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, 2003

OR

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

FOR THE TRANSITION PERIOD FROM TO ,
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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 incorporation (I.R.S. Employer Identification No.)
or organization)

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. [X]

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 30, 2003 was $130,942,081 (based on the closing sale price
of $21.83 on June 30, 2003 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
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 1, 2004, 6,841,592 shares of BKF Capital Group, Inc. common stock,
par value $1.00 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Items 10, 11, 12, 13 and 14 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 13, 2004, 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, 2003.

PART I

ITEM 1. BUSINESS

INTRODUCTION

BKF Capital Group, Inc. ("BKF") operates entirely through John A. Levin &
Co., Inc. ("John A. Levin & Co."), an SEC-registered investment adviser, and its
related entities. 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." Levin Management Co.,
Inc. ("Levin Management"), which owns 100% of John A. Levin & Co., provides
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."

BKF was incorporated in Delaware in 1954. Its executive 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
available its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to such reports, 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.

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. Levco
offers long-only equity strategies as well as a range of alternative investment
products and other more specialized investment programs. As of December 31,
2003, assets under management were approximately $12.7 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.

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.

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The following chart summarizes the assets under management of Levco as of
December 31, 2003.

(PIE CHART)

Institutional and Individual Separate Accounts. As of December 31, 2003,
directly managed institutional accounts represented approximately 23.3% of
Levco's total assets under management, with a total market value of
approximately $3.0 billion. As of such date, Levco served as investment adviser
to in excess of 125 separate institutional accounts. The average institutional
account value at December 31, 2003 was approximately $24 million.

Levco also directly manages accounts for individuals, which comprised
approximately 13.0% of Levco's total assets under management as of December 31,
2003, with a total market value of approximately $1.6 billion. As of December
31, 2003, Levco's individual client base represented approximately 440 accounts,
the average value of which was approximately $4 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, 2003, assets managed pursuant to
such sub-advisory relationships totaled approximately $2.3 billion, representing
approximately 18.2% of Levco's total assets under management. The single largest
sub-advisory relationship totaled approximately $1.3 billion, representing
approximately 10.6% of Levco's total assets under management. Registered
investment funds to which Levco acted as an adviser or sub-adviser as of
December 31, 2003 accounted for approximately $700 million, or approximately 6%,
of assets under management.

Wrap Fee Accounts. Levco participates in a number of wrap fee programs
sponsored by financial institutions. In such 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.
With approximately $2.5 billion of managed assets as of December 31, 2003, wrap
fee accounts represented approximately 19.8% of Levco's total assets under
management. Of this total, approximately $2.1 billion, or approximately 16% of
Levco's total assets under management, were with a single sponsor. As of such
date, Levco was being permitted by this sponsor to accept additional assets into
existing accounts, but was not permitted to open new accounts within the
program. Levco has not been informed as to when its status in the program will
change. As of December 31, 2003, Levco had approximately 12,000 wrap fee
accounts, the average value of which was approximately $200,000.

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Event-Driven Accounts. As of December 31, 2003, event-driven accounts,
with a total market value of approximately $2.4 billion, represented
approximately 19.1% of Levco's total assets under management. These accounts
invest in event-driven situations, including (i) merger arbitrage and event
arbitrage transactions, (ii) corporate restructuring and other event driven
situations, (iii) convertible securities on an outright and hedged basis, (iv)
subordinated debt, debt claims, bank debt and other loans that are potentially
volatile, including securities in undervalued, vulnerable, distressed and
bankrupt entities, and (v) other securities or instruments in which the strategy
may realize value based on fundamental factors.

Long-Short Equity Accounts. In May 2002, Levco launched a fundamental,
trading-oriented long/short equity strategy which, as of December 31, 2003, had
approximately $434 million in assets under management. These accounts, which
include proprietary private investment vehicles and separately managed accounts,
represent approximately 3.4% of Levco's total assets under management.

Short-Biased Accounts. As of December 31, 2003, short-biased accounts,
with a total market value of approximately $340 million, represented
approximately 2.7% 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, 2003, proprietary
unregistered investment funds following a variety of alternative investment
strategies, with a total market value of approximately $67 million (excluding
the event driven, short-biased and certain long/short vehicles), represented
approximately 0.5% of Levco's total assets under management.

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

ASSETS UNDER MANAGEMENT

The growth in assets under management between 1999 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 long only portfolios
as well as net outflows with regard to such portfolios. The growth experienced
in 2003 reflected market appreciation of assets under management, which was
partially offset by net outflows from the long only strategies.

DISTRIBUTION

As of December 31, 2003, Levco employed 28 marketing and client service
professionals. This group includes field forces focused on attracting assets
through wrap fee programs and institutional accounts, internal marketing
personnel, a client servicing team, a private client group and additional
marketing support and

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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 long only strategies, 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 and 2003
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, 2003. 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 pursuant to a large cap style, 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

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utilizing investment 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, 2003, BKF and its subsidiaries employed 142 people,
including 51 investment professionals, of whom 22 were primarily portfolio
managers, 19 were primarily securities analysts and 10 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
allowing employees to develop an important stake in the success of BKF will be a
key factor in the achievement of its business objectives.

Development of Complementary Long-Only Strategies. In addition to its
large cap value strategy, Levco has developed equity income, all cap
concentrated value strategies. In 2003, Levco also hired two portfolio
managers/securities analysts with expertise in the small cap sector. Management
believes the continued development of long-only strategies, including through
the addition of skilled investment personnel through recruitment and teams
lift-outs, will make Levco more attractive to existing and potential clients by
enabling it to offer a wider range of products.

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Development of Alternative Investment Strategies. The development of
alternative investment strategies has added depth and breadth to Levco's
research efforts and allowed for a broader range of product offerings. 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
from this product increase dramatically. A fundamental, trading-oriented
long/short strategy has also grown rapidly since its inception in May 2002.
During the bear market in 2001 and 2002, Levco's short biased alternative
investment strategy also enjoyed significant growth in assets and revenues.
Alternative investment strategies, however, do face capacity constraints. Levco
is seeking to increase its ability to manage assets in alternative investment
strategies 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. In 2003, Levco hired a portfolio manager who is managing a
vehicle that is pursuing a fundamentally based, long/short strategy focused on
the small/mid cap equity sector.

Strengthen Presence in Target Markets. Levco intends to devote sufficient
resources to maintain its existing relationships with target client segments,
including institutions, sub-advisers, financial intermediaries and private
clients. The required efforts include maintaining a field force and strong
client servicing efforts with respect to each of these target segments.

Development of Operational Infrastructure. Levco has developed an
operational infrastructure featuring dedicated portfolio administration,
technology and legal/compliance teams. Management believes that the maintenance
of a strong infrastructure that creates operational efficiencies is an essential
aspect of its plan to grow and develop multiple long only and alternative
investment strategies.

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

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engaging in certain lines of business for specified periods of time, revocation
of investment adviser, broker-dealer or other registrations, censures and fines.

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
insignificant 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 long only strategies and the event driven,
short-biased and long/short equity 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. In the case
of alternative investment strategies, the loss of the senior investment
professionals managing the strategy could result in the discontinuance of the
strategy by Levco. In 2003, the event driven strategies, which are primarily
dependent on two senior portfolio managers, represented approximately 31% of the
asset based investment advisory fees, approximately 89% of the incentive fees
and approximately 53% of BKF's total fees (see Item 6 -- Selected Financial
Data). 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 (most recently
amended in 2001) 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 two investment products
-- a large cap value strategy and an event-driven alternative investment
product. While the large cap value strategy and the event-driven 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.

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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 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, 2003, Levco had approximately 290 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 $17.97 million of revenues for Levco in 2003 (including
incentive fees), or approximately 18.6% of BKF's total fees (see Item
6 -- Selected Financial Data).

The five largest customers for long-only equity products accounted for
approximately 41.5% of all asset-based investment advisory fees earned in 2003
with respect to such products. 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 RESULTS

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 registered 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 AND BKF

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.
Furthermore, BKF, as a publicly traded company listed on the New York Stock
Exchange, is subject to the federal securities laws, including the Securities
Exchange Act of 1934, as amended, and the requirements of the exchange.

These laws and regulations generally grant supervisory agencies and bodies
broad administrative powers, including the power to limit or restrict Levco or
BKF from conducting its business if it fails to comply with

9

these laws and regulations. If Levco or BKF 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 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 BKF's profitability and operations and its ability to
conduct certain businesses in which it is currently engaged.

TERRORIST ATTACKS COULD ADVERSELY AFFECT BKF

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 51,000 square feet and are
governed by a lease which expires September 30, 2011. Under this lease, BKF will
acquire an additional 7,000 square feet for a period commencing in the second
quarter of 2004 and concluding on November 30, 2008. 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. 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, 2003.

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 12, 2004, there were 681
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 2002 or 2003. 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
2003, 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

(a) adjusted--see Note 4 to Consolidated Financial Statements

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. Levco specializes in managing equity
portfolios for institutional and individual investors. Levco offers long-only
equity strategies as well as 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 long only 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 long-only 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.

13

At December 31, 2003, assets under management at Levco were $12.7 billion,
compared to $11.3 billion a year earlier. Following is a comparison of Levco's
assets under management 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, 2003, 2002
and 2001, and the Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 of BKF Capital Group, Inc. and Subsidiaries
(which are included elsewhere herein) and should be read in conjunction with
such financial statements. It should be noted that certain affiliated investment
partnerships in which BKF may be deemed to have a controlling interest have been
consolidated. The number and identity of the partnerships being consolidated may
change over time as the percentage interest held by BKF and its affiliates in
affiliated investment partnerships changes. The assets, liabilities and related
operations of these partnerships and related minority interest have been
reflected in the consolidated financial statements for the annual periods ended
December 31, 2003 and 2002. The consolidation of the partnerships does not
impact BKF's equity or net income.

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, 2003 AS COMPARED TO YEAR ENDED DECEMBER 31, 2002.

Revenues

Total revenues for 2003 were $102.74 million, reflecting an increase of
17.5% from $87.41 million in revenues in 2002. This increase was primarily
attributable to (i) a 47.6% increase in incentive fees and allocations from
$24.59 million to $36.29 million and (ii) a net realized and unrealized gain on
investments from consolidated investment partnerships of $2.32 million in 2003
as compared to a loss of $3.54 million in 2002. The gains/losses on investments
from consolidated investment partnerships include minority interests, i.e., the
portion of the gains or losses generated by the partnerships allocable to all
partners other than Levco GP, Inc., which are separately identified on the
consolidated statements of operations. These gains were partly offset by a 2.4%
decrease in investment advisory fees (excluding incentive fees and allocations)
to $60.32 million in 2003 from $61.83 million in 2002.

14

The increase in incentive fees primarily resulted from an increase in
assets under management in the event-driven and long/short equity 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. In 2003, incentive fees were reduced by the reversal of accruals
made in 2002 with respect to an account following a short-biased strategy that
had a June 30 fiscal year end. The decrease in investment advisory fees was
attributable to (1) a decrease in the average assets under management pursuant
to the long-only strategies and (2) a decrease in the average fees paid with
respect to accounts managed pursuant to such strategies, which decrease was
partially offset by the increase in investment advisory fees attributable to
event-driven and long/short equity strategies.

The percentage of total fees attributable to event driven strategies
increased to approximately 53% in 2003 from 35% in 2002.

Net commission income generated by the broker-dealer business fell 31.3% to
$2.02 million in 2003 from $2.94 million in 2002, primarily as the result of a
decrease in the number of accounts at the broker-dealer and a decrease in
commission rates.

In 2003, BKF had realized and unrealized gains on investments (excluding
consolidated affiliated partnerships) of $1.02 million, comprised primarily of
(1) the receipt of approximately $189,000 from the settlement of class action
suits relating to investments made by BKF during the time it was a registered
investment company and (2) net gains of $785,000 in its investments in a range
of alternative investment strategies (excluding $8.93 million in incentive
allocations from affiliated partnerships). As of year end, approximately $8.10
million (excluding incentive allocations) was invested in such strategies. In
2002, BKF had realized and unrealized gains on investments (excluding
consolidated affiliated partnerships) of $31,000, 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 losses 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 2002, approximately
$1.83 million (excluding incentive allocations) was invested in such strategies.
Realized and unrealized gains and losses on investments in affiliated,
non-consolidated investment partnerships are recorded by BKF under the equity
method of accounting based on BKF's proportionate share of the income or loss
earned or incurred by the partnerships.

Interest income in 2003 (excluding consolidated affiliated partnerships)
was $453,000, reflecting a 30.8% decrease from $655,000 in 2002. This decrease
is primarily attributable to a decrease in interest rates.

Interest and dividend income from consolidated affiliated partnerships in
2003 was $309,000, reflecting a 65.8% decrease from $904,000 in 2002. This
decrease is primarily attributable to the decrease in the number, and the
corresponding decrease in the assets under management, of the affiliated
partnerships being consolidated.

Expenses

Total expenses for 2003 were $110.48 million, reflecting an increase of
23.5% from $89.46 million in 2002. Excluding amortization of finite life
intangibles and the loss on the lease amendment, total expenses were $98.35
million, reflecting an increase of 19.3% from $82.45 million in 2002. The
largest component of this increase was a 16.1% increase in employee compensation
and benefits (excluding grants of restricted stock units) to $69.63 million in
2003 from $59.97 million in 2002. This increase in compensation expense is
primarily attributable to an increase in the percentage of revenues paid as
compensation with respect to certain alternative investment products and an
increase in the percentage of total revenues attributable to alternative
investment strategies. Compensation with regard to alternative investment
products is determined on a different basis than compensation with regard to
long-only products. In December 2003, the Compensation Committee of the Board of
Directors, taking into consideration market and business conditions relating to
the long only products, determined to allow bonus payments (partly in the form
of equity awards to be granted in 2004) in excess of those that would have been
permitted pursuant to the compensation guidelines established in 2001 with
regard to long-only products.

15

Expenses associated with the grant of restricted stock units increased
339.1% to $8.13 million in 2003 from $1.85 million in 2002, primarily as the
result of restricted stock units granted in both 2002 and 2003 (including
restricted stock units granted in exchange for options).

Occupancy and equipment rental increased 7.7% to $6.32 million in 2003 from
$5.87 million in 2002. This increase resulted primarily from depreciation
expense relating to capital expenditures made in connection with the development
of the technological infrastructure and the construction of the office facility.

In 2003, BKF recorded a $5.13 million loss related to a lease amendment
that was entered into in October 2003. Under the amendment, BKF relinquished
space and reduced its rent expense by approximately $4.4 million over the
remaining term of the lease.

The expense accrual was calculated based on the net present value of the
payments representing the difference between the amounts that BKF was obligated
for on the space it relinquished and the amounts the landlord will receive from
the tenant succeeding BKF in the relinquished space.

Other operating expenses of BKF for 2003 were $14.09 million, reflecting a
decrease of 2.1% from $14.39 million in 2002. This decrease primarily reflected
(i) a decrease in portfolio management and trading system costs (which bear a
correlation to the number of accounts managed in wrap fee programs) and (ii) the
reversal of an accrual made with respect to payments to third party marketers
(as the result of the reversal of accrued incentive fees with regard to
short-biased products), which were partly offset by increased insurance premiums
for directors and officers/errors and omissions coverage.

Other operating expenses from consolidated affiliated partnerships
decreased by 51.2% to $177,000 from $363,000 primarily as the result of the
decrease in the number of the affiliated partnerships being consolidated.

Operating Loss

BKF had an operating loss of $7.75 million in 2003, as compared to an
operating loss of $2.05 million in 2002. Excluding amortization of finite life
intangibles, the loss on the lease amendment, and gains and losses and interest
and dividend income relating to the consolidated affiliated partnerships,
operating income was $1.77 million in 2003, as compared to $7.60 million in
2002. As discussed above, the largest factor in this decrease was the increase
in employee compensation and benefits (including expenses relating to restricted
stock units), which exceeded the increase in incentive fees and allocations.

Income Taxes

BKF recorded an income tax benefit of $1.08 million in 2003, as compared to
an income tax expense of $3.69 million (net of a deferred tax benefit of
$793,000) in 2002. The deferred tax asset is primarily attributable to future
tax benefits relating to (i) future compensation deductions in connection with
the delivery of stock underlying restricted stock unit awards and (ii) the loss
on the lease amendment.

Excluding the non-deductible amortization expense, BKF had an effective tax
rate of 43.96% in 2003, as compared to an effective tax rate of 44.7% in 2002.
The difference in effective tax rates in 2003 and 2002 is primarily attributable
to state and local taxes due to changes in the allocated income among various
taxing jurisdictions.

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

Revenues

Total revenues for 2002 were $87.41 million, reflecting a decrease of 7.3%
from $94.34 million in revenues in 2001. This decrease was primarily
attributable to (i) a 13.6% decrease in incentive fees and allocations from
$28.45 million to $24.59 million, (ii) a net realized and unrealized loss on
investments from consolidated affiliated partnerships of $3.54 million in 2002,
and (iii) a 98.2% decrease in net realized and unrealized gains on investments
to $31,000 from $1.69 million. The loss on investments from consolidated
affiliated partnerships includes minority interests, i.e., the portion of the
gains or losses generated by the partnerships allocable to all partners other
than Levco GP, Inc., which are separately identified on the
16

consolidated statements of operations. These decreases and losses were partly
offset by a 2.4% increase in investment advisory fees (excluding incentive fees
and allocations) to $61.83 million in 2002 from $60.40 million in 2001.

The decrease in incentive fees resulted from a decrease in the performance
of the event-driven and long only 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 long only strategies as
the result of a decrease in assets under management for these 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.

In 2002, BKF had realized and unrealized gains on investments (excluding
consolidated affiliated partnerships) of $31,000, 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 losses 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 $1.83
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, non-consolidated
investment partnerships are recorded by BKF based on the income passed through
by the partnerships.

Interest income in 2002 (excluding consolidated affiliated partnerships)
was $655,000, reflecting a 48.2% decrease from $1.26 million in 2001. This
decline resulted from (1) a significant decline in interest rates and (2) lower
average cash balances (as the result of seed capital investments and the decline
in revenues).

Interest and dividend income from consolidated affiliated partnerships in
2002 was $904,000. There were no consolidated investment partnerships in 2001.

Expenses

Total expenses for 2002 were $89.46 million, reflecting an increase of 5.3%
from $84.99 million in 2001. Excluding amortization of finite life intangibles,
total expenses were $82.45 million in 2002, reflecting an increase of 9.2% from
$75.49 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 in 2001 to $59.97 million in 2002. 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.

17

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 (i) professional and consulting fees paid to third parties
providing marketing, legal and investment related services, and (ii) 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 (Loss)

In 2002, there was an operating loss of $2.05 million, as compared to
operating income of $9.34 million for 2001, reflecting the decrease in revenues
and the increase in expenses. Excluding amortization of finite life intangibles
and realized and unrealized gains and losses on investment and interest and
dividend income relating to the consolidated affiliated partnerships, operating
income in 2002 was $7.60 million, reflecting a decline of 58.5%, from $18.85
million in 2001. As discussed above, the largest factors in this decrease were
investments in new 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.

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.

LIQUIDITY AND CAPITAL RESOURCES

BKF's current assets as of December 31, 2003 consist primarily of cash,
short term investments, advisory fees receivable and marketable equity
securities. While BKF's daily business operations are not generally capital
intensive, BKF utilizes capital to develop and seed new investment products. The
development of new products is an important element in BKF's business plan, and
such seed capital investments may require substantial financial resources. Due
to its relatively small size, BKF may consider a number of options to obtain
such seed capital. BKF has historically met its cash and liquidity needs through
cash generated by operating activities. At December 31, 2003, BKF had cash and
cash equivalents of $37.44 million, compared to $39.15 million at December 31,
2002. This decrease primarily reflects the timing of 2003 bonus payments, the
purchases of fixed assets and the investment of seed capital in an alternative
investment strategy, which were partly offset by the withdrawal of seed capital
from affiliated investment partnerships, the collection of receivables and the
annual withdrawal of general partner incentive allocations from affiliated
investment partnerships. The increase in investment advisory and incentive fees
receivable from $24.15 million at December 31, 2002 to $37.84 million at
December 31, 2003 primarily reflects the accrual of incentive fees, which was
partly offset by the receipt in 2003 of incentive fees earned in 2002.

The increase in investments in securities to $4.38 million at December 31,
2003 from $1.05 million at December 31, 2002, primarily reflects the seed
capital investment in an offshore investment vehicle and the seeding of a small
cap investment portfolio, which were partly offset by the return of capital
relating to the liquidation of the Van Eck Levin Mid Cap Value Fund during the
second quarter, as BKF ceased the development of its mid cap value effort. The
decrease in investments in securities from consolidated affiliated
18

partnerships from $17.81 million at December 31, 2002 to $3.93 million at
December 31, 2003, and the decrease in due from broker from consolidated
affiliated partnerships from $31.75 million at December 31, 2002 to $4.25
million at December 31, 2003 reflects (i) the liquidation in the first quarter
of 2003 of two investment partnerships and (ii) the de-consolidation of an
affiliated partnership as of January 1, 2003, which was partly offset by the
consolidation of an affiliated partnership that commenced operations in July
2003. The increase in prepaid expenses and other assets to $3.89 million at
December 31, 2003 from $2.12 million at December 31, 2002 primarily reflects the
prepayment of insurance policies and taxes. The increase in investments in
affiliated investment partnerships from $9.33 million at December 31, 2002 to
$17.04 million at December 31, 2003 primarily reflects the de- consolidation of
an affiliated partnership and the realization of incentive allocations for the
year ended December 31, 2003, which were partly offset by the withdrawal of
general partner incentive allocations from the unconsolidated affiliated
partnerships earned with respect to 2002. Incentive allocations typically are
withdrawn within three months following the end of the calendar year to pay
compensation and other expenses. Investments in unaffiliated partnerships
decreased to $3.78 million at December 31, 2003 from $4.28 million at December
31, 2002, reflecting the winding down of a consolidated multi-manager,
multi-strategy partnership. The proceeds from this withdrawal were invested in
an offshore investment vehicle managed pursuant to a similar strategy (which is
reflected in the investments in securities).

The increase in deferred tax assets to $8.67 million in 2003 from $5.68
million in 2002 is primarily attributable to tax benefits related to the loss on
the lease amendment.

Accrued expenses were $3.56 million at December 31, 2003, as compared to
$5.21 million at December 31, 2002. The largest component of such expenses is
the accrual for third party marketing fees. Such fees are based on a percentage
of accrued revenue, and such accruals may be reversed based on the subsequent
investment performance of the relevant accounts through the end of the
applicable performance measurement period. Expenses accrued during 2003 were
offset primarily by the payment of accrued third party marketing fees.

Accrued bonuses were $39.73 million at December 31, 2003, as compared to
$31.51 million at December 31, 2002, reflecting the payment of 2002 bonuses and
the accrual for 2003 bonuses.

The decrease in securities sold short from consolidated affiliated
partnerships from $9.40 million at December 31, 2002 to $1.12 million at
December 31, 2003 reflects (i) the liquidation in the first quarter of 2003 of
two investment partnerships and (ii) the de-consolidation of an investment
partnership as of January 1, 2003, which was partly offset by the consolidation
of an investment partnership that commenced operations in July 2003.

The increase in accrued incentive compensation to $10.29 million at
December 31, 2003 from $2.31 million at December 31, 2002 reflects the granting
of restricted stock units during the period.

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.

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, 2003,
total partners' capital in these partnerships was approximately $700.23 million.
As of December 31, 2003, the sum total of Levco GP's capital accounts in the
affiliated investment partnerships was approximately $17.04 million. The
financial condition and results of operations of certain 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 has not guaranteed any of the affiliated investment partnerships'
obligations, nor does it have any contractual commitments associated with them.

19

CONTRACTUAL OBLIGATIONS

As of December 31, 2003, the Company's contractual obligations, including
payments due by period, are as follows ($ in thousands):

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
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.

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."

20

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, 2003 and 2002, BKF had invested (1) $1.05 million
and $725,000, respectively, in seed capital for long only equity products, which
investments could be similarly impacted by a decline in the performance of value
stocks, and (2) $13.36 million and $18.97 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, 2003 and December 31, 2002 in long only equity products and
alternative investment strategies (excluding 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 15 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.

ITEM 9A. CONTROLS AND PROCEDURES

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 (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended). Based on that evaluation, BKF's management,
including the CEO and CFO, concluded that BKF's disclosure controls and
procedures were effective as of the end of the period covered by this report.
There have been no changes in BKF's internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934, as amended) that occurred during BKF's most recent quarter that has
materially affected, or is reasonably likely to materially affect, BKF's
internal control over financial reporting.

21

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 is
only reasonable assurance that BKF's controls will succeed in achieving their
stated goals under all potential future conditions.

PART III

ITEMS 10, 11, 12, 13 AND 14.

The information required by Items 10, 11, 12, 13 and 14 will be furnished
on or prior to April 29, 2004 (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.

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

The following financial statements of BKF Capital Group, Inc. and
Subsidiaries are filed as part of this report under Item 8-Financial Statements
and Supplementary Data:

(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

22

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

* 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.

23

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 15, 2004

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

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. as of December 31, 2003 and 2002, 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, 2003.
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 did not audit the financial statements of two consolidated
affiliated partnerships (collectively the "2003 CAP"), majority-owned
investments, which statements reflect total assets constituting 5 percent of the
related consolidated totals as of December 31, 2003 and which statements reflect
total revenues constituting 2 percent of the related consolidated totals for the
year ended December 31, 2003. We did not audit the financial statements of six
consolidated affiliated partnerships (collectively the "2002 CAP"),
majority-owned investments, which statements reflect total assets constituting
30 percent of the related consolidated totals as of December 31, 2002 and which
statements reflect total revenues constituting 3 percent of the related
consolidated totals for the year ended December 31, 2002. Those statements were
audited by an other auditor whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for the 2003 CAP and 2002
CAP, is based solely on the reports of the other auditor.

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 and the reports of the other
auditor provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditor,
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, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States.

As discussed in Note 4 to the financial statements, in the context of
making determinations pursuant to Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities", the Company also decided to
consolidate certain affiliated investment partnerships in which it may be deemed
to have a controlling interest.

/s/ ERNST & YOUNG LLP

March 3, 2004
New York, New York

F-2

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
AltVantage Absolute Return Fund, L.P.

We have audited the statement of assets, liabilities and partnership
capital of AltVantage Absolute Return Fund, L.P. (a limited partnership),
including the schedule of investments, as of December 31, 2002, and the related
statements of operations, changes in partnership capital and cash flows for the
year then ended. These financial statements (not shown separately herein) are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly,
in all material respects, the assets and liabilities of AltVantage Absolute
Return Fund, L.P. as of December 31, 2002, and the results of its operations,
changes in its net assets and cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.

Eisner LLP

New York, New York
April 11, 2003

F-3

INDEPENDENT AUDITORS' REPORT

To the Partners
Greenspring Partners, L. P.
New York, New York

We have audited the statement of assets, liabilities and partnership
capital of Greenspring Partners, L. P. (a limited partnership) as of December
31, 2002, and the related statements of operations and changes in partnership
capital for the year then ended. These financial statements (not shown
separately herein) are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with accounting principles generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of Greenspring Partners, L. P.
as of December 31, 2002, and the results of its operations for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.

Eisner LLP

New York, New York
January 13, 2003

F-4

INDEPENDENT AUDITORS' REPORT

To the Partners
Levco Debt Opportunity Partners, L.P.
New York, New York

We have audited the statement of assets, liabilities and partnership
capital of Levco Debt Opportunity Partners, L.P. as of December 31, 2003 and
2002, and the related statements of operations and changes in partnership
capital for the years then ended. These financial statements (not shown
separately herein) are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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 opinions.

In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of Levco Debt Opportunity
Partners, L.P. as of December 31, 2003 and 2002, the results of its operations
and changes in partnership capital for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

Eisner LLP

New York, New York
February 6, 2004

F-5

INDEPENDENT AUDITORS' REPORT

To the Partners
Meadow Lane Associates, L.P.

We have audited the statement of financial condition of Meadow Lane
Associates, L.P. (in liquidation) as of September 30, 2002, and the related
statements of operations and changes in partnership capital for the nine months
then ended. These financial statements (not shown separately herein) are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of Meadow Lane Associates, L.P.
(in liquidation) as of September 30, 2002, and the results of its operations for
the nine months then ended in conformity with accounting principles generally
accepted in the United States of America.

Eisner LLP

New York, New York
October 17, 2002

F-6

INDEPENDENT AUDITORS' REPORT

To the Partners
PWF Capital Partners, L.P.
New York, New York

We have audited the statement of assets, liabilities and partnership
capital of PWF Capital Partners, L.P. (a limited partnership) as of December 31,
2002, and the related statements of operations and changes in partnership
capital for the period from May 1, 2002 (commencement of operations) to December
31, 2002. These financial statements (not shown separately herein) are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of PWF Capital Partners, L.P.
as of December 31, 2002, and the results of its operations for the period from
May 1, 2002 (commencement of operations) to December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.

Eisner LLP

New York, New York
January 13, 2003

F-7

INDEPENDENT AUDITORS' REPORT

To the Partners
RCL Capital, L.P.
New York, New York

We have audited the statement of assets, liabilities and partnership
capital of RCL Capital, L.P. (a limited partnership) as of December 31, 2003,
and the related statements of operations and changes in partnership capital for
the period from July 14, 2003 (commencement of operations) to December 31, 2003.
These financial statements (not shown separately herein) are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of RCL Capital, L.P. as of
December 31, 2003, and the results of its operations, its changes in partnership
capital for the period from July 14, 2003 (commencement of operations) to
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.

Eisner LLP

New York, New York
January 12, 2004

F-8

INDEPENDENT AUDITORS' REPORT

To the Partners
SR Capital Partners, L.P.
New York, New York

We have audited the statement of assets, liabilities and partnership
capital of SR Capital Partners, L.P. (a limited partnership) as of December 31,
2002, and the related statements of operations and changes in partnership
capital for the period from May 1, 2002 (commencement of operations) to December
31, 2002. These financial statements (not shown separately herein) are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of SR Capital Partners, L.P. as
of December 31, 2002, and the results of its operations for the period from May
1, 2002 (commencement of operations) to December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.

Eisner LLP

New York, New York
January 13, 2003

F-9

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLAR AMOUNTS IN THOUSANDS)

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

(a) adjusted -- see Note 4.

See accompanying notes
F-10

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS)

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

(a) adjusted -- see Note 4.

See accompanying notes
F-11

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)

- ---------------
(a) adjusted -- see Note 4.

See accompanying notes

F-12

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS IN THOUSANDS)

See accompanying notes

F-13

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. operates through a wholly-owned subsidiary, Levin
Management Co., Inc. and its subsidiaries, all of which are referred to as
"Levco." 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"), JALCO's two wholly-owned
subsidiaries, Levco GP Inc. ("Levco GP") and LEVCO Securities, Inc. ("LEVCO
Securities") and certain affiliated investment partnerships for which the
Company is deemed to have controlling the interest of the applicable
partnership. Two investment partnerships were consolidated at December 31, 2003
and five were consolidated at December 31, 2002. In addition, the operations of
three investment partnerships (two terminated in March, 2003 and one
de-consolidated October 1, 2003 due to a decrease in ownership interest) were
included in the statements of operations and cash flows for the applicable
periods during the year ended December 31, 2003. The operation of one additional
investment partnership (which terminated in September, 2002) was included in the
consolidated statement of operations and cash flows for the applicable periods
during the year ended December 31, 2002. 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.

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.

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. Such accruals may be reversed as a result of subsequent
investment performance prior to the conclusion of the applicable contract year.

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

F-14

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Commissions earned on distribution of an unaffiliated investment advisor's
funds are recorded once a written commitment is obtained from the investor.

REVENUE RECOGNITION POLICIES FOR CONSOLIDATED AFFILIATED PARTNERSHIPS ("CAP")

Marketable securities owned and securities sold short, are valued at
independent market prices with the resultant unrealized gains and losses
included in operations.

Security transactions are recorded on a trade date basis.

Interest income and expense are accrued as earned or incurred.

Dividend income and expense are recorded on the ex-dividend date.

CASH AND CASH EQUIVALENTS

The Company treats all United States Treasury Bills with maturities at
acquisition of six months or less as cash equivalents and are valued at cost
plus accrued interest, which approximates market value. Investments in money
market funds are valued at net asset value. 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, and in the case of one partnership,
distressed corporate debt. The assets and liabilities 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 and
certain AIP whereby Levco GP is deemed to have a controlling interest in the
partnership (see Note 4). 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
unconsolidated AIP, has not guaranteed any of the AIP obligations, nor does it
have any contractual commitments associated with them. Investments in the
unconsolidated AIP held through Levco GP, are recorded based upon the equity
method of accounting. Levco GP's investment amount in the unconsolidated AIP
equals the sum total of its capital accounts, including incentive allocations,
in the AIP. Each AIP values its underlying investments in accordance with
policies as described in its 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 investments in the AIP other than its interest in
these partnerships. See Note 8 -- Related Party Transactions.

INVESTMENTS IN SECURITIES

Investments in securities consist primarily of equity securities and shares
in unconsolidated 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 unconsolidated affiliated onshore and offshore investment
companies are stated at net asset value as provided by the investment companies'
independent administrator. 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.

F-15

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 files consolidated Federal and combined state and local income
tax returns.

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
an 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.

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 SFAS No. 142, goodwill is no longer amortized but is subject to an
impairment test at least annually or when indicators of potential impairment
exist. Other intangible assets with finite lives are amortized over their useful
lives. See Note 6 -- Intangible Assets. Investment contracts are amortized
straight line over 10 years. Employment contracts were amortized over the life
of the contracts.

EARNINGS PER SHARE

The Company accounts for Earnings Per Share under SFAS No. 128, "Earnings
Per Share". 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.

F-16

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

In calculating diluted earnings (loss) per share for the years ended
December 31, 2003, 2002 and 2001, 1,937,636, 1,936,543, and 400,537 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 except for fixed
assets, goodwill and investment advisory contracts, 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 predominantly 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. 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. Under APB Opinion No. 25, no compensation costs were recognized
relating to the option

F-17

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

The following table illustrates the effect on net income (loss) and
earnings (loss) 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
year ended December 31, 2001:

RECLASSIFICATIONS

Certain prior period amounts reflect reclassifications to conform with the
current year's presentation.

SIGNIFICANT ACCOUNTING POLICIES OF CONSOLIDATED AFFILIATED PARTNERSHIPS ("CAP")

Securities sold short represent obligations to deliver the underlying
securities sold at prevailing market prices and option contracts written
represent obligations to purchase or deliver the specified security at the
contract price. The future satisfaction of these obligations may be at amounts
that are greater or less than that recorded on the consolidated statements of
financial condition. The CAP monitors their positions continuously to reduce the
risk of potential loss due to changes in market value or failure of
counterparties to perform.

INVESTMENTS IN UNAFFILIATED INVESTMENT PARTNERSHIPS

The Company's investments in unaffiliated investment partnerships result
from the consolidation of an affiliated investment partnership that invests in
unaffiliated investment partnerships. Investments in unaffiliated investment
partnerships are recorded at fair value, which generally is equal to the CAP pro
rata interest in

F-18

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the net assets of each unaffiliated investment partnership (based upon the net
asset values reported by the unaffiliated investment partnerships). The Company
has given notice to each of the underlying unaffiliated partnerships of its
intention to withdraw. This was due to the liquidation of the applicable CAP.

MINORITY INTEREST

Minority interests in the accompanying consolidated statements of financial
condition represent the minority owners' share of the equity of consolidated
investment partnerships. Minority interest in the accompanying consolidated
statements of operations represents the minority owners' share of the income or
loss of consolidated investment partnerships.

PARTNER CONTRIBUTIONS AND WITHDRAWALS

Typically, contributions are accepted monthly and withdrawals are made
quarterly upon the required notification period having been met. The
notification period ranges from thirty to sixty days.

RECENT ACCOUNTING DEVELOPMENTS

In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). 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"). See
Note 4 -- Consolidation of CAP.

In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, and hedging
relationships designated after June 30, 2003. The Company has adopted this
statement, which did not have a material impact on the Company's financial
statements.

In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
after June 15, 2003. Under SFAS No. 150 certain financial instruments shall be
classified as a liability on the issuer's financials statements. The Company has
adopted this statement, which did not have a material impact on the Company's
financial statements.

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,
however, 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 normal course of business, the CAP enter into transactions in
various financial instruments, including derivatives, for trading purposes, in
order to reduce their exposure to market risk. These transactions include option
contracts and securities sold short.

Substantially all of the CAP cash and securities positions are deposited
with one clearing broker for safekeeping purposes. The broker is a member of
major securities exchanges.

F-19

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INVESTMENT ADVISORY FEES RECEIVABLE

Included in investment advisory fees receivable are approximately $680,000
and $2.9 million of accrued incentive fees as of December 31, 2003 and 2002,
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. CONSOLIDATION OF CAP

In January 2003, the FASB issued FIN 46, which addresses the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
variable interest entities ("VIE"). 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"). FIN 46 generally would require that the assets,
liabilities and results of operations of a VIE be consolidated into the
financial statements of the enterprise that is the primary beneficiary.

An entity is classified as a VIE if (a) total equity is not sufficient to
permit the entity to finance its activities without additional subordinated
financial support or (b) its equity investors lack (i) the direct or indirect
ability to make decisions about an entity's activities through voting rights or
absorb the expected losses of the entity if they occur or (ii) the right to
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 and may include fees to
decision makers and fees to guarantors of substantially all VIE assets or
liabilities.

Initially, Fin No. 46 required a public enterprise with a variable interest
in a VIE created before January 31, 2003, to apply FIN 46 to that VIE as of the
beginning of the first interim or annual reporting period beginning after June
15, 2003. The Company adopted FIN 46 for the applicable periods presented. In
the context of making determinations pursuant to FIN 46, BKF also decided to
consolidate certain affiliated investment partnerships in which it may be deemed
to have a controlling interest (see Note 1). The consolidation of these
partnerships does not impact the Company's equity or net income. Levco GP has
general partner liability with respect to its interest in each of the CAP.

F-20

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables present the consolidation of the CAP with BKF as of
December 31, 2003 and December 31, 2002. The consolidating statements of
financial condition have been included to assist investors in understanding the
components of financial condition and operations of BKF and the CAP. A
significant portion of the results of operations have been separately identified
in the consolidated statements of operations (dollar amounts in thousands):

F-21

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

F-22

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. FIXED ASSETS

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

Depreciation and amortization expense was approximately $1.6 million, $1.1
million and $864,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.

6. 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)

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

7. SIGNIFICANT CUSTOMERS

The Company recorded revenue from one of its broker consults programs of
approximately $8.2 million, $13.6 million and $14.6 million, or 8%, 16% and 16%
of total revenues, and from certain affiliated investment

F-23

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

vehicles utilizing event driven strategies of $40.9 million, $25.9 million and
$27.4 million, or 40%, 30% and 29% of total revenues for the years ended
December 31, 2003, 2002 and 2001, respectively.

8. 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 $1.8 million, $2.0 million and $2.8 million for the years ended
December 31, 2003, 2002 and 2001, respectively. At December 31, 2003 and 2002
approximately $522,000 and $480,000, 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 unconsolidated AIP is as follows (dollar amounts in thousands):

Included in the carrying value of investments in AIP at December 31, 2003
and 2002 are incentive allocations approximating $8.9 million and $7.5 million,
respectively.

Included in the Company's incentive fees and general partner incentive
allocations are approximately $6.4 million and $6.3 million payable directly to
employee owned and controlled entities ("Employee Entities") for the years ended
December 31, 2003 and 2002, 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 $6.4 million and $6.3 million for the years
ended December 31, 2003 and 2002, respectively. These amounts are included in
the Consolidated Statement of Operations.

The Company earned investment advisory fees and incentive allocations/fees
from unconsolidated affiliated domestic investment partnerships and affiliated
offshore investment vehicles of approximately $56.6 million, $38.1 million and
$32.5 million for the years ended December 31, 2003, 2002 and 2001,
respectively.

Included in investment advisory and incentive fees receivable at December
31, 2003 and 2002 are $4.3 million and $2.7 million, respectively, of advisory
fees from AIP and sponsored investment offshore vehicles. Also included in
investment advisory and incentive fees receivable are $25.2 million and $13.1
million of incentive fees from sponsored offshore investment vehicles at
December 31, 2003 and 2002, respectively.

F-24

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMMISSION REVENUES

Commission revenues earned on securities transactions 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.

9. STOCKHOLDERS' EQUITY

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.

10. COMMITMENT AND CONTRACTUAL OBLIGATIONS

COMMITMENT

The Company has office space obligations that require monthly payments plus
escalations through September 2011. At December 31, 2003, the minimum annual
rental commitments under the operating lease are as follows (dollar amounts in
thousands):

2004.............................................. 2,896
2005.............................................. 3,002
2006.............................................. 3,019
2007.............................................. 3,085
2008.............................................. 3,688
Thereafter........................................ 10,144
-------
Total minimum payments required................... $25,834
=======

Rent expense net of subrental income was $4.1 million, $4.1 million, and
$1.7 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Subrental income was $162,000 (of which $136,000 was received from an entity
controlled by an independent Director of the Company), $49,000 and $144,000 for
the years ended December 31, 2003, 2002 and 2001, respectively.

In addition, the Company incurred a $5.0 million loss from a lease
amendment as of September 2003, related to the surrender of approximately 21,000
square feet in October 2003. The expense related to the loss will be paid out
over the remaining life of the Company's primary office lease, which expires on
September 30, 2011. The expense was calculated by taking the total estimated
future obligations and discounting it by an imputed interest rate of 6%. The
Company no longer has any obligation on the surrendered space other than the
accrued lease loss. The estimated monthly payments are approximately $65,000.

F-25

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONTRACTUAL OBLIGATIONS

In the ordinary course of business, BKF enters into contracts with third
parties pursuant to which BKF or the third party provides services to the other.
In many of the contracts, BKF agrees to indemnify the third party under certain
circumstances. The terms of the indemnity vary from contract to contract and the
amount of the indemnification liability, if any, cannot be determined.

11. 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, 2003 and 2002, LEVCO Securities was in
compliance with this Rule.

12. 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 contributions by employees who have a minimum of
six months service, up to 100%, subject to statutory limitations. Included in
employee compensation and benefits was $471,000, $808,000 and $492,000 of the
employee match contributions for the years ended December 31, 2003, 2002 and
2001, respectively.

13. STOCK-BASED COMPENSATION PLANS

In December 1998, the shareholders of BKF approved an Incentive
Compensation Plan ("Compensation Plan"), which was amended in May 2001 that
allows the Company to pay officers and employees part of their compensation in
restricted stock units ("RSU"), restricted stock and other forms of equity-based
compensation, including stock options. At December 31, 2003, the awards
authorized and available for future grants under the Compensation Plan were
2,600,000 and 340,971, 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, 2002 and 2003 is summarized
below:

F-26

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 2004 and 2005
is $4.5 million and $2.8 million, respectively.

During 2003, the Company issued 515,565 RSU (of which 2,500 were forfeited
in 2003) to employees of the Company, 65,700 of the awards vest through December
2004, 203,760 vest through March 2006, and the remaining 246,105 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 2003 RSU grants in 2004, 2005 and 2006 is $4.3 million, $2.5
million and $228,000, respectively.

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 (of which
333 were forfeited in 2003) being granted in exchange for the options tendered.
The RSU vests 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.

During 2003, the Company granted 11,625 RSU to non-employee directors of
the Company with a value of $210,000 to reduce cash payments for Board of
Directors and Committee meetings.

Employee compensation expense related to the RSU for the years ended
December 31, 2003, 2002 and 2001 was approximately $8.1 million, $1.9 million
and $557,000, respectively. See Note 14 -- Non-Cash Transactions.

B. NON-QUALIFIED STOCK OPTIONS

Stock option activity for the years ended December 31, 2002 and 2003 is
summarized below:

F-27

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock options outstanding and exercisable at December 31, 2003 are as
follows:

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, employees
and non-employee Directors. RSU vesting in a given year are eligible to be
deferred into this plan. As of December 31, 2003, 443,540 of vested RSU were
deferred pursuant to the plan until November 2004 and January 2005.

14. NON-CASH TRANSACTIONS

The Company issued 13,813 shares of common stock in lieu of cash
compensation aggregating $180,000 for the year ended December 31, 2001 of which
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 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.

In 2003, the Company withheld 109,435 shares of common stock for required
withholding taxes in connection with the delivery of 262,652 RSU.

During 2003, the Company granted 11,625 RSU to non-employee directors of
the Company with a value of $210,000 to reduce cash payments for Board of
Directors and Committee meetings. In addition, 626,670 RSU (of which 2,833 were
forfeited in 2003) were granted to employees with a value aggregating $10.4
million. Of this amount, $3.4 million was expensed in 2003.

F-28

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. 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, lease amendment loss, unrealized losses on investment,
and depreciation. Deferred tax liabilities arise from deferred revenues,
unrealized gains on investments, and state and local taxes.

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.

F-29

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

An income tax benefit of approximately $633,000 and $317,000 relating to
the Compensation Plan was allocated to additional paid-in capital in 2003 and
2002, respectively.

16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

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

F-30

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(a) Revenues & operating income (loss) have been adjusted -- see Note 4.

17. MARCH 2004 RESTRICTED STOCK GRANT (UNAUDITED)

In March 2004, certain executive officers of the Company, who are subject
to performance based criteria with regard to their 2003 compensation, and
several employees were granted 56,105 shares of restricted stock.

F-31