UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Commission file number 1-14947

JEFFERIES GROUP, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (212) 284-2550

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

Indicate the number of shares outstanding of the registrant’s class of common stock, as of the latest practicable date. 56,631,100 shares as of the close of business July 20, 2004.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
JUNE 25, 2004

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

See accompanying unaudited notes to consolidated financial statements.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

See accompanying unaudited notes to consolidated financial statements.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

See accompanying unaudited notes to consolidated financial statements.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Continued on next page.

See accompanying unaudited notes to consolidated financial statements.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited)
(Dollars in thousands)

See accompanying unaudited notes to consolidated financial statements.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Summary of Significant Accounting Policies

The accompanying consolidated financial statements include the accounts of Jefferies Group, Inc. and all its subsidiaries (together, the “Company”), including Jefferies & Company, Inc. (“Jefferies”), Helfant Group, Inc. (“Helfant”), Jefferies International Limited, Bonds Direct Securities LLC (“Bonds Direct”), Quarterdeck Investment Partners, LLC (“Quarterdeck”), Jefferies Asset Management, LLC, Jefferies Financial Products, LLC and all other entities in which the Company has a controlling financial interest or is the “primary beneficiary”, including Jefferies Employees Opportunity Fund, LLC (“JEOF”). The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Certain reclassifications have been made to previously reported balances to conform to the current presentation. Operating results for the three-month period or six-month period ended June 25, 2004 is not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the audited consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Change in Quarter End

Beginning with the quarter ending September 30, 2004 the Company will change its quarter end to the last day of the calendar quarter. With the expansion of our new businesses and products, the Company believes calendar period reporting is more consistent with its operating cycle, as well as the reporting periods of other industry peers.

Principles of Consolidation

The Company’s policy is to consolidate all entities in which it owns more than 50% of the outstanding voting stock and has effective control. In addition, in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), as revised, the Company consolidates entities which lack characteristics of an operating entity or business for which it is the primary beneficiary. Under FIN 46, the primary beneficiary is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests.

In situations where the Company has significant (generally defined as owning a voting or economic interest of 20% to 50%) but not effective control, the Company applies the equity method of accounting.

In those cases where the Company’s investment is less than 20% and significant influence does not exist, the investments are carried at fair value.

Recent Accounting Developments

The Company regularly reviews its policies in light of all relevant pronouncements and guidance provided by appropriate regulatory bodies.

A member of the Securities and Exchange Commission staff recently provided interpretative guidance on what may constitute an important right that affects a company’s consolidation policies with regard to its investment partnerships (AICPA Statement of Position No. 78-9 Accounting for Investments in Real Estate Ventures (“SOP 78-9”)). Among other factors to consider, SOP 78-9 indicates that in the event that limited partners have “kick-out” rights there is a presumption that the general partner or asset manager does not control the investment vehicle and such vehicle should

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

not be consolidated. SOP 78-9 defines “kick-out” rights as the right to replace the general partner or manager. As a result of this change, the Company began to account for its interests in Jefferies RTS Fund (“RTS”) on the equity method of accounting. The impact of this change is discussed below.

De-consolidation of Asymmetric Capital Management Limited (“ACM”)

ACM was formed in March 2003 to manage the Asymmetric Convertible Fund. The Company, which owns 50% of ACM, provided all of the initial capital and bore all the risks and rewards of ownership and was considered the primary beneficiary and thus had effective control. ACM was a consolidated entity through the quarter ended March 25, 2004.

During the second quarter of 2004, as a result of the increase in tangible assets and shareholders equity of ACM, ACM was no longer dependent on the Company for financial support and the Company was deemed to no longer have “effective control” of ACM. As a result, the Company is required to account for its interests in ACM on the equity method of accounting.

As a result of the de-consolidation, revenues from asset management activities were $1.9 million lower on a pro-forma basis for the quarter ended June 25, 2004 and net minority interest in earnings of consolidated subsidiaries was reduced by a comparable amount. The impact on net earnings was $0 for the quarter ended June 25, 2004.

De-consolidation of RTS

RTS was formed as a limited partnership in March 2003 with an initial investment of $5 million by the Company and $3 million by the portfolio managers. In June 2004, in anticipation of raising additional third party capital for RTS, the limited partners were granted certain industry-standard rights, including the ability to replace the manager of RTS (“kick-out” rights). As a result of these changes, the Company is required to account for its interests in RTS on the equity method of accounting.

As a result of the de-consolidation, revenues from asset management activities were $1.8 million lower on a pro-forma basis for the quarter ended June 25, 2004 and net minority interest in earnings of consolidated subsidiaries was reduced by a comparable amount. The impact on net earnings was $0 for the quarter ended June 25, 2004.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Commissions

All customer securities transactions are reported on the consolidated statement of financial condition on a settlement date basis with related income reported on a trade-date basis.

Principal Transactions

Securities owned, securities pledged and securities sold, not yet purchased, are valued at fair value, and unrealized gains or losses are reflected in revenues from principal transactions.

Investment Banking

Underwriting revenues and fees from mergers and acquisitions, restructuring and other investment banking advisory assignments are recorded when the services related to the underlying transaction are completed under the terms of the engagement. Expenses associated with these transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded. Underwriting revenues are presented net of unreimbursed deal related expenses. Revenue associated with restructuring and advisory engagements is also recorded net of unreimbursed deal related expenses.

Asset Management Fees and Investment Income From Managed Funds

Period end assets under management by asset class were as follows (in millions of dollars):

	(1)		The Company’s managed or co-managed assets under management in two Jefferies Partners Opportunity funds, Jefferies Employees Opportunity Fund, LLC and the Jackson Creek CDO but does not include third party managed funds.
	(2)		The RTS Fund and Jefferies Paragon Fund.
	(3)		Asymmetric Convertible Fund and other managed international convertible bond assets.
	(4)		The Jefferies Real Asset Fund.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Asset management fees and investment income from managed funds include revenues the Company receives from asset management and performance fees from funds managed by the Company, revenues from asset management and performance fees the Company receives from third-party managed funds, and investment revenue from the Company’s investments in these funds.

The Company receives fees in connection with management and investment advisory services the Company performs for various domestic and international funds and managed accounts, including two Jefferies Partners Opportunity funds, Jefferies Paragon Fund, Jefferies Real Asset Fund, Asymmetric Convertible Fund, Jefferies RTS Fund and Jackson Creek CDO. These fees are based on the value of assets under management and may include performance fees based upon the performance of the funds. Management fees are generally recognized over the period that the related service is provided based upon the beginning or ending Net Asset Value of the relevant period. Generally, performance fees are earned when the return on assets under management exceeds certain benchmark returns, “high-water marks”, or other performance targets. Performance is recognized on a monthly basis and is not subject to adjustment once the measurement period ends (generally quarterly or annually) and performance fees have been realized.

The following summarizes revenues from asset management fees and investment in managed funds for the three-month and six-month periods ended June 25, 2004 and June 27, 2003 (in thousands of dollars):

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following tables details the Company’s average investment in managed funds, investment income from managed funds, investment income from managed funds – minority interest portion and net investment income from managed funds for the quarters ended June 25, 2004 and March 26, 2004, and the six months ended June 25, 2004 (in millions of dollars):

Quarter Ended June 25, 2004

Quarter Ended March 26, 2004

Six-months June 25, 2004

	(1)		The Company’s managed or co-managed assets under management in two Jefferies Partners Opportunity funds, Jefferies Employees Opportunity Fund, LLC and the Jackson Creek CDO and third party managed funds.
	(2)		The RTS Fund and Jefferies Paragon Fund.
	(3)		Asymmetric Convertible Fund and other managed international convertible bond assets.
	(4)		The Jefferies Real Asset Fund.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Interest

Jefferies derives a substantial portion of its interest revenues, and incurs a substantial portion of its interest expenses in connection with it securities borrowed / securities lending activity. Jefferies also earns interest on its securities portfolio, on its operating and segregated balances, on its margin lending activity and on certain of its investments, including its investment in short term bond funds. Interest expense also includes interest payable on the Company’s long-term debt obligations.

Cash and Financial Instruments – Cash Management Activities

The following are financial instruments that are readily convertible into cash as of June 25, 2004 and December 31, 2003 (in thousands of dollars):

(a)

Items are included in Securities Owned (see note below). Items are financial instruments utilized in the Company’s overall cash management and are readily convertible to cash.

Securities Owned, Securities Pledged to Creditors and Securities Sold, Not Yet Purchased

The following is a summary of the market value of major categories of securities owned and securities sold, not yet purchased, as of June 25, 2004 and December 31, 2003 (in thousands of dollars):

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following is a summary of the market value of major categories of securities pledged to creditors as of June 25, 2004 and December 31, 2003 (in thousands of dollars):

Receivable from, and Payable to, Customers

Receivable from, and payable to, customers includes amounts receivable and payable on cash and margin transactions. Securities owned by customers and held as collateral for these receivables are not reflected in the accompanying unaudited consolidated financial statements.

Investments in Managed Funds

Investments in managed funds includes the Company’s investments in two Jefferies Partners Opportunity funds, Jefferies Paragon Fund, Jefferies Real Asset Fund, Asymmetric Convertible Fund, Jefferies RTS Fund, Jackson Creek CDO and other investments.

Goodwill

Goodwill represents the excess of cost over net assets acquired. Goodwill is no longer amortized, but is tested for impairment at least annually by comparing the fair value of a reporting unit with its carrying amount, including goodwill.

Income Taxes

Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of the Company’s assets and liabilities. The Company’s tax assets and liabilities are presented as a component of “Other assets” and “Accrued expenses and other liabilities,” respectively, in the consolidated statements of financial condition.

Bank Loans

Bank loans represent short-term borrowings that are payable on demand and generally bear interest at the brokers’ call loan rate. At June 25, 2004 there were $95,000,000 in unsecured bank loans outstanding with an average interest rate of 1.57%.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Long-Term Debt

The following summarizes long-term convertible debt and long-term debt outstanding as of June 25, 2004 and December 31, 2003 (in thousands of dollars):

In March 2004, the Company issued $350 million aggregate principal amount of unsecured 5½% senior notes due March 15, 2016, with a yield of 5.6%.

The Company has entered into a fair value hedge with no ineffectiveness using interest rate swaps in order to convert $200 million aggregate principal amount of unsecured 7¾% senior notes due March 15, 2012 into floating rates based upon LIBOR. The effective interest rate on the $200 million aggregate principal amount of unsecured 7¾% senior notes, after giving effect to the swaps, is 3.7%. The fair value of the mark to market of the swaps was positive $16.7 million as of June 25, 2004, which was recorded as an increase in the book value of the debt and an increase in other assets.

Pension

The following summarizes the net periodic pension cost for the three-month and six-month periods ended June 25, 2004 and June 27, 2003 (in thousands of dollars):

The Company presently anticipates contributing between $3 million and $5 million to its pension plan during 2004. As of June 25, 2004, no contributions have been made.

Minority Interest

Minority interest represents the minority equity holders’ proportionate share of the equity of JEOF and Bonds Direct. At June 25, 2004, Jefferies Group, Inc. had effective control and owned approximately 29% and 55% of JEOF and Bonds Direct, respectively. As previously discussed, both Jefferies RTS and ACM were de-consolidated in the second quarter and are now accounted for under the equity method of accounting.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Common Stock

On July 14, 2003, the Company declared a 2-for-1 split of all outstanding shares of common stock, payable August 15, 2003 to stockholders of record as of July 31, 2003. The stock split was effected as a stock dividend of one share for each one share outstanding on the record date. All share, share price and per share information included in the consolidated financial statements and notes thereto has been restated to reflect the effect of the two-for-one stock split.

Stock-Based Compensation

On January 1, 2003, the Company adopted, on a prospective basis, the fair value method of accounting for stock-based compensation under FASB No. 123, “Accounting for Stock-Based Compensation as amended by FASB No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123”. Therefore, employee stock options granted on and after January 1, 2003 will be expensed by the Company over the option vesting period, based on the estimated fair value of the award on the date of grant. In the first half of 2004, the Company recorded a net compensation expense reversal of $38,000 because stock option amortization expense of $7,000 was exceeded by $45,000 in expense reversals related to stock option forfeitures. Additionally, the Company recorded compensation expense of $3.6 million related to the Company’s Employee Stock Ownership Plan and $900,000 related to the Company’s Employee Stock Purchase Plan, the latter was based on a discount from market. There were stock option grants totaling 9,233 shares in the first half of 2004. These grants were made through the Company’s Deferred Compensation Plan. Also, there were grants of restricted stock and restricted stock units, some of which relate to 2003 employee compensation, totaling 3,313,824 shares in the first half of 2004.

In 2002 and prior years, the Company measured the cost of its stock-based compensation plans using the intrinsic value approach under Accounting Principles Board (“APB”) Opinion No. 25 rather than applying the fair value method provisions of FASB No. 123. Accordingly, the Company has not recognized compensation expense related to stock options granted prior to January 1, 2003 and shares issued to participants in the Company’s employee stock purchase plan prior to January 1, 2003. Therefore, the cost related to stock-based compensation included in the determination of net income for 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of FASB No. 123.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Had compensation cost for the Company’s stock-based compensation plans been determined consistent with FASB No. 123, the Company’s net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands of dollars, except per share amounts):

Earnings per Share

The following reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three-month and six-month periods ended June 25, 2004 and June 27, 2003 (in thousands, except per share amounts):

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Other Comprehensive Gain (Loss)

The following summarizes other comprehensive gain and accumulated other comprehensive loss at June 25, 2004 and for the three-months then ended (in thousands of dollars):

The following summarizes other comprehensive gain and accumulated other comprehensive loss at June 27, 2003 and for the three-months then ended (in thousands of dollars):

Comprehensive income for the three-months ended June 25, 2004 and June 27, 2003 was as follows (in thousands of dollars):

The following summarizes other comprehensive gain and accumulated other comprehensive loss at June 25, 2004 and for the six-months then ended (in thousands of dollars):

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following summarizes other comprehensive gain and accumulated other comprehensive loss at June 27, 2003 and for the six-months then ended (in thousands of dollars):

Comprehensive income for the six-months ended June 25, 2004 and June 27, 2003 was as follows (in thousands of dollars):

Net Capital Requirements

As registered broker-dealers, Jefferies, Helfant, and Bonds Direct are subject to the Securities and Exchange Commission’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. Jefferies, Helfant, and Bonds Direct have elected to use the alternative method permitted by the Rule, which requires that they each maintain minimum net capital, as defined, equal to the greater of $250,000 or 2% of the aggregate debit balances arising from customer transactions, as defined.

As of June 25, 2004, Jefferies’, Helfant’s and Bonds Direct’s net capital and excess net capital were as follows (in thousands of dollars):

Quarterly Dividends

In 1988, the Company instituted a policy of paying regular quarterly dividends. There are no restrictions on the Company’s present ability to pay dividends on common stock, other than the governing provisions of the Delaware General Corporation Law.

Dividends per Common Share (declared and paid):

On July 13, 2004, the Company approved a 25 percent increase in the Company’s quarterly dividend to 10 cents per share from 8 cents. The dividend will be payable Sept. 15 to shareholders of record Aug. 16.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Financial Instruments

Off-Balance Sheet Risk

The Company has contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to sell, securities sold but not yet purchased, repurchase agreements, future purchases and sales of foreign currencies, securities transactions on a when-issued basis, options contracts, futures index contracts, commodities futures contracts and underwriting. Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the market values of the securities underlying the financial instruments may be in excess of, or less than, the contract amount. The settlement of these transactions is not expected to have a material effect upon the Company’s consolidated financial statements.

Derivative Financial Instruments

The Company has derivative financial instrument positions in foreign exchange forward contracts, option contracts, and index and commodity futures contracts, all of which are measured at fair value with realized and unrealized gains and losses recognized in earnings. The foreign exchange forward contract positions are generally taken to lock in the dollar cost of proceeds of foreign currency commitments associated with unsettled foreign denominated securities purchases or sales. The average maturity of the forward contracts is generally less than two weeks. The option positions taken are generally part of a strategy to offset equity positions. The index futures positions are taken as a hedge against securities positions, as a hedge against the commodities futures positions underlying the indices, or as a hedge against the commodities related swap positions. The average maturity of the index futures positions and the commodities futures positions is generally one to two months.

The Company has also entered into a fair value hedge with no ineffectiveness using interest rate swaps in order to convert $200.0 million aggregate principal amount of unsecured 7¾% senior notes due March 15, 2012 into floating rates based upon LIBOR. The effective interest rate on the $200.0 million aggregate principal amount of unsecured 7¾% senior notes, after giving effect to the swaps, is 3.7%. The fair value of the mark to market of the swaps was positive $16.7 million as of June 25, 2004, which was recorded as an increase in the book value of the debt and an increase in derivative assets classified as part of other assets.

The gross contracted or notional amount of index futures contracts, commodities futures contracts, options contracts, foreign exchange forward contracts and interest rate swaps, which are not reflected in the consolidated statement of financial condition, is set forth in the table below (in thousands of dollars) and provides only a measure of the Company’s involvement in these contracts at June 25, 2004 and December 31, 2003. They do not represent amounts subject to market risk and, in many cases, serve to reduce the Company’s overall exposure to market and other risks.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Fair Value of Derivative Financial Instruments

FASB No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value.

The following is an aggregate summary of the average first half of 2004 and full year 2003 and June 25, 2004 and December 31, 2003 fair values of derivative financial instruments (in thousands of dollars):

Guarantees

The Company adopted the provisions of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. The Interpretation requires that the Company recognize the fair value of guarantee and indemnification arrangements issued or modified by the Company after December 31, 2002, if these arrangements are within the scope of that Interpretation. In addition, under previously existing generally accepted accounting principles, the Company continues to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the guarantees and indemnifications when those losses are estimable.

In the normal course of business, the Company had letters of credit outstanding aggregating $20.0 million at June 25, 2004, mostly to satisfy various collateral requirements in lieu of depositing cash or securities. These letters of credit have a current carrying amount of aggregate liability of $0.

As of June 25, 2004, the Company had outstanding guarantees of $26.0 million relating to undrawn bank credit obligations of two associated investment funds in which the Company has an interest. Also, the Company has guaranteed obligations of Jefferies International Limited (“JIL”) to various banks which provide clearing and credit services to JIL and to counterparties of JIL. In addition, as of June 25, 2004, the Company had commitments to invest up to $7.8 million in various investments.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Credit Risk

In the normal course of business, the Company is involved in the execution, settlement and financing of various customer and principal securities transactions. Customer activities are transacted on a cash, margin or delivery-versus-payment basis. Securities transactions are subject to the risk of counterparty or customer nonperformance. However, transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through settlement date or to the extent of margin balances.

The Company seeks to control the risk associated with these transactions by establishing and monitoring credit limits and by monitoring collateral and transaction levels daily. The Company may require counterparties to deposit additional collateral or return collateral pledged. In the case of aged securities failed to receive, the Company may, under industry regulations, purchase the underlying securities in the market and seek reimbursement for any losses from the counterparty.

Concentration of Credit Risk

As a securities firm, the Company’s activities are executed primarily with and on behalf of other financial institutions, including brokers and dealers, banks and other institutional customers. Concentrations of credit risk can be affected by changes in economic, industry or geographical factors. The Company seeks to control its credit risk and the potential risk concentration through a variety of reporting and control procedures, including those described in the preceding discussion of credit risk.

Segment Reporting

The Company’s operations have been classified into a single business segment, a securities broker-dealer, which includes several types of financial services. This segment includes the traditional securities brokerage and investment banking activities of the Company. Traditional securities brokerage and investment banking activities account for over 90% of total revenue for the three months ended June 25, 2004.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations

Special Note on Forward-Looking Statements

This report contains or incorporates by reference “forward-looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include statements about our future and may contain expectations regarding revenues, earnings, operations and other financial projections, and may include statements of future performance, positioning, plans and objectives. These forward-looking statements are usually preceded by the words “continue,” “intend,” “will,” “plan,” “expect,” “anticipate,” “estimate,” “believe,” or similar expressions. These forward-looking statements represent only our belief regarding future events and rely on assumptions and are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from expectations. This report and other documents we file describe these assumptions, risks, uncertainties, and other factors. You should read and interpret any forward-looking statements together with these documents, including the following:

•

the risk factors contained in this report under the caption “Factors Affecting Our Business”;

•

the discussion of our analysis of financial condition and results of operations contained in this report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

•

the notes to consolidated financial statements contained in this report; and

•

our other SEC filings.

Any forward-looking statement speaks only as of the date on which that statement is made. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made.

Overview

We operate as a full-service investment bank and institutional securities firm focused on the middle market. We provide trade execution in equity, high yield, convertible and international securities, as well as research and asset management capabilities, to institutional investors and offer financial advisory, capital raising, mergers and acquisitions, and restructuring services primarily to small and mid-cap companies. We also offer correspondent clearing, prime brokerage, private client services and securities lending services.

We believe that the middle market niche is largely under-served. We actively look to enhance our middle market position by leveraging our internal resources, opportunistically hiring, acquisitions, and strategic partnering. The addition of Quarterdeck in 2002, which specializes in mergers and acquisitions in the global aerospace, defense, and federal information technology industries and the addition of Broadview in 2003, which specializes in mergers and acquisitions in the information, communications and healthcare technology industries represented important steps in our effort to create the leading investment bank serving middle-market companies and their investors. In addition, in 2003, to complement our middle market focus and to leverage our trading expertise, we began the development of a broadly based asset management infrastructure which will support the development of various investment strategies including those focused on long-short equity, real assets, fixed income and foreign exchange through a variety of pooled investment vehicles. We expect to continue to support and make additional investments in these various vehicles.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

High Yield Funds – Secondary Trading

We first established our High Yield department in 1990 with the hiring of approximately 25 high yield salesmen, traders and research professionals. Initially, we allocated approximately $30 million in capital to this group to be used in the trading of high yield, distressed and special situation securities. Between 1990 and 1999, the group grew to approximately 40 professionals, utilized approximately $150 million of trading capital and was profitable every quarter.

In 1999, we had a total capitalization of approximately $550 million and total tangible book value of $397 million. The $150 million in high yield trading inventory was the largest single commitment that we had at the time and represented approximately 27% of our total capital.

In response to significant demand for bigger “markets” in high yield securities by our customers, we determined that a larger pool of capital was necessary. Working closely with legal and accounting professionals, we established the Jefferies Partner Opportunity Funds (“JPOFs”) and a vehicle for employees, Jefferies Employees Opportunity Fund (“JEOF”), to provide incremental capital for the trading of high yield, distressed, and special situation securities. The three vehicles are set up as distinct broker-dealers in order to permit them to share in the trading desk activities on a pari-passu basis. By utilizing this structure, we were able to make larger markets to our clients, limit our exposure to a relatively illiquid asset class, and maintain significant upside in the business by virtue of ongoing management and incentive fees.

The JPOFs were capitalized with approximately $308 million in equity capital and $205 million in leverage provided by a third party financial institution. The investors in the JPOFs included numerous institutions and high net worth individuals with a fee structure similar to most hedge funds – a 1% management fee based on assets managed plus a 20% incentive fee based on returns in excess of 8%. The funds are responsible for reimbursing us for our share of trading and administrative expenses. We have direct investments in these funds, (separate from the committed capital associated with the trading desk), of approximately $45 million, and earned investment income of $7 million and $4 million for the year ended December 31, 2003 and the six months ended June 25, 2004, respectively. As of June 25, 2004, we had additional firm capital that trades with these funds on a pari-passu basis of $335 million.

JEOF was formed to offer all accredited investors who were our employees at the time an opportunity to provide additional capital. A number of our employees, including our senior management, have made investments ranging from $10,000 to $2.5 million and total $35 million. In addition, the JEOF investment was leveraged with an incremental $23 million in the form of revolving debt provided by a third party financial institution. JEOF is charged a 3% management fee based on assets under management that is payable to us and is also responsible for reimbursing us for its share of trading and administrative expenses.

Richard Handler, currently our chairman and CEO, is the portfolio manager for all three funds – the two JPOFs and JEOF. He receives no direct compensation from any of these funds. His entire compensation is based on our overall results. As required by JPOF investors, he has direct investments in the JPOFs totaling approximately $10 million and pays full management and incentive fees to us on exactly the same basis as every other JPOF investor.

When combined with these third party funds, our high yield trading desk, as of June 25, 2004, had over $906 million worth of working capital available to it as follows (dollars in millions):

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Trades executed on the high yield desk are shared proportionately, that is on a pari passu basis, based on the total committed capital in the table above. We are paid management fees, as described above, plus a proportionate share of all direct and other trading and administrative costs, by each of the funds. We have earned management fees totaling $9 million and $5 million in the year ended December 31, 2003 and six months ended June 25, 2004, respectively.

The returns, net of management and incentive fees, for the JPOFs since inception are as follows: