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SECURITIES AND EXCHANGE COMMISSION

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, 2001

OR

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

For the transition period from                 to                

Commission File Number: 1-14947

JEFFERIES GROUP, INC.

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:

      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 o

      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 amendment to this Form 10-K.     o

      State the aggregate market value of the common stock held by nonaffiliates of the registrant. $862,733,606 as of December 31, 2001.

      Indicate the number of shares outstanding of the registrant’s class of common stock, as of the latest practical date. 26,232,572 shares as of the close of business February 1, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

      Registrant’s Definitive Proxy Statement with respect to the 2002 Annual Meeting of Stockholders to be held on May 23, 2002 is incorporated by reference into Part III of this Form 10-K.

LOCATION OF EXHIBIT INDEX

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JEFFERIES GROUP, INC.

2001 FORM 10-K ANNUAL REPORT

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Exhibit Index located on page 43 of this report.

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PART I

ITEM 1. BUSINESS.

      Jefferies Group, Inc. and its subsidiaries operate as an international investment bank that focuses on capital raising, research, mergers and acquisitions, advisory and restructuring services for small- to medium-sized companies and on trading in equity and high yield securities, convertible bonds, options, futures and international securities for institutional clients. The term “Company” refers, unless the context requires otherwise, to Jefferies Group, Inc. and its subsidiaries. The Company and its various subsidiaries maintain 20 offices worldwide, including New York, Atlanta, Boston, Chicago, Dallas, Hong Kong, London, Los Angeles, Paris, San Francisco, Tokyo and Zurich.

      As of December 31, 2001, the Company and its subsidiaries had 1,201 full-time employees, including 639 representatives registered with NASD Regulation, Inc. (“NASDR”). The Company’s executive offices are located at 520 Madison Avenue, New York, New York 10022, and its telephone number is (212) 284-2550.

Jefferies & Company, Inc.

      Jefferies & Company, Inc. (“JEFCO”) was founded in 1962 and is engaged in equity, convertible debt and high yield securities brokerage and trading and corporate finance. JEFCO is one of the leading national firms engaged in the distribution and trading of blocks of equity securities both on the national securities exchanges and in the “third market.” The term “third market” refers to transactions in listed equity securities effected away from national securities exchanges. JEFCO’s revenues are derived primarily from commission revenues and market making or trading as principal in equity, high yield, convertible securities, options, futures and international securities with or on behalf of institutional investors, with the balance generated by corporate finance and other activities. JEFCO currently provides fundamental equity and/or high yield research in the areas of: Financial Services; Knowledge Services; Electric Utilities; Oil Services — Energy; Gaming & Leisure; Healthcare; Maritime Shipping; Consumer Business; Software — Interactive Entertainment; Telecommunications; Media; IT Services — Government and Commercial; and Special Situations.

Jefferies International Limited and Jefferies Pacific Limited

      Jefferies International Limited (“JIL”), a broker-dealer subsidiary, was incorporated in 1986 in England. JIL is a member of The International Stock Exchange and The Securities and Futures Authority. JIL introduces customers trading in U.S. securities to JEFCO and also trades as a broker-dealer in international equity and convertible securities and American Depositary Receipts (“ADRs”). In 1995, JIL formed a wholly owned Swiss subsidiary, Jefferies (Switzerland) Ltd. In 1996, JIL formed a wholly owned English subsidiary, Jefferies (Japan) Limited, which maintains a branch office in Tokyo.

      Jefferies Pacific Limited (“JPL”), a broker subsidiary, was incorporated in 1992 in Hong Kong. JPL presently introduces foreign customers trading in U.S. securities to JEFCO.

Helfant Group, Inc.

      On September 28, 2001, the Company acquired Lawrence Helfant Inc. (“Helfant”), which owns 100% of Lawrence Helfant LLC (“Helfant LLC”), a New York Stock Exchange (“NYSE”) member firm. Helfant LLC is the largest independent execution service provider on the NYSE. The acquisition was made with a combination of stock and cash totaling approximately $32.6 million. The acquisition was accounted for as a purchase and resulted in approximately $23.4 million in goodwill. On January 14, 2002, the Company merged W & D Securities, Inc. (“W & D”), another NYSE member firm in which the Company has an ownership interest, with Lawrence Helfant, Inc. to create Helfant Group, Inc. (“Helfant Group”).

Separation of Investment Technology Group, Inc. from Jefferies Group, Inc.

      The Company was originally incorporated in 1998 as a holding company under the name JEF Holding Company, Inc. At the time of its incorporation, JEF Holding Company, Inc. was a wholly owned subsidiary of

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      On April 27, 1999, Old Group and ITGI consummated the transactions (the “Transactions”) that resulted in the separation of ITGI from the other Old Group businesses. On April 22, 1999, Old Group transferred all non-ITGI assets and liabilities to JEF Holding Company, Inc., a holding company. Old Group then distributed all of the common stock of JEF Holding Company, Inc. to Old Group stockholders through a tax-free spin-off. After the transfers, Old Group’s 15 million shares of ITGI became its only asset. The spin-off was immediately followed by a tax-free merger of ITGI with and into Old Group. Following the merger, Old Group was renamed Investment Technology Group, Inc. and JEF Holding Company, Inc. was renamed Jefferies Group, Inc., the Registrant in this annual report.

      The Transactions were treated for financial reporting purposes as if Old Group had spun-off its entire 80.5% stake in ITGI to Old Group stockholders. Accordingly, since the results of ITGI were previously consolidated with Old Group, all financial information for the periods prior to April 27, 1999 have been restated to reflect the results of ITGI as a discontinued operation. The net assets of ITGI have been segregated for prior periods from the other assets and liabilities of Old Group. For financial reporting purposes, the net assets of ITGI as of April 27, 1999 have been treated as a distribution to Old Group stockholders.

Commission Business

      A substantial portion of the Company’s revenues is derived from customer commissions on brokerage transactions in equity (primarily listed) and debt securities for domestic and international investors such as investment advisors, banks, mutual funds, insurance companies and pension and profit sharing plans. Such investors normally purchase and sell securities in block transactions, the execution of which requires special marketing and trading expertise. JEFCO, for example, is one of the leading national firms in the execution of equity block transactions, and believes that its institutional customers are attracted by the quality of its execution (with respect to considerations of quantity, timing and price) and its competitive commission rates, which are negotiated on the basis of market conditions, the size of the particular transaction and other factors. In addition to domestic equity securities, JEFCO executes transactions in high yield securities, domestic and international convertible securities, international equity securities, ADRs, options, preferred stocks, financial futures and other similar products.

      All of JEFCO’s equity account executives are electronically interconnected through a system permitting simultaneous verbal and graphic communication of trading and order information by all participants. JEFCO believes that its execution capability is significantly enhanced by this system, which permits its account executives to respond to each other and to negotiate order indications directly with customers rather than through a separate trading department.

Principal Transactions

      In the regular course of its business, JEFCO takes securities positions as a market maker to facilitate customer transactions and for investment purposes. In making markets and when trading for its own account, JEFCO exposes its own capital to the risk of fluctuations in market value. Trading profits (or losses) depend primarily upon the skills of the employees engaged in market making and position taking, the amount of capital allocated to positions in securities and the general trend of prices in the securities markets.

      JEFCO monitors its risk by maintaining its securities positions at or below certain pre-established levels. These levels reduce certain opportunities to realize profits in the event that the value of such securities increases. However, they also reduce the risk of loss in the event of a decrease in such value and result in controlled interest costs incurred on funds provided to maintain such positions. JEFCO also attempts to minimize risk with respect to its principal transactions by finding willing buyers and sellers when possible and entering into riskless principal transactions thereby reducing the need to hold inventory positions for even short periods of time.

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      Equities. The Equities Division of JEFCO makes markets in over 1,500 over-the-counter equity securities and ADRs, and trades securities for its own account, as well as to accommodate customer transactions. Since early 2001, bid, ask and sale prices for stocks traded on the national securities exchanges and in the Nasdaq Stock Market have been quoted in decimal or cent format, rather than in fractions of a dollar. Decimalization has narrowed the differences, or spreads, between bid and ask prices on equity securities and has also reduced price increments for those securities. Decimalization may reduce the trading revenue the Company earns from its market making operations.

      High Yield. The High Yield Division of JEFCO principally trades non-investment grade public and private debt securities as well as distressed securities and bank debt. The Division specializes in trading and making markets in over 500 unrated or less than investment grade corporate debt securities and accounts for these positions at market value. At December 31, 2001, the aggregate long and short market value of these positions was $150.7 million and $1.5 million, respectively. Risk of loss upon default by the borrower is significantly greater with respect to unrated or less than investment grade corporate debt securities than with other corporate debt securities. These securities are generally unsecured and are often subordinated to other creditors of the issuer. These issuers usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than are investment grade issuers. There is a limited market for some of these securities and market quotes are generally available only from a small number of dealers.

      Three funds managed by JEFCO invest on a pari passu basis in all trading and investment activities undertaken by the High Yield Division. Two of these funds, the Jefferies Partners Opportunity Funds, are principally capitalized with equity contributions from institutional and high net worth investors. The third fund, Jefferies Employees Opportunity Fund, (and collectively with the two Jefferies Partners Opportunity Funds, the “High Yield Funds”) is principally capitalized with equity investments from JEFCO employees. JEFCO, senior management (including the Company’s chief executive officer, president and chief financial officer) and certain JEFCO employees have direct investments in all three funds on terms identical to other fund participants. JEFCO has a 14% aggregate interest in the funds, senior management has a 4% interest and all employees (exclusive of senior management) have a 9% interest. The High Yield Division and each of the funds share gains or losses on all trading and investment activities of the High Yield Division on the basis of a pre-established sharing arrangement related to the amount of capital each has available for such transactions. The sharing arrangement is modified from time to time to reflect changes in the respective amounts of available capital. As of December 31, 2001, the funds were being allocated an aggregate of 68% of such gains and losses. The funds also reimburse JEFCO for their share of allocable trading expenses. At year end 2001, the High Yield Division had $970 million of combined pari passu capital available from the funds (including unfunded commitments and availability under the fund revolving credit facility) and JEFCO to deploy and execute the Division’s investment and trading strategy. The High Yield Funds are actively managed by Richard Handler, the Company’s Chief Executive Officer. Investors in the funds would have the right to redeem their investment should Mr. Handler cease actively managing the High Yield Funds. See “— Asset Management.”

      Convertible Securities. JEFCO also trades domestic and international convertible securities and assists corporate and institutional clients in identifying attractive investments in these securities.

      Other Proprietary Trading. JEFCO has investments in partnerships and mutual funds as well as other relationships with independent management firms, which contribute to revenues from principal transactions.

Corporate Finance

      JEFCO’s Corporate Finance Division offers corporations (primarily middle market growth companies) a full range of financial advisory services as well as debt, equity, and convertible financing services. Products include acquisition financing, bridge and senior loan financing, private placements and public offerings of debt and equity securities, debt refinancings, restructuring, merger and acquisition and exclusive sales advice, structured financings and securitizations, consent and waiver solicitations, and company and bondholder representations in corporate restructurings. Investment banking activity involves both economic and regulatory

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      JEFCO intends to continue to pursue opportunities for its corporate customers, which may require it to finance and/or underwrite the issuance of securities. Under circumstances where JEFCO is required to act as an underwriter or to trade on a proprietary basis with its customers, JEFCO may assume greater risk than would normally be assumed in certain other principal transactions.

Interest

      JEFCO derives a substantial portion of its interest revenues, and incurs a substantial portion of its interest expenses, in connection with its securities borrowed/ securities loaned activity. JEFCO also earns interest on its securities portfolio, on its operating and segregated balances, on its margin lending activity and on certain of its investments.

      Securities Borrowed/ Securities Loaned. In connection with both its trading and brokerage activities, JEFCO borrows securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date, and lends securities to other brokers and dealers for similar purposes. JEFCO has an active securities borrowed and lending matched book business (“Matched Book”), in which JEFCO borrows securities from one party and lends them to another party. When JEFCO borrows securities, JEFCO provides cash to the lender as collateral, which is reflected in the Company’s financial statements as receivable from brokers and dealers. JEFCO earns interest revenues on this cash collateral. Similarly, when JEFCO lends securities to another party, that party provides cash to JEFCO as collateral, which is reflected in the Company’s financial statements as payable to brokers and dealers. JEFCO pays interest expense on the cash collateral received from the party borrowing the securities. A substantial portion of JEFCO’s interest revenues and interest expense results from the Matched Book activity. The initial collateral advanced or received approximates or is greater than, the fair value of the securities borrowed or loaned. JEFCO monitors the fair value of the securities borrowed and loaned on a daily basis and requests additional collateral or returns excess collateral, as appropriate.

      Margin Lending. Customers’ transactions are executed on either a cash or margin basis. In a margin transaction, JEFCO extends credit to the customer, collateralized by securities and cash in the customer’s account, for a portion of the purchase price, and receives income from interest charged on such extensions of credit.

      In permitting a customer to purchase securities on margin, JEFCO is subject to the risk that a market decline could reduce the value of its collateral below the amount of the customer’s indebtedness and that the customer might otherwise be unable to repay the indebtedness.

      In addition to monitoring the creditworthiness of its customers, JEFCO also considers the trading liquidity and volatility of the securities it accepts as collateral for its margin loans. Trading liquidity and volatility may be dependent, in part, upon the market on which the security is traded, the number of outstanding shares of the issuer, events affecting the issuer and/or securities markets in general, and whether or not there are any legal restrictions on the sale of the securities. Certain types of securities have historical trading patterns, which may assist JEFCO in making its evaluation. Historical trading patterns, however, may not be good indicators over relatively short time periods or in markets which are affected by unusual or unexpected developments. JEFCO considers all of these factors at the time it agrees to extend credit to customers and continues to review its extensions of credit on an ongoing basis.

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      The majority of JEFCO’s margin loans are made to United States citizens or to corporations which are domiciled in the United States. JEFCO may extend credit to investors or corporations who are citizens of foreign countries or who may reside outside the United States. JEFCO believes that should such foreign investors default upon their loans and should the collateral for those loans be insufficient to satisfy the investors’ obligations, it may be more difficult to collect such investors’ outstanding indebtedness than would be the case if investors were citizens or residents of the United States.

      Although JEFCO attempts to minimize the risk associated with the extension of credit in margin accounts, there is no assurance that the assumptions on which JEFCO bases its decisions will be correct or that it is in a position to predict factors or events which will have an adverse impact on any individual customer or issuer, or the securities markets in general.

Asset Management

      The Company receives asset management fees from its management of six funds domestically and eighteen funds internationally. The domestic funds consist of the three High Yield Funds, a fund of funds principally for employees and a venture capital fund principally for employees, each of which began activities in 2000. In addition, in 2001 the Company started a second domestic fund of funds. Investors include institutional investors, employees of JEFCO and JEFCO itself.

      The three High Yield Funds invest on a pari passu basis in all trading and investment activities undertaken by JEFCO’s High Yield Division. See “— Principal Transactions — High Yield.” The funds have a revolving credit facility that is collateralized by their investments which is non-recourse to the Company. JEFCO receives a management fee from the Jefferies Partners Opportunity funds in an amount equal to 1% per annum of the market value of the funds’ investments and is entitled to a carried interest of 20% of all distributions once investors have received a specified threshold return. Jefferies Employees Opportunity Fund pays JEFCO a management fee of 3% per annum and there is no carried interest. Each of these funds is registered as a broker/dealer under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers. The funds do not hold cash or securities for customers.

      JEFCO manages the investments of the other funds based on their particular investment strategies, and fund activities are not tied to any particular trading activities of JEFCO. JEFCO receives a management fee for its services from each of these funds.

Competition

      All aspects of the business of the Company are intensely competitive. The Company competes directly with numerous other brokers and dealers, investment banking firms and banks. In addition to competition from firms currently in the securities business, there has been increasing competition from others offering financial services. These developments and others have resulted, and may continue to result, in significant additional competition for the Company.

Regulation

      The securities industry in the United States is subject to extensive regulation under both federal and state laws. The Commission is the federal agency responsible for the administration of federal securities laws. In addition, self-regulatory organizations, principally the NASDR and the securities exchanges, are actively involved in the regulation of broker-dealers. These self-regulatory organizations conduct periodic examinations of member broker-dealers in accordance with rules they have adopted and amended from time to time, subject to approval by the Commission. Securities firms are also subject to regulation by state securities commissions in those states in which they do business. As of December 31, 2001, JEFCO was registered as a broker-dealer in 50 states, the District of Columbia and Puerto Rico, W & D was registered as a broker-dealer in 3 states and Helfant LLC was registered as a broker-dealer in 5 states.

      Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital

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      As registered broker-dealers, JEFCO and Helfant Group, which was formed in January 2002 by the merger of Helfant into W & D, are required by law to belong to the Securities Investor Protection Corporation (“SIPC”). In the event of a member’s insolvency, the SIPC fund provides protection for customer accounts up to $500,000 per customer, with a limitation of $100,000 on claims for cash balances.

      Net Capital Requirements. Every U.S. registered broker-dealer doing business with the public is subject to the Commission’s Uniform Net Capital Rule (the “Rule”), which specifies minimum net capital requirements. Jefferies Group, Inc. is not a registered broker-dealer and is therefore not subject to the Rule; however, its United States broker-dealer subsidiaries are so registered and are subject thereto.

      The Rule provides that a broker-dealer doing business with the public shall not permit its aggregate indebtedness to exceed 15 times its adjusted net capital (the “basic method”) or, alternatively, that it not permit its adjusted net capital to be less than 2% of its aggregate debit balances (primarily receivables from customers and broker-dealers) computed in accordance with such Rule (the “alternative method”). As of December 31, 2001, JEFCO and W & D used the alternative method of calculation and Helfant LLC used the basic method. JEFCO and Helfant Group now use the alternative method of calculation.

      Compliance with applicable net capital rules could limit operations of JEFCO, such as underwriting and trading activities, that require use of significant amounts of capital, and may also restrict loans, advances, dividends and other payments by JEFCO or Helfant Group to the Company. As of December 31, 2001, JEFCO’s, W & D’s and Helfant LLC’s net capital was $138.2 million, $2.2 million and $2.1 million, respectively, which exceeded minimum net capital requirements by $134.3 million, $1.9 million and $1.7 million, respectively. See note 15 of Notes to Consolidated Financial Statements.

Risk Management

      As an international investment bank, risk is an inherent part of the Company’s business. Global markets, by their nature, are prone to uncertainty and subject participants to a variety of risks. The Company has developed policies and procedures to identify, measure and monitor each of the risks involved in its trading, brokerage and corporate finance activities on an international basis. Risk management is considered to be of paramount importance. The Company devotes significant resources across all of its worldwide trading operations to the measurement, management and analysis of risk, including investments in personnel, information technology infrastructure and systems. Since 1997, the Company has retained the services of Ernst & Young LLP (“E&Y”) to perform internal audit procedures on an outsource basis for the benefit of the Company’s management and Audit Committee. In this capacity, E&Y coordinates the scope and results of internal audit procedures with the Company’s management and Audit Committee. The Company’s independent auditors, KPMG LLP, consider the internal audit work performed by E&Y, among other things, in determining the scope of the annual audit of the Company’s consolidated financial statements.

ITEM 2. PROPERTIES.

      The Company maintains sales offices in New York, Austin, Atlanta, Boston, Chicago, Dallas, Hong Kong, Houston, London, Los Angeles, Nashville, New Orleans, Richmond, Paris, San Francisco, Short Hills, Stamford, Tokyo and Zurich. In addition, the Company maintains operations offices in Los Angeles and Jersey City. The Company leases all of its office space which management believes is adequate for its business. For information concerning leasehold improvements and rental expense, see notes 1, 6 and 12 of Notes to Consolidated Financial Statements.

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ITEM 3. LEGAL PROCEEDINGS.

      Many aspects of the Company’s business involve substantial risks of liability. In the normal course of business, the Company and its subsidiaries have been named as defendants or co-defendants in lawsuits involving primarily claims for damages. The Company’s management believes that pending litigation should not have a material adverse effect on the Company.

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

      None.

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PART II

      The Company’s Common Stock began trading on the NYSE on March 15, 1996, under the symbol JEF. Previously, the Common Stock traded in the Nasdaq National Market System under the symbol JEFG. The following table sets forth for the periods indicated the range of high and low prices per share for the Common Stock as reported by the NYSE.

      There were approximately 405 holders of record of the Company’s Common Stock at February 1, 2002.

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

      Dividends per Common Share (declared and paid):

      During 2001, the Company issued an aggregate of 853,854 shares of common stock (838,854 of which were shares of restricted common stock) in connection with a strategic alliance with Quarterdeck Investment Partners, LLC and the acquisition of a 16 2/3% interest therein, the purchase of a portion of the carried interest in FS Private Investment LLC and FS Private Investment III LLC and the purchase of Lawrence Helfant, Inc. These securities were issued in transactions not involving a public offering and were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

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ITEM 6. SELECTED FINANCIAL DATA.

      The selected data presented below as of and for each of the years in the five-year period ended December 31, 2001, are derived from the consolidated financial statements of Jefferies Group, Inc. and its subsidiaries, which financial statements have been audited by KPMG LLP, independent auditors. Such data should be read in connection with the consolidated financial statements including the related notes contained on pages 16 through 43. Certain reclassifications have been made to the prior period amounts to conform to the current period’s presentation.

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      Total assets increased $1,386.9 million from $3,957.9 million at December 31, 2000 to $5,344.7 million at December 31, 2001. The increase is mostly due to a $1,203.9 million increase in receivable from brokers and dealers related to securities borrowed. The increase in securities borrowed is mostly a result of an increase in payable to brokers and dealers (related to securities loaned). The Company lends and borrows securities as part of its business. See “Business — Interest.”

      Total liabilities increased $1,279.7 million from $3,499.4 million at December 31, 2000 to $4,779.1 million at December 31, 2001. The increase is largely due to the before-mentioned increase in payable to brokers and dealers.

      The earnings of the Company are subject to wide fluctuations since many factors over which the Company has little or no control, particularly the overall volume of trading and the volatility and general level of market prices, may significantly affect its operations. The following provides a summary of revenues by source for the past three years.

2001 Compared to 2000

      Revenues, net of interest expense, increased $52.9 million, or 9%, in 2001 as compared to 2000. The increase was due primarily to a $33.4 million, or 37%, increase in corporate finance revenues, a $12.4 million, or 6%, increase in commissions, a $9.6 million, or 4%, increase in principal transactions, an $8.1 million, or 85%, increase in asset management revenues, partially offset by a $11.0 million, or 40%, decrease in net interest income (interest revenues less interest expense). Principal transaction revenues include the Company’s proportionate share of the results of the High Yield Funds, which are described under “Business — Principal Transactions — High Yield.” For 2001, the Company’s share of these funds accounted for $10.2 million of revenues, up from $5.1 million for 2000. Commissions and principal transactions revenue increased mostly due to the High Yield Division. Corporate finance revenues increased due mostly to an increase in advisory fees. Net interest income was down largely due to decreased interest rates and a reduction in the spread on the securities borrowed and loaned matched book business. Asset management revenues include management fees and a “carried” interest from the High Yield Funds (Jefferies Employees Opportunity Fund does not have a 20% “carried” interest), and management fees from other managed funds.

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      Total non-interest expenses increased $45.6 million, or 9%, in 2001 as compared to 2000. Compensation and benefits increased $23.6 million, or 6%, mostly due to an increase in incentive based compensation accruals, as well as increased headcount. Compensation expense is net of amounts reimbursed to the Company by the High Yield Funds. Floor brokerage and clearing fees increased $10.5 million, or 29%, due to increased volume of business executed on the various exchanges, including additional volume related to Helfant, which was acquired on September 28, 2001. Other expense increased $5.7 million or 22%, primarily due to an increase in charitable contributions and legal expense. Occupancy and equipment rental increased $3.7 million, or 19%, mostly due to office expansion. Travel and promotional expenses increased $2.9 million, or 16%, primarily due to higher expenses associated with business travel. Communications remained relatively unchanged from the prior year.

      As a result of the above, earnings before income taxes increased $7.3 million, or 8%. The effective tax rate was approximately 42% in 2001 and 2000. Net earnings were up $4.6 million to $59.5 million, compared to $55.0 million in 2000.

      Basic net earnings per share were $2.42 in 2001 on 24.6 million shares compared to $2.30 in 2000 on 23.9 million shares. Diluted earnings per share were $2.28 in 2001 on 26.1 million shares compared to $2.26 in 2000 on 24.3 million shares.

2000 Compared to 1999

      Revenues, net of interest expense, increased $73.8 million, or 14%, in 2000 as compared to 1999. The increase was due primarily to a $31.9 million, or 14%, increase in principal transactions, a $18.7 million, or 9%, increase in commissions, a $10.0 million, or 12%, increase in corporate finance, a $8.7 million, or 46%, increase in net interest income (interest revenues less interest expense), and a $7.6 million, or 385%, increase in asset management revenues, partially offset by a $3.1 million, or 45%, decrease in other income. Commissions and principal transactions revenue increased mostly due to the Equities and International Divisions. Corporate finance revenues increased due mostly to an increase in advisory fees. Net interest income was up largely due to an increase in the securities borrowed /securities loaned finder business and to increased interest income on proprietary securities positions. Asset management revenues increased due to the High Yield Funds, two of which began trading in January 2000. Other income decreased largely due to a reduction in correspondent income.

      Total non-interest expenses increased $62.5 million, or 14%, in 2000 as compared to 1999. Compensation and benefits increased $46.8 million, or 14%, mostly due to an increase in incentive based compensation accruals, as well as increased headcount. Other expense increased $4.6 million or 22%, primarily due to an increase in legal expense. Occupancy and equipment rental increased $3.2 million, or 20%, mostly due to office expansion. Floor brokerage and clearing fees increased $3.1 million, or 9%, due to increased volume of business executed on the various exchanges. Communications increased $3.0 million, or 7%, due mostly to increased trade volume. Travel and promotional expenses increased $1.8 million, or 11%, primarily due to higher expenses associated with account executive expenses and customer events.

      As a result of the above, earnings before income taxes were up $11.3 million, or 13%. The effective tax rate was approximately 42% in 2000 and 1999.

      Earnings from continuing operations were up $6.1 million to $55.0 million, compared to $48.8 million in 1999.

      Earnings from discontinued operations, net of income taxes, amounted to zero in 2000, due to the cessation of ITGI as a subsidiary of the Company in April 1999.

      Basic earnings from continuing operations per share were $2.30 in 2000 on 23.9 million shares compared to $2.05 in 1999 on 23.8 million shares. Diluted earnings from continuing operations per share were $2.26 in 2000 on 24.3 million shares compared to $2.04 in 1999 on 24.0 million shares.

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      Basic net earnings per share were $2.30 in 2000 on 23.9 million shares compared to $2.60 in 1999 on 23.8 million shares. Diluted earnings per share were $2.26 in 2000 on 24.3 million shares compared to $2.55 in 1999 on 24.0 million shares.

Liquidity and Capital Resources

      A substantial portion of the Company’s assets are liquid, consisting of cash or assets readily convertible into cash. The majority of securities positions (both long and short) in the Company’s trading accounts are readily marketable and actively traded. Receivables from brokers and dealers are primarily current open transactions or securities borrowed transactions, which can be settled or closed out within a few days. Receivables from customers, officers and directors include margin balances and amounts due on uncompleted transactions. Most of the Company’s receivables are secured by marketable securities.

      The Company’s assets are funded by equity capital, senior debt, subordinated debt, securities loaned, customer free credit balances, bank loans and other payables. Bank loans represent secured and unsecured short-term borrowings (usually overnight) which are generally payable on demand. The Company has arrangements with banks for unsecured financing of $220 million. Secured bank loans are collateralized by a combination of customer, non-customer and firm securities. The Company has always been able to obtain necessary short-term borrowings in the past and believes that it will continue to be able to do so in the future. Additionally, the Company has $32.8 million in letters of credit outstanding, which are used in the normal course of business to satisfy various collateral requirements in lieu of depositing cash or securities.

      JEFCO and Helfant Group, which was formed in January 2002 by the merger of Helfant into W & D, are subject to the net capital requirements of the Commission and other regulators, which are designed to measure the general financial soundness and liquidity of broker-dealers. JEFCO, Helfant and W & D have consistently operated in excess of the minimum requirements. As of December 31, 2001, JEFCO’s, W & D’s and Helfant’s net capital was $138.2 million, $2.2 million and $2.1 million, respectively, which exceeded minimum net capital requirements by $134.3 million, $1.9 million and $1.7 million, respectively. As of December 31, 2001 JEFCO and W & D used the alternative method of calculation of net capital and Helfant used the basic method of calculation of net capital. JEFCO and Helfant Group now use the alternative method of calculation.

      During 1999, JEFCO obtained an NASDR-approved $120 million revolving credit facility to be used in connection with underwriting activities. During June 2000, JEFCO terminated the revolving credit facility. There were no borrowings against the revolving credit facility in either 2000 or 1999.

Effects of Changes in Foreign Currency Rates

      The Company maintains a foreign securities business in its foreign offices (Hong Kong, London, Paris, Tokyo and Zurich) as well as in some of its domestic offices. Most of these activities are hedged by related foreign currency liabilities or by forward exchange contracts. However, the Company is still subject to some foreign currency risk. A change in the foreign currency rates could create either a foreign currency transaction gain/loss (recorded in the Company’s Consolidated Statements of Earnings) or a foreign currency translation adjustment to the stockholders’ equity section of the Company’s Consolidated Statements of Financial Condition.

New Accounting Standard on Derivative Instruments and Hedging Activities

      Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” 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.

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      This statement was amended by both SFAS No. 137 and SFAS No. 138 and is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. On January 1, 2001, the Company implemented this statement without a material impact on the Company.

New Accounting Standard on Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

      SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” establishes accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. SFAS No. 140 requires a debtor to (a) reclassify financial assets pledged as collateral and report those assets in its statement of financial condition separately from other assets not so encumbered if the secured party has the right by contract or custom to sell or repledge the collateral and (b) disclose assets pledged as collateral that have not been reclassified and separately reported in the statement of financial condition.

      This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Disclosures about securitizations and collateral accepted need not be reported for periods on or before December 15, 2000, for which financial statements are presented for comparative purposes. On December 31, 2000, the Company implemented this statement without a material impact on the Company.

New Accounting Standards on Business Combinations and Goodwill and Other Intangible Assets

      SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets” changed the accounting for business combinations and goodwill in two significant ways. First, Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is now prohibited. Second, Statement 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of that Statement, which, for companies with calendar year ends, is January 1, 2002. The implementation of these statements did not have a material impact on the Company.

New Accounting Standards on Accounting for Asset Retirement Obligations

      SFAS No. 143, “Accounting for Asset Retirement Obligations”, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The implementation of this statement is not expected to have a material impact on the Company.

New Accounting Standards on Accounting for the Impairment or Disposal of Long-Lived Assets

      SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. This Statement also eliminates the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The provisions of this Statement generally are to be applied prospectively. The implementation of this statement is not expected to have a material impact on the Company.

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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      The Company maintains equity securities inventories in exchange-listed, Nasdaq and non-public securities on both a long and short basis as well as various partnership interests. The fair value of these securities at December 31, 2001, was $240 million in long positions and $76 million in short positions. The potential loss in fair value, using a hypothetical 10% decline in prices, is estimated to be approximately $16 million due to the offset of losses in long positions with gains in short positions. In addition, the Company generally enters into exchange-traded option and index futures contracts to hedge against potential losses in inventory positions, thus reducing this potential loss exposure. This hypothetical 10% decline in prices would not be material to the Company’s financial condition, results of operations or cash flows.

      The Company also invests in money market funds, high-yield, corporate and U.S. Government agency debt and mutual bond funds. Money market funds do not have maturity dates and do not present a material market risk. The fair value of the Company’s high yield, corporate and U.S. Government agency debt at December 31, 2001 was $307 million in long positions and $74 million in short positions. Mutual bond funds also do not have maturity dates; the Company’s position in such funds totaled $6 million at December 31, 2001. The potential loss in fair value of the high-yield, corporate and U.S. Government agency debt and the mutual bond funds, using a hypothetical 5% decline in value, is estimated to be approximately $12 million due to the offset of losses in long positions with gains in short positions. This hypothetical 5% decline in value would not be material to the Company’s financial condition, results of operations or cash flows.

      At December 31, 2001, the Company had $150 million aggregate principal amount of Senior Notes outstanding, with fixed interest rates. The Company has no cash flow exposure regarding these Notes due to the fixed rate of interest.

      Also, at December 31, 2001, the Company had $2.8 million aggregate principal amount of zero coupon Euro-denominated Convertible Loan Notes. The Company has no cash flow exposure regarding these Notes because of the zero coupon.

      The table below provides information about the Company’s derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, exchange rates and stock price movements. For debt obligations and reverse repurchase agreements, the table presents principal cash flows with expected maturity dates. For foreign exchange forward contracts, index futures contracts and option contracts, the table presents notional amounts with expected maturity dates.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO FINANCIAL STATEMENTS

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Independent Auditors’ Report

The Board of Directors and Stockholders

      We have audited the accompanying consolidated statements of financial condition of Jefferies Group, Inc. and subsidiaries (the “Company”) as of December 31, 2001 and 2000 and the related consolidated statements of earnings, changes in stockholders’ equity and comprehensive income (loss) and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

      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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jefferies Group, Inc. and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

	KPMG LLP

Los Angeles, California

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JEFFERIES GROUP, INC.

Consolidated Statements of Financial Condition

See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP, INC.

Consolidated Statements of Earnings