Advisers Act imposes numerous obligations on registered investment
advisers, including fiduciary, recordkeeping, operational and disclosure
obligations. John A. Levin & Co. is also registered with the Commodity Futures
Trading Commission as a commodity trading advisor and a commodity pool operator,
and Levco GP is registered with that agency as a commodity pool operator. John
A. Levin & Co. and Levco GP are members of the National Futures Association.
LEVCO Securities is registered as a broker-dealer under the Securities Exchange
Act of 1934, is a member of the National Association of Securities Dealers, Inc.
and is a member of the Municipal Securities Rulemaking Board. In addition, Levco
is subject to the Employee Retirement Income Security Act of 1974 and its
regulations insofar as it is a "fiduciary" with respect to certain clients.

These laws and regulations generally grant supervisory agencies and bodies
broad administrative powers, including the power to limit or restrict Levco from
conducting its business if it fails to comply with these laws and regulations.
If Levco fails to comply with these laws and regulations, these agencies may
impose sanctions, including the suspension of individual employees, limitations
on business activities for specified
9

periods of time, revocation of registration, and other censures and fines. Even
if in compliance with all laws and regulations, changes in these laws or
regulations could adversely affect Levco's profitability and operations and its
ability to conduct certain businesses in which it is currently engaged.

TERRORIST ATTACKS COULD ADVERSELY AFFECT OUR COMPANY

Terrorist attacks, including biological or chemical weapons attacks, and
the response to such terrorist attacks, could have a significant impact on New
York City, the local economy, the United States economy, the global economy, and
global financial markets. It is possible that the above factors could have a
material adverse effect on our business, especially given the fact that all
operations are conducted from a single location in New York City and BKF has
incurred lease obligations with regard to this location through September 2011.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements made in this Annual Report on Form 10-K, including
statements under "Item 1. Business" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations," that are not
historical facts, including, most importantly, those statements preceded by,
followed by, or that the include the words "may," "believes," "expects,"
"anticipates," or the negation thereof, or similar expressions constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. For those statements, BKF claims the protection
of the safe harbor for forward-looking statements contained in the Reform Act.
These forward-looking statements are based on BKF's current expectations and are
susceptible to a number of risks, uncertainties and other factors, and BKF's
actual results, performance and achievements may differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include the following: retention and
ability of qualified personnel; the performance of the securities markets and of
value stocks in particular; the investment performance of client accounts; the
retention of significant client and/or distribution relationships; competition;
the existence or absence of adverse publicity; changes in business strategy;
quality of management; availability, terms and deployment of capital; business
abilities and judgment of personnel; labor and employee benefit costs; changes
in, or failure to comply with, government regulations; the costs and other
effects of legal and administrative proceedings; and other risks and
uncertainties referred to in this document and in BKF's other current and
periodic filings with the Securities and Exchange Commission, all of which are
difficult or impossible to predict accurately and many of which are beyond BKF's
control. BKF will not undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events. In addition, it is BKF's policy generally not to make any specific
projections as to future earnings, and BKF does not endorse any projections
regarding future performance that may be made by third parties.

ITEM 2. PROPERTIES

BKF's executive offices are located at One Rockefeller Plaza, New York, New
York. BKF's offices currently encompass approximately 72,000 square feet and are
governed by a lease which expires September 30, 2011. The majority of BKF's
operations are conducted at this location. BKF believes that these facilities
are adequate for its current and anticipated levels of operation. Depending on
its evaluation of its needs, BKF may sublease a portion of its space, and such a
sublease could result in the recognition of a significant loss. BKF also
maintains a business continuity facility located at Five River Bend, Stamford,
Connecticut. This facility encompasses approximately 5,000 square feet and is
governed by a lease which expires September 30, 2011.

10

ITEM 3. LEGAL PROCEEDINGS

Neither BKF, Levco nor their affiliates are currently involved in any
material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 2002.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
MATTERS

BKF's common stock trades on the New York Stock Exchange (the "NYSE") under
the symbol "BKF". At the close of business of March 27, 2003, there were 1,006
holders of record of BKF's common stock.

The following table sets forth for the periods indicated the high and low
reported sale prices per share for the common stock as reported on the NYSE:

DIVIDENDS

BKF did not declare or pay any dividends in 2001 or 2002. The declaration
and payment of dividends by BKF is in the discretion of the board of directors.
BKF is a holding company, and its ability to pay dividends is subject to the
ability of its subsidiaries to provide cash to BKF. The board of directors will
determine future dividend policy based on the results of operations, financial
condition, capital requirements and other circumstances.

11

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data has been derived in part from BKF's audited
2002 and 2001 and previous years' unaudited consolidated pro forma statements of
operations and should be read in conjunction with such statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Annual Report on Form 10-K. All amounts
are in millions, excluding share and per share data.

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

(1) Gives effect for reverse stock split of 1 for 6 effectuated January 7, 2000.
Assumes same amount of shares were outstanding throughout period.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

BKF operates entirely through Levco, an investment adviser registered with
the Securities and Exchange Commission that was acquired by BKF in June 1996.
Levco specializes in managing equity portfolios for institutional and individual
investors. Most accounts are managed pursuant to value equity strategies; Levco
also offers a range of alternative investment products and other more
specialized investment programs. Most clients are based in the United States,
though a significant portion of investors in the alternative investment products
are located outside the United States.

Levco acts as the managing general partner of a number of investment
partnerships and also acts as an adviser to private investment vehicles
organized outside the United States.

With respect to accounts managed pursuant to its value equity strategies,
Levco generally receives advisory fees based on a percentage of the market value
of assets under management, including market appreciation or depreciation and
client contributions and withdrawals. In some cases, Levco receives
performance-based fees from accounts pursuing value equity strategies. With
respect to private investment vehicles and separate accounts managed pursuant to
similar strategies, Levco is generally entitled to receive both a fixed
management fee based on a percentage of the assets under management and a share
of net profits.

Levco obtains some of its clients for its large cap value product through
wrap fee programs sponsored by major financial services companies. In these
programs, clients pay the sponsoring broker an asset-based fee that covers
brokerage commissions, advisory services, custodial fees, and other reporting
and administrative services. Investors are able to select Levco from among a
limited number of managers participating in the program, and Levco receives a
portion of the wrap fee paid by the clients who select Levco to manage their
accounts through the program.

13

At December 31, 2002, assets under management at Levco were $11.3 billion,
compared to $14.3 billion a year earlier. Following is a comparison of Levco's
assets under management (in millions) as defined by product and client type:

Levco also has a wholly-owned broker-dealer subsidiary that clears through
CSC on a fully disclosed basis. Generally, the customers of the broker-dealer
subsidiary are advisory clients of Levco, and the trades executed through the
broker-dealer are generally placed by Levco in its capacity as investment
adviser.

The following discussion and analysis of the results of operations is based
on the Consolidated Statements of Financial Condition at December 31, 2002 and
2001, the Consolidated Statements of Operations for the years ended December 31,
2002 and 2001, and the Pro Forma Consolidated Statement of Operations for the
year ended December 31, 2000 of BKF Capital Group, Inc. and Subsidiaries (which
are included elsewhere herein) and should be read in conjunction with such
financial statements. In light of the evolution of BKF from a closed-end
management investment company to a holding company whose primary asset is the
investment management business of Levco, pro forma consolidated financial
statements have been included in this Annual Report on Form 10-K in order to
provide meaningful comparisons of financial information for the years ended
December 31, 2002, 2001 and 2000. A discussion of historical financial results
of BKF as a closed-end management investment company has not been included
because BKF completed the distribution of substantially all of its assets on
January 7, 2000 pursuant to a Plan of Distribution of Assets approved by
stockholders on August 19, 1999 and ceased to be registered as an investment
company on April 18, 2000. Particular attention should be paid to the fact that
a change in accounting principle was effected on April 18, 2000 resulting in an
amortization expense that has been reflected in the pro forma consolidated
financial statements. The consolidated financial statements for 2000 reflect the
actual cumulative amortization charge absorbed by BKF in 2000 as the result of
the change in accounting principle.

Certain statements under this caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. See
"Special Note Regarding Forward Looking Statements."

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO YEAR ENDED DECEMBER 31, 2001.

Revenues

Total revenues for 2002 were $89.43 million, reflecting a decrease of 2.1%
from $91.39 million in revenues in 2001. This decrease was primarily
attributable to a 13.6% decrease in incentive fees and allocations from $28.45
million to $24.59 million, which was only partly offset by a 2.5% increase in
investment advisory fees (excluding incentive fees and allocations) from $60.40
million to $61.90 million. The decrease in incentive fees resulted from a
decrease in the performance of the event-driven and value-equity

14

products, which was only partially offset by an increase in incentive fees and
allocations attributable to the short-biased products. Incentive fees and
general partner allocations are accrued on a quarterly basis but are primarily
determined and billed or allocated, as the case may be, at the end of the
applicable contract year or upon investor withdrawal. Such accruals may be
reversed prior to being earned or allocated as the result of investment
performance. The increase in investment advisory fees was attributable to an
increase in the assets managed pursuant to the event-driven and short-biased
strategies, which increase was partially offset by the decline in investment
advisory fees attributable to value equity strategies as the result of a
decrease in assets under management for these products.

As the result of the decline in assets under management in the value equity
strategies over the course 2002, even if assets under management in these
strategies in 2003 were to remain at December 31, 2002 levels, investment
advisory fees from these strategies in 2003 could be expected to decline
relative to 2002 (as average assets under management over the course of the year
would be lower). The underperformance of value equity strategies in 2002
relative to their benchmarks may also adversely impact BKF's ability to retain
existing accounts and attract new accounts in 2003 with respect to its value
equity products.

Net commission income generated by the broker-dealer business rose 15.6% to
$2.94 million in 2002 from $2.54 million in 2001, primarily as the result of
increased assets under management in accounts pursuing alternative investment
strategies.

Expenses

Total expenses for 2002 were $89.09 million, reflecting an increase of 4.8%
from $84.99 million in 2001. Excluding amortization of intangibles and
restricted stock unit grants, total expenses were $80.23 million, reflecting an
increase of 7.8% from $74.43 million in 2001. The largest component of this
increase was a 93.6% increase in occupancy and equipment rental from $3.03
million to $5.87 million. This increase resulted primarily from lease amendments
entered into in September 2001, which added a total of approximately 38,000
square feet and resulted in an additional rental expense of approximately $2.5
million in 2002. The lease for the business continuity facility entered into in
September 2002 resulted in an additional rental expense of $22,000 in 2002.

The largest component of total expenses, employee compensation and benefits
(excluding grants of restricted stock units), increased 0.7%, from $59.57
million to $59.97 million. Expenses associated with the grant of restricted
stock units rose from $557,000 in 2001 to $1.85 million in 2002. The increase in
compensation expense despite the decrease in revenues is primarily attributable
to the exclusion of certain costs and expenses incurred in connection with new
product development (including compensation and real estate expenses) in
calculating the percentage of pre-tax, pre-compensation profits available for
compensation under the compensation guidelines approved by the board of
directors.

Other operating expenses of BKF for 2002 were $14.39 million, reflecting an
increase of 16.7% from $12.33 million in 2001. This increase primarily reflected
an increase in (1) professional and consulting fees paid to third parties
providing marketing, legal and investment related services, and (2) portfolio
management and trading system costs (which bear a correlation to the number of
accounts managed in wrap fee programs). It should be noted that portfolio
management and trading system costs are determined on a per account basis, so
that as the average account size decreases, margins suffer a corresponding
decrease.

Expenses related to accrued incentive fees or general partner incentive
allocations, including compensation expense and third party marketing fees, are
subject to reversal if the incentive fees or general partner incentive
allocations are not ultimately realized.

Operating Income

Operating income fell to $337,000, declining from $6.40 million for 2001,
reflecting the decrease in revenues and the increase in expenses. Excluding the
amortization of intangibles expense and the grant of restricted stock units,
operating income in 2002 was $9.20 million, reflecting a decline of 45.8%, from
$16.95 million in 2001. As discussed above, the largest factors in this decrease
were investments in new

15

products, the decrease in performance based fees, the increase in rental expense
and the increase in fees paid to third parties providing marketing, legal and
investment related services.

Net Realized and Unrealized Gain on Investments

In 2002, BKF had realized and unrealized gains on investments of $253,000,
reflecting (1) the receipt of approximately $185,000 from the settlement of
class action suits relating to investments made by BKF during the time it was a
registered investment company and (2) the net gains in its investments in a
range of long only and alternative investment strategies (excluding $7.50
million in incentive allocations from affiliated partnerships). As of year end,
approximately $19.7 million (excluding incentive allocations) was invested in
such strategies. In 2001, BKF had a net realized and unrealized gain on
investments of $1.69 million, reflecting (1) the receipt of approximately
$915,000 from the settlement of class action lawsuits relating to investments
made by BKF during the time it was a registered investment company and (2) net
gains in its seed capital investments in a range of long only and alternative
investment strategies (excluding incentive allocations of $8.00 million). As of
December 31, 2001, approximately $12.31 million (excluding incentive
allocations) was invested in such strategies. Under the equity method of
accounting, realized and unrealized gains and losses on investments in
affiliated investment partnerships are recorded by BKF based on the income
passed through by the partnerships.

Interest and Dividend Income

Interest and dividend income was $663,000 in 2002, reflecting a decline of
48.9% from $1.30 million in 2001. This decline resulted from (1) a significant
decline in interest and (2) lower average cash balances (as the result of seed
capital investments and the decline in revenues).

Income Taxes

BKF recorded an income tax expense of $3.69 million, net of a deferred tax
benefit of ($793,000) in 2002, as compared to an income tax expense of $7.85
million (net of a deferred tax benefit of $377,000) in 2001. The deferred tax
asset is primarily attributable to future tax benefits relating to (1) future
compensation deductions in connection with the delivery of stock underlying
restricted stock unit awards and (2) losses on investments in affiliated
partnerships.

Excluding the non-deductible amortization expense, BKF had an effective tax
rate of 44.7% in 2002, as compared to an effective tax rate of 41.6% in 2001.
The difference in effective tax rates in 2002 and 2001 is primarily attributable
to state and local taxes due to changes in the allocated income among various
taxing jurisdictions.

YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO PRO FORMA YEAR ENDED DECEMBER 31,
2000.

Revenues

Total revenues for 2001 were $91.39 million, reflecting an increase of
19.3% from $76.60 million in revenues in 2000. This increase was primarily
attributable to a 32.4% increase in investment advisory fees (excluding
incentive fees and general partner incentive allocations) from $45.61 million to
$60.40 million, which increase was partly offset by a 2.8% decline in incentive
fees and general partner incentive allocations from $29.26 million to $28.45
million. The increase in investment advisory fees is primarily attributable to
the increase in assets under management in (1) the large cap value strategy,
which experienced a significant increase in assets managed in wrap fee programs,
and (2) the event driven product. The decrease in incentive fees and general
partner incentive allocations is primarily attributable to a decrease in the
performance of the accounts paying performance-based compensation. Incentive
fees and general partner allocations are accrued on a quarterly basis but are
primarily determined and billed or allocated, as the case may be, at the end of
the applicable contract year or upon investor withdrawal. Such accruals may be
reversed prior to being earned or allocated as the result of investment
performance.

16

Net commission income generated by the broker-dealer business rose 46.5%
from $1.74 million in 2000 to $2.54 million in 2001. This increase was primarily
attributable to an increase in the assets under management of accounts that
trade through LEVCO Securities.

Expenses

Total expenses for 2001 were $84.99 million, reflecting an increase of
10.9% from $76.65 million in 2000. Excluding amortization of intangibles and
restricted stock units granted and vested in 2000, total expenses were $74.43
million, reflecting an increase of 30.0% from $57.28 million in 2000. The
largest component of this increase was a 30.6% increase in compensation expense,
which went from $45.61 million (excluding grants of restricted stock units) to
$59.57 million. The increase in compensation expense is primarily attributable
to (1) the increase in revenues and (2) the increase in compensation expense as
a percentage of pre-tax, pre-compensation profits (excluding certain costs
incurred in connection with new product development) under the compensation
guidelines approved by the board of directors effective as of the beginning of
2001. Such compensation guidelines were approved by the board of directors
following consultation with independent compensation consultants.

Occupancy and equipment rental for 2001 was $3.03 million, reflecting an
increase of 32.7% from $2.29 million in 2000. This increase resulted from lease
amendments entered in the latter part of 2000 and in 2001, which added a total
of approximately 39,000 square feet and resulted in an additional rental expense
of approximately $455,000 in 2001.

Other operating expenses of BKF for 2001 were $12.33 million, reflecting an
increase of 31.5% from $9.38 million in 2000. This increase primarily reflected
an increase in (1) portfolio management and trading system costs (which bear a
correlation to the number of accounts managed in wrap fee programs), (2)
professional and consulting fees paid to third parties providing marketing,
legal and investment related services, and (3) reimbursements to client accounts
in connection with trading activities.

Operating Income

Operating income rose to $6.40 million from a loss of $44,000 for 2000,
reflecting the increase in revenues, which exceeded the increase in expenses.
Excluding the amortization of intangibles expense and the grant of restricted
stock units in 2000, operating income in 2001 was $16.95 million, reflecting a
decline of 12.3%, from $19.33 million in 2000.

Net Realized and Unrealized Gain on Investments

In 2001, BKF had realized and unrealized gains on investments of $1.69
million, reflecting (1) the receipt of approximately $915,000 from the
settlement of class action suits relating to investments made by BKF during the
time it was a registered investment company and (2) the net gains in its
investments in a range of long only and alternative investment strategies
(excluding incentive allocations of $8.00 million). As of year end,
approximately $12.31 million (excluding incentive allocations) was invested in
such strategies. In 2000, BKF had a net realized and unrealized gain on
investments of $204,000 which reflects a gain of $584,000 on investments in
affiliated partnerships (excluding incentive allocations) and long only equity
value portfolios funded by BKF in the fourth quarter of 2000 in order to
establish track records for developing products, which was offset by a $380,000
permanent write down of a historical private placement position that had been
part of BKF's portfolio when it was an investment company.

Interest and Dividend Income

Interest and dividend income was $1.30 million in 2001, reflecting a
decline of 4.3% from $1.36 million in 2000. This decline resulted from a
significant decline in interest rates, which was only partially offset by higher
cash balances.

17

Income Taxes

BKF recorded an income tax expense of $7.85 million, net of a deferred tax
benefit of ($377,000), in 2001, as compared to an income tax benefit of
($665,000) in 2000 (reflecting an deferred tax benefit of $6.4 million for such
year).

In 2000, BKF realized a $10.9 million capital loss for book purposes
relating to an investment that was made when BKF was still an investment
company; $4.53 million of this loss was used in 2000 to offset taxable capital
gains. The balance of the unused capital loss was carried back to previous
taxable years for federal, state and local income tax purposes to offset prior
taxable capital gains. Such carry back resulted in total tax refunds of $3.0
million. The deferred tax asset in 2001 is primarily attributable to future tax
benefits relating to future compensation deductions and unrealized partnership
losses.

Excluding the non-deductible amortization expense, BKF had an effective tax
rate of 41.6% in 2001. Excluding the non-deductible amortization expense and the
realization of the capital loss previously recorded as an unrealized loss by the
investment company, BKF would have had an effective tax rate of 46.6% in 2000.
For the period ended December 31, 2000, application of a 46.6% effective tax
rate would have resulted in a provision for taxes of $5.75 million. This amount
was offset by ($6.4) million in future tax benefits primarily attributable to
($3.0) million in future tax benefits from the unused portion of the capital
loss, ($5.6) million in future tax benefits relating to future compensation
deductions attributable to the grant of restricted stock units (as the
compensation expense is not deductible for tax purposes until the delivery of
the underlying stock) and $2.2 million in future taxable income attributable to
deferred revenue and unrealized gain on investments. The difference in effective
tax rates in 2001 and 2000 is primarily attributable to state and local taxes
due to changes in the allocated income among various taxing jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

BKF's current assets as of December 31, 2002 consist primarily of cash,
short term investments, advisory fees receivable and marketable equity
securities.

While BKF utilizes capital to develop and seed new investment products,
BKF's business is not generally capital intensive. BKF has historically met its
cash and liquidity needs through cash generated by operating activities. At
December 31, 2002, BKF had cash and cash equivalents of $39.1 million, compared
to $41.83 million at December 31, 2001. This decrease in cash and cash
equivalents primarily reflects the use of cash to make seed capital investments
during the course of 2002. Investment advisory fees receivable were $24.18
million at December 31, 2002 and $27.83 million at December 31, 2001, reflecting
the decreases in assets under management and incentive fees. The increase in
investments in affiliated investment partnerships to $26.15 million at December
31, 2002 from $17.53 million at December 31, 2001 primarily reflects the
investment by BKF of $9.4 million in conjunction with the development of two
affiliated investment partnerships. Approximately $7.5 million of the
investments in affiliated limited partnerships represent general partner
incentive allocations that typically are withdrawn within three months following
the end of the calendar year to pay compensation and other expenses.

The increase in deferred tax assets to $5.68 million in 2002 from $4.89
million in 2001 is primarily attributable to future tax benefits related to
grants of restricted stock units made in 2002.

Prepaid expenses and other assets declined to $2.01 million at December 31,
2002 from $2.56 million at December 31, 2001 primarily as the result of the
amortization of the pre-paid premium on the three year Directors and
Officers/Errors and Omissions Liability insurance policy.

Investments in securities of $1.05 million at December 31, 2002, as
compared to $2.78 million at December 31, 2001, represent shares purchased to
seed affiliated investment funds. The decline represents the liquidation of the
financial services long-only portfolio, a reduction in seed capital allocations
through investments in securities (but note the increase in investments in
affiliated limited partnerships), and a decline in portfolio values.

18

Accrued expenses were $5.09 million at December 31, 2002, as compared to
$4.39 million at December 31, 2001. This increase is primarily attributable to
increases in sales commissions payable to Levco salespeople and referral fees
payable to third parties.

Accrued bonuses were $31.51 million at December 31, 2002, as compared to
$37.61 million at December 31, 2001. This decrease is primarily attributable to
the decrease in revenues during 2002, as well as the payment of certain bonuses
during the course of the year.

Based upon BKF's current level of operations and anticipated growth, BKF
expects that cash flows from operating activities will be sufficient to finance
its working capital needs for the foreseeable future. BKF's business is not
seasonal. Except for the lease commitments and related expenditures described
below, BKF has no material commitments for capital expenditures. The Company has
office space obligations that require monthly payments plus escalations through
September 2011. At December 31, 2002, the minimum annual rental commitments
under the operating leases are as follows:

2003........................................................ $ 3,999,000
2004........................................................ 4,002,000
2005........................................................ 4,012,000
2006........................................................ 4,079,000
2007........................................................ 4,197,000
Thereafter.................................................. 18,804,000
-----------
Total minimum payments required............................. $39,093,000
===========

BKF is not currently utilizing its entire facility. It is anticipated that
a portion will be built out and that BKF will incur costs of at least $2.5
million in connection with such construction, which costs will be amortized over
the remaining life of the lease. In addition, depending on its evaluation of its
needs, BKF may sublease a portion of its space, and such a sublease could result
in the recognition of a significant loss.

OFF BALANCE SHEET RISK

Levco GP serves as the managing general partner for several affiliated
investment partnerships which trade primarily in equity securities or, in the
case of one partnership, in distressed corporate debt. As of December 31, 2002,
total partners' capital in these partnerships was approximately $654 million. As
of December 31, 2002, the sum total of Levco GP's capital accounts in the
affiliated investment partnerships was approximately $26.1 million. The
financial condition and results of operations of these affiliated investment
partnerships are not included in BKF's consolidated statements of financial
condition (except to the extent of Levco GP's equity ownership). Levco GP does
not maintain control over the affiliated investment partnerships, has not
guaranteed any of the affiliated investment partnerships' obligations, and does
not have any contractual commitments associated with them. In addition, limited
partners in the affiliated investment partnerships have the right to remove the
managing general partner at any time.

RELATED PARTY TRANSACTIONS

Levco earned investment advisory fees from accounts for which four current
members of BKF's Board of Directors (of which one is an officer of the Company)
have controlling discretion. The amounts earned from these accounts were $2.0
million and $2.8 million for the years ended December 31, 2002 and 2001,
respectively. These accounts are managed in Levco's routine course of business
and do not and will not impact BKF's current and prospective financial position
and operating results any differently than similarly sized managed accounts.

19

CRITICAL ACCOUNTING POLICIES

REVENUE RECOGNITION AND RELATED EXPENSES

With respect to incentive fees and allocations, BKF has elected to accrue
income on a quarterly basis, though such fees and allocations are determined and
billed or allocated at the end of the applicable measurement period. Such
accruals, as well as related compensation and third party referral fees, may be
reversed as the result of subsequent investment performance prior to the
conclusion of the applicable contract year or investor withdrawal.
Alternatively, BKF could have adopted a policy of not recognizing such fees or
allocations until the respective payments are fixed at the end of the
performance measurement period. Since most incentives fees or allocations are
determined as of the end of the calendar year, the adoption of a revenue
recognition policy that defers recognition of incentive fees or allocations and
associated expenses could result in much lower levels of income, and associated
compensation expenses, for periods prior to the fourth quarter. BKF's annual
financial results would not be materially affected, as most of the performance
measurement periods conclude on December 31.

PURCHASE PRICE ALLOCATION

In order to account for the acquisition of Levco by BKF in 1996 utilizing
the purchase method of accounting, Levco's cost in excess of net assets was
reflected in the following intangible items: goodwill, employment contracts for
key personnel and investment advisory contracts. The total value of these
intangibles at the time of the acquisition was $116.8 million. BKF determined
that 20% of that amount was attributable to goodwill, 20% to the employment
contracts and 60% to the investment contracts. BKF amortizes the value of the
goodwill over a 15 year period, the value of the investment contracts over a ten
year period, and amortized the employment contracts, which have all expired,
over their respective terms. Pursuant to Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," commencing in 2002,
the net carrying value of the goodwill of $14.8 million at December 31, 2001,
ceased to be amortized. Goodwill is subject to an annual impairment test. Other
intangible assets with finite lives, such as investment contracts, will continue
to be amortized over their useful lives.

INVESTMENTS IN AFFILIATED INVESTMENT PARTNERSHIPS

Levco GP serves as the managing general partner for several affiliated
investment partnerships which are not consolidated with BKF. These general
partnerships are periodically assessed to determine whether the underlying
assets and liabilities should be consolidated. See "Item 7 -- Off Balance Sheet
Risk."

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Since BKF's revenues are largely driven by the market value of Levco's
assets under management, these revenues are exposed to fluctuations in the
equity markets. Management fees for most accounts are determined based on the
market value of the account on the last day of the quarter with respect to which
the investment advisory fee is charged, so any significant increases or
decreases in market value occurring on or shortly before the last day of a
quarter may materially impact revenues for the quarter. Furthermore, since Levco
manages most of its assets in a large cap value style, a general decline in the
performance of value stocks could have an adverse impact on Levco's revenues.
Similarly, a lack of opportunity to implement, or a failure to successfully
implement, Levco's event-driven strategies, could reduce performance based
incentive fees and allocations and thereby negatively impact BKF's revenues. In
addition, as of December 31, 2002 and 2001, BKF had invested (1) $700,000 and
$2.99 million, respectively, in seed capital for long only value equity
products, which investments could be similarly impacted by a decline in the
performance of value stocks, and (2) $18.97 million and $9.32 million (excluding
accrued incentive allocations), respectively, in proprietary alternative
investment strategies, which are also exposed to market fluctuations.

The following table (dollars in thousands) summarizes our investments as of
December 31, 2002 and December 31, 2001 in long only value equity products and
alternative investment strategies (excluding

20

incentive allocations) and provides a sensitivity analysis assuming a 10%
increase or decrease in the value of these investments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The independent auditor's reports and financial statements listed in the
accompanying index are included in Item 14 of this Annual Report on Form 10-K.
See Index to Financial Statements on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no disagreements on accounting or financial disclosure
matters.

PART III

ITEMS 10, 11, 12 AND 13.

The information required by Items 10, 11, 12 and 13 will be furnished on or
prior to April 30, 2002 (and is hereby incorporated by reference) by an
amendment hereto or pursuant to a definitive proxy statement pursuant to
Regulation 14A which will contain such information.

ITEM 14. DISCLOSURE CONTROLS AND PROCEDURES

As of March 27, 2003, an evaluation was performed under the supervision and
with the participation of BKF's management, including the CEO and CFO, of the
effectiveness of the design and operation of BKF's disclosure controls and
procedures. Based on that evaluation, BKF's management, including the CEO and
CFO, concluded that BKF's disclosure controls and procedures were effective as
of March 27, 2003. There have been no significant changes in BKF's internal
controls or in other factors that could significantly affect internal controls
subsequent to March 27, 2003.

It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Form 10-K:

(1) Financial Statements

Included herein at pages F-1 through F-23.

21

(2) Financial Data Schedules

All schedules are omitted, as the required information is inapplicable or
is included in the financial statements or related notes.

(3) Exhibits

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

* Filed herewith

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of the period
covered by this report.

22

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

BKF CAPITAL GROUP, INC.

By: /s/ GLENN A. AIGEN
------------------------------------
Glenn A. Aigen
Senior Vice President
and Chief Financial Officer

Date: March 31, 2003

Each person whose signature appears below hereby constitutes and appoints
John A. Levin, Glenn A. Aigen and Norris Nissim and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution, for him in
any and all capacities, to execute and cause to be filed with the Securities and
Exchange Commission any and all amendments to the Annual Report on Form 10-K,
with exhibits thereto and other documents connected therewith and to perform any
acts necessary to be done in order to file such documents, and hereby ratifies
and confirms all that said attorney-in-fact or their substitute or substitutes
may do or cause to be done by virtue hereof.

24

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, John A. Levin, certify that:

1. I have reviewed this annual report on Form 10-K of BKF Capital
Group, Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report in
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ JOHN A. LEVIN
--------------------------------------
John A. Levin
Chief Executive Officer

Date: March 31, 2003

25

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Glenn A. Aigen, certify that:

1. I have reviewed this annual report on Form 10K of BKF Capital
Group, Inc.;

2. Based in my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements , and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report in
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ GLENN A. AIGEN
--------------------------------------
Glenn A. Aigen
Chief Financial Officer

Date: March 31, 2003

26

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
BKF Capital Group, Inc.

We have audited the accompanying consolidated statements of financial
condition of BKF Capital Group, Inc. (formerly known as Baker, Fentress &
Company) as of December 31, 2002 and 2001, and the consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the three year period ended December 31, 2002. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
BKF Capital Group, Inc. at December 31, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the years in the three
year period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 1 to the financial statements, in 2000, BKF Capital
Group, Inc. changed its method of accounting for its acquisition of Levin
Management Co., Inc. in 1996.

/s/ Ernst & Young LLP

February 21, 2003

F-2

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders
BKF Capital Group, Inc.

We have reviewed the pro forma adjustments reflecting the transaction
described in Note 1 and the application of those adjustments to the historical
amounts in the accompanying pro forma consolidated statements of operations and
cash flows for the year ended December 31, 2000 of BKF Capital Group, Inc.
(formerly known as Baker, Fentress & Company). The historical financial
statements are derived from the historical financial statements of BKF Capital
Group, Inc. and Levin Management Co., Inc., which were both audited by us. Such
pro forma adjustments are based on management's assumptions described in Note 1.
Our review was conducted in accordance with standards established by the
American Institute of Certified Public Accountants.

A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments, and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion.

The objective of this pro forma financial information is to show what the
significant effects on the historical financial information might have been had
the transaction occurred at an earlier date. However, the pro forma financial
statements are not necessarily indicative of the results of operations and cash
flows that would have been attained had the above-mentioned transaction actually
occurred earlier.

Based on our review, nothing came to our attention that caused us to
believe that management's assumptions do not provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
transaction described in Note 1, that the related pro forma adjustments do not
give appropriate effect to those assumptions, or that the pro forma column does
not reflect the proper application of those adjustments to the historical
financial statement amounts in the pro forma consolidated statements of
operations and cash flows for the year ended December 31, 2000.

/s/ Ernst & Young LLP

February 21, 2003

F-3

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(AUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
(SEE NOTE 1)

See accompanying notes
F-4

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(SEE NOTE 1)

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

(a) Pro forma results have been adjusted for the investment company specific
income and expenses of BKF Capital Group, Inc. for the period January 1,
2000 to April 18, 2000 of interest income ($228) and interest expense
($406).

(b) Calculation reflects the reverse stock split (which was effectuated January
7, 2000).

See accompanying notes
F-5

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(SEE NOTE 1)

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

(a) Includes cumulative effect of change in accounting principle in 2000.

See accompanying notes
F-6

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- HISTORICAL
(AUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
(SEE NOTE 1)

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

(a) Includes cumulative effect of change in accounting principle in 2000.

(b) The cash flow represents the historical cash flows of BKF Capital Group,
Inc. (the former registered investment company) for the period January 1,
2000 to April 18, 2000 and the combined cash flows of the holding company
for the period April 19, 2000 to December 31, 2000.

See accompanying notes
F-7

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(AUDITED)
(AMOUNTS IN THOUSANDS)
(SEE NOTE 1)

See accompanying notes
F-8

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION

BKF Capital Group, Inc. (formerly Baker, Fentress & Company, hereto
referred to as "BKF" or the "Company") operated under the Investment Company Act
of 1940 as a non-diversified closed-end management investment company. In August
1999, the Board of Directors and shareholders of BKF adopted and implemented a
Plan for Distribution of Assets ("Plan"), pursuant to which substantially all of
BKF's investment securities were sold. The cash proceeds, as well as shares of
Consolidated-Tomoka Land Company ("CTO"), were subsequently distributed to
shareholders by January 7, 2000. The Company received a deregistration order
from the Securities and Exchange Commission ("SEC") on April 18, 2000,
effectively completing its evolution from an investment company to a company
whose primary business now operates through a wholly-owned subsidiary, Levin
Management Co., Inc. and its subsidiaries, all of which are referred to as
"Levco." As of April 2000, financial reporting of BKF and Levco is on a
consolidated basis. The Company trades on the New York Stock Exchange, Inc.
("NYSE") under the symbol ("BKF").

The Consolidated Financial Statements of Levco include its wholly-owned
subsidiary, John A. Levin & Co., Inc., ("JALCO") and JALCO's two wholly-owned
subsidiaries, Levco GP Inc. ("Levco GP") and LEVCO Securities, Inc. ("LEVCO
Securities"). All intercompany transactions have been eliminated in
consolidation.

JALCO is an investment advisor registered under the Investment Advisers Act
of 1940, as amended, which provides investment advisory services to its clients
which include U.S. and foreign corporations, mutual funds, limited partnerships,
universities, pension and profit sharing plans, individuals, trusts,
not-for-profit organizations and foundations. JALCO also participates in broker
consulting programs (Wrap Accounts) with several nationally recognized financial
institutions. LEVCO Securities is registered with the SEC as a broker-dealer and
is a member of the National Association of Securities Dealers, Inc. Levco GP
acts as the managing general partner of several affiliated investment
partnerships and is registered with the Commodities Futures Trading Commission
as a commodity pool operator.

The Pro Forma Consolidated Statements of Operations for the year ended
December 31, 2000 presents the historical results of BKF and Levco, giving
effect to the following pro forma adjustments:

- inclusion of operating expenses attributable to operating a publicly
traded company, which were previously borne by BKF;

- reversal of all investment company specific components of BKF revenue and
expenses since the Company will have no ongoing operations other than
that of Levco;

- inclusion of amortization expense on intangible assets based on the
recasting of the June 1996 acquisition of Levco by BKF using the purchase
method of accounting. This item is non-deductible for income tax
purposes;

- adjustment for income tax effect of pro forma adjustments; and

- the 1 to 6 reverse stock split effectuated on January 7, 2000

The Pro Forma Consolidated Statement of Cash Flows for the year ended
December 31, 2000 reflects the pro forma cash flows of the combined companies as
if BKF had received its deregistration order effective January 1, 2000. BKF and
Levco financial information is being presented on a consolidated basis.

F-9

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

THE 2000 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS ARE PRESENTED SINCE THEY
ARE MORE REPRESENTATIVE OF THE COMPANY'S OPERATIONS AFTER THE IMPLEMENTATION
OF THE PLAN.

The Pro Forma Consolidated Financial Statements do not necessarily
represent the results of operations of the Company which actually would have
occurred had the proposed transaction been previously consummated or project the
results of operations or the financial position of the Company for any future
date or period. The SEC approved the application for deregistration of the
Company as a registered investment company on April 18, 2000. Therefore, the Pro
Forma Consolidated Statement of Operations for the year ended December 31, 2000
reflects the non-recurring charge relating to the change in accounting method
for the cumulative effect of the amortization of intangible assets resulting
from recording the Levco transaction under purchase accounting.

All numerical information presented in the notes to the consolidated
financial statements has been rounded to the nearest thousand dollars, unless
otherwise noted.

REVENUE RECOGNITION

Generally, investment advisory fees are billed quarterly, in arrears, and
are based upon a percentage of the market value of each account at the end of
the quarter. Wrap account fees are billed quarterly based upon a percentage of
the market value of each account as of the previous quarter end. Incentive fees,
general partner incentive allocations earned from affiliated investment
partnerships, and incentive fees from other accounts are accrued on a quarterly
basis and are billed quarterly or at the end of their respective contract year,
as applicable.

Commissions earned on securities transactions executed by LEVCO Securities
and related expenses are recorded on a trade-date basis.

In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. The Company adopted SAB No. 101 as required in the
first quarter of 2000. The adoption of SAB No. 101 has not had a material effect
on the Company's consolidated results of operations or financial position.

CASH AND CASH EQUIVALENTS

The Company treats all highly liquid instruments with maturities at
acquisition of six months or less as cash equivalents. The Company maintained
substantially all of its cash and cash equivalents invested in interest bearing
instruments at two nationally recognized financial institutions, which at times
may exceed federally insured limits. As a result the Company is exposed to
market and credit risk.

INVESTMENTS IN AFFILIATED INVESTMENT PARTNERSHIPS

Levco GP serves as the managing general partner for several affiliated
investment partnerships ("AIP"), which primarily engage in the trading of
publicly traded equity securities, in the case of one partnership, distressed
corporate debt, or other non affiliated alternative investment funds (i.e., fund
of funds) which in turn invest primarily in publicly traded securities. The
financial condition and results of operations of the AIP are not included in the
Company's consolidated statements of financial condition with the exception of
Levco GP's equity ownership. The limited partners of the AIP have the right to
redeem their partnership interests at least quarterly. Additionally, the
unaffiliated limited partners of the AIP may terminate Levco GP as the general
partner of the AIP at any time. Levco GP does not maintain control over the AIP,
has not guaranteed any of the AIP obligations, nor does it have any contractual
commitments associated with them. Investments in AIP held through Levco GP, are
recorded based upon the equity method of accounting. This investment amount
equals the sum total of Levco GP's capital accounts, including incentive
allocations, in the AIP. Each

F-10

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

AIP values their underlying investments in accordance with policies as described
in each of their audited financial statements and underlying offering memoranda.
It is the Company's general practice to withdraw the incentive allocations
earned from the AIP within three months after the fiscal year end. Levco GP has
general partner liability with respect to its interest in each of the AIP and
has no assets in the AIP other than its interest in these partnerships. See
Note 7 -- Related Party Transactions.

INVESTMENTS IN SECURITIES

Investments in securities consist primarily of equity securities and shares
in affiliated onshore and offshore investment companies, which invest in equity
securities. Investments in securities are accounted for as "trading securities."
Equity securities are stated at quoted market values and shares in the
affiliated onshore and offshore investment companies are stated at net asset
value. The resulting unrealized gains and losses are included in net realized
and unrealized gain (loss) from investments. Realized gains and losses are
recorded on the identified cost basis. Dividend income is included in interest
and dividend income in the Consolidated Statement of Operations.

INCOME TAXES

The Company accounts for income taxes under the liability method prescribed
by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to the differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
basis. Future tax benefits are recognized only to the extent that realization of
such benefits is more likely than not to occur.

The Company filed consolidated Federal and combined state and local income
tax returns for the years ended December 31, 2001 and 2000 and intends to file
in the same manner in subsequent years. Prior to April 18, 2000, BKF was a
Regulated Investment Company ("RIC"), which distributed all of its income. It
was generally not subject to income taxes and, therefore, no tax provision was
previously recorded. Levco, an operating company, is subject to federal, state
and local taxes on income. The Pro Forma Consolidated Statement of Operations
for the year ended December 31, 2000 reflects a tax provision on the pro forma
consolidated results of operations.

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.

LONG-LIVED ASSETS

Long-lived assets are accounted for in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which requires
impairment losses to be recognized on long-lived assets used in operations when
indication of an impairment exists.

FIXED ASSETS

Furniture, fixtures, office and computer equipment and leasehold
improvements are carried at cost less accumulated depreciation/amortization.
Depreciation of furniture, fixtures, office and computer equipment is provided
over the estimated useful lives of the respective assets. Leasehold improvements
are amortized over the shorter of the economic life or the term of the lease.

F-11

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INTANGIBLE ASSETS

The cost in excess of net assets of Levco acquired by BKF in June 1996 is
reflected as goodwill, investment advisory contracts, and employment contracts
in the Consolidated Statements of Financial Condition. Through December 31,
2001, goodwill was amortized straight line over 15 years. Effective January 1,
2002 the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets".
Under the new rules, goodwill will no longer be amortized but is subject to an
impairment test at least annually or when indicators of potential impairment
exist in accordance with SFAS No. 142. Other intangible assets with finite lives
will continue to be amortized over their useful lives. See Note 5 -- Intangible
Assets. Investment contracts are amortized straight line over 10 years.
Employment contracts were amortized over the life of the contracts. The
employment contracts and related amortization have been eliminated from the
Consolidated Statement of Financial Condition as of December 31, 2001. Whereas
the Pro Forma Consolidated Financial Statements reflect these intangible assets
under the purchase accounting method, the retroactive income effect of recasting
this transaction was recorded in 2000 as a one-time change in accounting
principle charge to income for all accumulated amortization from June 1996
through April 18, 2000.

EARNINGS PER SHARE

The Company has not presented historical earnings per share for the year
ended December 31, 2000 due to the significant changes in its operations, which
are not reflected in the historical financial statements. BKF, as a registered
investment company, presented its net asset value ("NAV") per share. The pro
forma earnings per share for 2000 is shown using the actual BKF shares
outstanding (adjusted for the 1 to 6 reverse stock split effectuated in January
2000).

The Company adopted SFAS No. 128, "Earnings Per Share" in the second
quarter of 2000. Basic earnings (loss) per share is calculated by dividing net
income (loss) by the weighted average number of common shares outstanding during
the year. Diluted earnings (loss) per share is computed by dividing net income
(loss) by the total of the weighted average number of shares of common stock
outstanding and common stock equivalents. Diluted earnings (loss) per share is
computed using the treasury stock method.

The following table sets forth the computation of basic and diluted
earnings (loss) per share (dollar amounts in thousands, except per share data):

F-12

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In calculating diluted income (loss) per share for the years ended December
31, 2002, 2001 and 2000, 1,936,543, 400,537 and 786,706 common stock equivalents
were excluded due to their anti-dilutive effect on the calculation.

COMPREHENSIVE INCOME

The Company has not presented consolidated statements of comprehensive
income in accordance with SFAS No. 130 "Reporting Comprehensive Income," because
it does not have any items of "other comprehensive income".

FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair values of the Company's assets and liabilities, which qualify as
financial instruments under Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments," approximate the
carrying amounts presented in the Consolidated Statements of Financial
Condition.

BUSINESS SEGMENTS

The Company has not presented business segment data, in accordance with
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information," because it operates in one business segment, the investment
advisory and asset management business.

STOCK-BASED COMPENSATION

The Company follows SFAS No. 123, "Accounting for Stock-Based
Compensation," and has adopted the intrinsic value method under APB Opinion No.
25, "Accounting for Stock Issued to Employees," for all arrangements under which
employees receive shares of stock or other equity instruments of the Company, or
if the Company incurs liabilities to employees in amounts based on the price of
its stock. Under APB Opinion No. 25, no compensation costs were recognized
relating to the option grants because the exercise prices of the options awarded
were equal to the fair market price of the common stock on the dates of the
grants.

F-13

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 (dollar amounts in thousands, except per share amounts):

The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for the
years ended December 31, 2001 and 2000, respectively:

RECLASSIFICATIONS

Certain amounts in the 2001 and 2000 consolidated financial statements have
been reclassified to conform with current year classifications.

RECENT ACCOUNTING DEVELOPMENTS

Accounting for Costs Associated with Exit or Disposal Activities

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit and Disposal Activities," which nullified Emerging Issue
Task Force Issue ("Issue") No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)," by requiring the recognition of a liability
for a cost associated with an exit or disposal activity only when the liability
is incurred as opposed to the date of an entity's commitment to an exit plan, as
defined in Issue No. 94-3. The adoption of this statement, which is effective
January 1, 2003, is not expected to have a material impact on the Company's
financial statements.

F-14

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accounting and Disclosure Requirements for Guarantees

In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." Under FIN No. 45, certain
guarantees are required to be recorded at fair value at the inception of the
guarantee. FIN No. 45 also requires a guarantor to make new disclosures,
effective for guarantees issued or modified after December 31, 2002. The
adoption of this interpretation is not expected to have a material impact on the
Company's financial statements.

Stock-based Compensation

In December 2002, the FASB Issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123."
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation and amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures about the method of accounting for stock-based
compensation. The Company has elected to apply the disclosure provisions of SFAS
No. 123.

Consolidation

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 addresses the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to variable interest
entities ("VIE") and generally would require that the assets, liabilities and
results of operations of a VIE be consolidated into the financial statements of
the enterprise that has a controlling financial interest in it. The
interpretation provides a framework for determining whether an entity should be
evaluated for consolidation based on voting interests or significant financial
support provided to the entity ("variable interests").

An entity is classified as a VIE if total equity is not sufficient to
permit the entity to finance its activities without additional subordinated
financial support or its equity investors lack the direct or indirect ability to
make decisions about an entity's activities through voting rights, absorb the
expected losses of the entity if they occur or receive the expected residual
returns of the entity if they occur. Once an entity is determined to be a VIE,
its assets, liabilities and results of operations should be consolidated with
those of its primary beneficiary. The primary beneficiary of a VIE is the entity
which either will absorb a majority of the VIE's expected losses or has the
right to receive a majority of the VIE's expected residual returns. The expected
losses and residual returns of a VIE include expected variability in its net
income or loss, fees to decision makers and fees to guarantors of substantially
all VIE assets or liabilities and are calculated in accordance with Statement of
Financial Accounting Concept No. 7, "Using Cash Flow Information and Present
Value in Accounting Measurements."

A public enterprise with a variable interest in a VIE created before
January 31, 2003, shall apply FIN No. 46 to that VIE as of the beginning of the
first interim or annual reporting period beginning after June 15, 2003.
Additionally, if it is reasonably possible that an enterprise will consolidate
or disclose information about a VIE when the guidance becomes effective, there
are several disclosure requirements effective for all financial statements
issued after January 31, 2003.

Management has not completed its assessment of this interpretation's impact
on its consolidated financial statements, but does not believe that the Company
is the primary beneficiary of any VIEs that would require them to consolidate
those entities under the provisions of FIN 46. However, once management
completes its assessment, if it is determined that the Company is the primary
beneficiary of these VIEs, the Company will be required to consolidate the
assets, liabilities and results of operations with minority interest recorded
for the ownership share applicable to other investors, of the entities upon the
adoption of FIN 46, and such

F-15

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

presentation would have a significant impact on the Company's consolidated
financial statements. However, such treatment would not change the results of
operations. See note 7.

2. OFF-BALANCE SHEET RISK

LEVCO Securities acts as an introducing broker and all transactions for its
customers are cleared through and carried by a major U.S. securities firm on a
fully disclosed basis. LEVCO Securities has agreed to indemnify its clearing
broker for losses that the clearing broker may sustain from the customer
accounts introduced by LEVCO Securities. In the ordinary course of its business,
LEVCO Securities does not accept orders with respect to client accounts if the
funds required for the client to meet its obligations are not on deposit in the
client account at the time the order is placed. In the event a customer is
unable to fulfill its contractual obligation to the clearing broker, LEVCO
Securities may be exposed to off-balance sheet risk.

3. INVESTMENT ADVISORY FEES RECEIVABLE

Included in investment advisory fees receivable are approximately $2.9
million and $2.2 million of accrued incentive fees as of December 31, 2002 and
2001, respectively, for which the full contract measurement period has not been
reached. The Company has provided for the applicable expenses relating to this
revenue. If the accrued incentive fees are not ultimately realized, a
substantial portion of the related accrued expenses will be reversed.

4. FIXED ASSETS

Fixes assets consist of the following (dollar amounts in thousands):

Depreciation expense was approximately $1.1 million, $864,000 and $795,000
for the years ended December 31, 2002, 2001 and 2000, respectively.

F-16

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." The effect of adopting SFAS No. 142 was as follows:

EFFECT OF NON-AMORTIZATION OF GOODWILL ON THE CONSOLIDATED STATEMENTS OF
OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

FUTURE EXPECTED AMORTIZATION EXPENSE OF INTANGIBLE ASSETS (DOLLAR AMOUNTS IN
THOUSANDS)

2003........................................................ $7,009
2004........................................................ 7,009
2005........................................................ 7,009
2006........................................................ 3,504

6. SIGNIFICANT CUSTOMERS

The Company recorded revenue from one of its broker consults programs of
approximately $13.6 million, $14.6 million and $9.6 million, or 15%, 16% and 13%
of total revenues, and from two of its affiliated investment vehicles, which
utilized the same investment strategy, of $25.9 million, $27.4 million and $25.4
million, or 29%, 30% and 33% of total revenues for the years ended December 31,
2002, 2001 and 2000, respectively.

7. RELATED PARTY TRANSACTIONS

INVESTMENT ADVISORY FEES FROM RELATED PARTIES

The Company earned investment advisory fees from accounts for which four
current members of the Company's Board of Directors (of which one is an officer
of the Company) have controlling discretion. The amounts earned from these
accounts were $2.0 million, $2.8 million and $2.6 million for the years ended

F-17

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 2002, 2001 and 2000, respectively. At December 31, 2002 and 2001
approximately $480,000 and $696,000, respectively, were included in investment
advisory and incentive fee receivable relating to these accounts.

INVESTMENTS IN AFFILIATED INVESTMENT PARTNERSHIPS AND RELATED REVENUE

Summary financial information, including the Company's carrying value and
income from the AIP is as follows (dollar amounts in thousands):

The Company earned investment advisory fees and incentive allocations/fees
from affiliated domestic investment partnerships and affiliated offshore
investment vehicles of approximately $38.1 million, $32.5 million and $28.9
million for the years ended December 31, 2002, 2001 and 2000, respectively.

Included in investments in affiliated investment partnerships at December
31, 2002 and 2001 are incentive allocations approximating $7.5 million and $8.0
million, respectively.

Included in the Company's incentive fees and general partner incentive
allocations are approximately $6.3 million and $5.0 million payable directly to
employee owned and controlled entities ("Employee Entities") for the years ended
December 31, 2002 and 2001, respectively. These amounts are included in the
Company's carrying value of the AIP at the end of the applicable period. These
Employee Entities, which serve as non-managing general partners of several AIP,
also bear the liability for all compensation expense relating to the allocated
revenue, amounting to approximately $6.3 million and $5.0 million for the years
ended December 31, 2002 and 2001, respectively. These amounts are included in
the Consolidated Statement of Operations.

Included in investment advisory and incentive fees receivable at December
31, 2002 and 2001 are $2.7 million and $1.8 million, respectively, of advisory
fees from AIP and sponsored offshore vehicles. Also included in investment
advisory and incentive fees receivable are $13.1 million and $14.2 million of
incentive fees from sponsored offshore investment vehicles (similar to several
domestic AIP) at December 31, 2002 and 2001, respectively.

COMMISSION REVENUES

All commission revenues reflected on the Consolidated Statements of
Operations have been generated by transactions introduced to a clearing broker
by LEVCO Securities, which acts as a broker for certain investment advisory
accounts of the Company. Commission revenues have been presented net of the
related clearing expenses.

8. STOCKHOLDERS' EQUITY

The Company effectuated a 1 to 6 reverse stock split on January 7, 2000.
All share numbers and per share amounts in the Company's consolidated financial
statements reflect the reverse split.

F-18

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company adopted a Share Purchase Rights Plan on May 29, 2001 (The
"Rights Plan"). The Rights Plan was implemented by declaring a dividend,
distributable to stockholders of record on June 18, 2001. With certain
exceptions, the rights become exercisable if a person or group acquires 10% or
more of the Company's outstanding common stock. Such an acquisition causes each
right to be adjusted to permit the holder (other than such person or any member
of such group) to buy a number of additional shares of common stock of the
Company having a market value of twice the exercise price of the rights. In
addition, if the Company is involved in a merger or other business combination
at any time after a person or group has acquired 10% or more of the Company's
shares, the Rights will entitle the holder to buy a number of shares of common
stock of the acquiring company having a market value of twice the exercise price
of each right. Rights held by the acquiring person or group become void. The
Company may also redeem the rights for $.01 per right or may exchange each right
for one share of common stock, subject to restrictions set forth in the Rights
Plan. The rights expire on June 17, 2011.

9. COMMITMENT

The Company has office space obligations that require monthly payments plus
escalations through September 2011. At December 31, 2002, the minimum annual
rental commitments under the operating lease are as follows (dollar amounts in
thousands):

2003........................................................ $ 3,999
2004........................................................ 4,002
2005........................................................ 4,012
2006........................................................ 4,079
2007........................................................ 4,197
Thereafter.................................................. 18,804
-------
Total minimum payments required............................. $39,093
=======

Rent expense was $4.1 million, $1.7 million, $1.1 million (net of subrental
income of $144,000 and $264,000 in 2001 and 2000) for the years ended December
31, 2002, 2001 and 2000, respectively. The subrental agreement expired on June
30, 2001.

10. NET CAPITAL REQUIREMENT

LEVCO Securities is subject to the SEC's Uniform Net Capital Rule 15c3-1
("Rule"), which requires the maintenance of minimum net capital and requires
that the ratio of aggregate indebtedness to net capital, both as defined, shall
not exceed 15 to 1. At December 31, 2002 and 2001, LEVCO Securities was in
compliance with this Rule.

11. EMPLOYEE BENEFIT PLANS

Levco has adopted a Section 401(k) plan. All employees with three months or
more of service are eligible to participate in the plan. Eligible participants
may contribute up to 15% of their earnings, subject to statutory limitations.
Levco may match employee contributions that have a minimum of six months
service, up to 100%, subject to statutory limitations. Included in employee
compensation and benefits was $808,000, $492,000 and $446,000 of the employee
match contributions for the years ended December 31, 2002, 2001 and 2000,
respectively.

As of January 1, 2000, the Company froze its target Benefit Plan (the
"Benefit Plan"), which covered all employees who reached the age of 20.5 and had
completed nine months of service to the Company. Contributions were made by the
Company based on the employee's age and compensation. As of Decem-

F-19

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ber 31, 1999, the Benefit Plan was fully funded and the Company has no further
liability. In December 2002, the Company received the letter of determination to
liquidate the Benefit Plan. The assets of the Benefit Plan were distributed in
February 2003.

12. STOCK-BASED COMPENSATION PLANS

In December 1998, the shareholders of BKF approved an Incentive
Compensation Plan ("Compensation Plan") that allows the Company to pay officers
and employees part of their compensation in restricted stock units ("RSU") and
other forms of equity-based compensation, including stock options. At December
31, 2002, the awards authorized and available for future grants under the
Compensation Plan were 2,600,000 and 524,237, respectively. All awards are
issued at the discretion of BKF's Compensation Committee.

A. RESTRICTED STOCK UNITS

RSU activity for the years ended December 31, 2000, 2001 and 2002 is
summarized below:

During 2001, the Company issued 16,000 RSU to employees and Directors of
the Company which vested on the dates of grant and, pursuant to Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," were expensed or capitalized as prepaid Directors fees, as
appropriate, on the dates of grant based on the value of the RSU on such date.
Compensation expense and Directors fees expense related to the RSU for the year
ended December 31, 2001 were approximately $166,000 and $56,000, respectively.
Additionally, for the year ended December 31, 2002, there was $170,000 in
Directors fees expensed relating to the 2001 RSU grant. See Note 13 -- Non-Cash
Transactions.

During 2002, the Company issued 651,980 RSU (of which 2,334 were forfeited
in 2002) to employees of the Company; 165,878 of the awards (net of forfeitures)
vest through January 2005, 33,000 vest through February 2005 and the remaining
450,768 vest through December 2005. All of the awards are expensed on a
straight-line method over the vesting period. The expected annual expense
(subject to future forfeitures) related to the 2002 RSU grant in 2003, 2004 and
2005 is $4.5 million, $4.5 million and $2.8 million, respectively.

Employee compensation expense related to the RSU for the years ended
December 31, 2002, 2001 and 2000 was approximately $1.9 million, $557,000 and
$12.3 million, respectively. See Note 13 -- Non-Cash Transactions.

F-20

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

B. NON-QUALIFIED STOCK OPTIONS

Stock option activity for the years ended December 31, 2001 and 2002 is
summarized below:

Stock options outstanding and exercisable at December 31, 2002 are as
follows:

During 2001, the Company granted 335,308 non-qualified stock options to
employees with an exercise price of $28.27. These options have a ten-year life,
vest over a three-year period and become exercisable upon vesting. See Note
16 -- Subsequent Events.

C. DEFERRED COMPENSATION PLAN

On April 18, 2000, the Company adopted a Long Term Deferred Compensation
Plan to provide a competitive long-term incentive for key officers and
employees. RSU vesting in a given year are eligible to be deferred into this
plan. As of December 31, 2002, 35,416 of vested RSU were deferred pursuant to
the plan.

13. NON-CASH TRANSACTIONS

In 2000, the Company financed a portion of its Directors and
Officers/Errors and Omissions insurance policy (premium of $910,000).

The Company issued 13,813 shares of common stock in lieu of cash
compensation aggregating $180,000 in each of the years ended December 31, 2001
and 2000. In 2001, 5,435 of such shares were withheld to cover required
withholding taxes.

In 2001, the Company withheld 8,971 shares of common stock in connection
with the delivery of 18,813 RSU for required withholding taxes.

During 2001, the Company granted 14,000 RSU to non-employee directors of
the Company with a value of $337,000. Of this amount $166,000 has been used to
reduce cash payments for Board of Directors and

F-21

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Committee meetings. In addition, 2,000 RSU were granted to an employee with a
value of $56,000. This amount was expensed in 2001.

In 2002, the Company withheld 5,298 shares of common stock in connection
with the delivery of 13,813 RSU for required withholding taxes.

During 2002, the Company used $170,000 of the 2001 RSU grant to
non-employee directors to reduce payments for Board of Directors and Committee
meetings. In addition, 651,980 RSU (of which 2,334 were forfeited in 2002) were
granted to employees with a value aggregating $13.9 million. Of this amount,
$1.9 million was expensed in 2002.

14. INCOME TAXES

The provision (benefit) for income taxes consists of the following (dollar
amounts in thousands):

Deferred tax assets arise from the future tax benefit on deferred and
non-cash compensation, unrealized losses on investment, depreciation and
utilization of capital losses. Deferred tax liabilities arise from deferred
revenues, unrealized gains on investments, and state and local taxes.

F-22

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities, shown net in the deferred tax
asset on the Consolidated Statements of Financial Condition, consisted of the
following (dollar amounts in thousands):

The Company's provision (benefit) for income taxes differs from the amount
of income tax determined by applying the applicable U.S. federal statutory
income tax rate principally due to state and local taxes and non-deductible
amortization. The Company has determined that the amortization expense on
intangible assets is non-deductible since the purchase method of accounting has
been applied retroactive to June 1996.

A reconciliation of income tax expense (benefit) with expected federal
income tax expense computed at the applicable federal tax rate of 35% is as
follows (dollar amounts in thousands):

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

(1) Primarily, the effect of the recognition of a capital loss related to
certain private portfolio investments held by BKF when it operated as an
investment company.

F-23

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

An income tax benefit of approximately $317,000 relating to the
Compensation Plan was allocated to additional paid-in capital in 2002.

15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table sets forth the selected quarterly financial data
(dollar amounts in thousands, except per share data):

F-24

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. SUBSEQUENT EVENTS

On December 11, 2002 the Company issued a tender offer to exchange 333,308
outstanding options for RSU, on a three for one exchange basis. As of January
10, 2003 the tender offer was complete, with a total of 111,105 RSU being
granted in exchange for the options tendered. The RSU will vest in two annual
installments with fifty percent (50%) vesting on December 31, 2003 and fifty
percent (50%) vesting on December 31, 2004. The company will recognize $2.0
million of compensation expense related to the RSU over the two-year vesting
period.

17. MARCH 2003 RSU GRANT (UNAUDITED)

In March 2003, the Company granted 10,500 RSU to non-employee directors of
the Company with a value of approximately $192,000. This amount will be used to
reduce cash payments for Board of Directors and Committee meetings.

In addition, certain executive officers of the Company, who are subject to
performance based criteria with regard to their 2002 compensation, and several
employees were granted 347,365 RSU as of March 2003.

After giving effect for the tender offer, Director RSU grants, and the
March 2003 RSU grant the Company has approximately 390,000 shares available for
future grants under the Incentive Compensation plan.

F-25