JEFFERIES GROUP INC /DE/ - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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


	For the quarterly period ended March 28, 2003


[ ]		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.

(Exact name of registrant as specified in its charter)


Delaware		95-4719745

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


520 Madison Avenue, 12^th Floor, New York, New York			10022

(Address of principal executive offices)			(Zip Code)

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. 27,672,843 shares as of the close of business April 25, 2003.

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TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
		CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
		CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
Exhibit 10.1
Exibit 99.1

JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MARCH 28, 2003


				Page

PART I.		FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Statements of Financial Condition -
			March 28, 2003 (unaudited) and December 31, 2002		3
		Consolidated Statements of Earnings (unaudited) -
			Three Months Ended March 28, 2003		4
		Consolidated Statement of Changes in Stockholders’ Equity (unaudited) -
			Three Months Ended March 28, 2003		5
		Consolidated Statements of Cash Flows (unaudited) -
			Three Months Ended March 28, 2003 and March 29, 2002		6
		Notes to Consolidated Financial Statements (unaudited)			8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk			20
	Item 4.	Controls and Procedures			20
PART II.		OTHER INFORMATION
	Item 1.	Legal Proceedings			20
	Item 6.	Exhibits and Reports on Form 8-K			20
	Signature				21
	Certifications				21

Page 2 of 22

JEFFERIES GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)


					March 28,			December 31,
					2003			2002

					(unaudited)
ASSETS
Cash and cash equivalents					$	36,462		$	39,948
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations						236,112			288,576
Securities borrowed						7,430,528			5,119,352
Receivable from brokers, dealers and clearing organizations						167,583			102,371
Receivable from customers						189,824			206,329
Securities owned						479,519			452,375
Securities pledged to creditors						84,812			56,348
Investments						351,921			334,361
Premises and equipment						50,062			49,355
Goodwill						57,322			55,472
Other assets						249,596			194,204

					$	9,333,741		$	6,898,691

LIABILITIES AND STOCKHOLDERS’ EQUITY
Bank loans					$	42,000		$	12,000
Securities loaned						7,210,478			4,738,938
Payable to brokers, dealers and clearing organizations						101,205			109,077
Payable to customers						356,093			481,346
Securities sold, not yet purchased						271,367			239,285
Accrued expenses and other liabilities						241,143			236,922

						8,222,286			5,817,568
Long-term convertible debt						3,407			3,319
Long-term debt						447,661			449,287

						8,673,354			6,270,174

Stockholders’ equity:
	Preferred stock, $.0001 par value. Authorized 10,000,000 shares; none issued					—			—
	Common stock, $.0001 par value. Authorized 100,000,000 shares; issued 30,334,905 shares in 2003 and 29,641,148 shares in 2002					3			3
	Additional paid-in capital					249,283			226,787
	Retained earnings					509,253			496,418
	Less:
		Treasury stock, at cost, 2,766,999 shares in 2003 and 2,689,108 shares in 2002				(93,710	)		(90,817	)
		Accumulated other comprehensive loss:
			Currency translation adjustments			1,327			1,895
			Additional minimum pension liability			(5,769	)		(5,769	)

		Total accumulated other comprehensive loss				(4,442	)		(3,874	)

				Total stockholders’ equity		660,387			628,517

					$	9,333,741		$	6,898,691

See accompanying unaudited notes to consolidated financial statements.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, except per share and ratio amounts)


			Three Months Ended

			March 28,		March 29,
			2003		2002

Revenues:
	Commissions		$	56,657	$	64,573
	Principal transactions			58,689		66,667
	Investment banking			44,203		37,668
	Interest			21,499		21,629
	Asset management			2,677		3,487
	Other			1,574		1,318

		Total revenues		185,299		195,342
Interest expense				21,050		17,598

Revenues, net of interest expense				164,249		177,744

Non-interest expenses:
	Compensation and benefits			95,397		104,567
	Floor brokerage and clearing fees			10,812		14,148
	Technology and communications			14,471		11,395
	Occupancy and equipment rental			7,326		6,158
	Business development			6,050		6,304
	Other			6,936		5,208

		Total non-interest expenses		140,992		147,780

Earnings before income taxes				23,257		29,964
Income taxes				9,072		12,292

		Net earnings	$	14,185	$	17,672

Earnings per share:
	Basic		$	0.57	$	0.71
	Diluted		$	0.50	$	0.65
Weighted average shares:
	Basic			24,905		24,766
	Diluted			28,562		27,380
Fixed charge coverage ratio				3.9X		6.3X

See accompanying unaudited notes to consolidated financial statements.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
THREE MONTHS ENDED MARCH 28, 2003
(Dollars in thousands, except per share amounts)


													Accumulated			Total
				Additional									Other			Stock-
		Common		Paid-in			Retained			Treasury			Comprehensive			holders’
		Stock		Capital			Earnings			Stock			Loss			Equity

Balance, December 31, 2002		$	3	$	226,787		$	496,418		$	(90,817	)	$	(3,874	)	$	628,517
Exercise of stock options, including tax benefits (20,049 shares)			—		551			—			—			—			551
Purchase of treasury stock (56,092 shares)			—		—			—			(2,097	)		—			(2,097	)
Issuance of ESPP / SSPP shares (54,136 shares)			—		1,902			—			—			—			1,902
Issuance of restricted stock (597,773 shares), net of forfeitures, and additional vesting of restricted stock shares, including tax benefits			—		20,393			—			(796	)		—			19,597
Employee stock ownership plan amortization and stock purchases, net			—		(350	)		—			—			—			(350	)
Quarterly dividends ($.05 per share per quarter)			—		—			(1,350	)		—			—			(1,350	)
Comprehensive income:
	Net earnings		—		—			14,185			—			—			14,185
	Other comprehensive loss, net of tax:
	Translation adjustment		—		—			—			—			(568	)		(568	)

Comprehensive income			—		—			—			—			—			13,617

Balance, March 28, 2003		$	3	$	249,283		$	509,253		$	(93,710	)	$	(4,442	)	$	660,387

See accompanying unaudited notes to consolidated financial statements.

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


					Three Months Ended

					March 28,				March 29,
					2003				2002

Cash flows from operating activities:
	Net earnings					$	14,185		$	17,672

	Adjustments to reconcile net earnings to net cash provided by (used in) operation activities:
		Depreciation and amortization					3,235			5,268
		(Increase) decrease in cash and securities segregated and on deposit for regulatory purposes					52,464			(22,694	)
		(Increase) decrease in receivables:
			Securities borrowed				(2,311,176	)		(64,881	)
			Brokers, dealers and clearing organizations				(65,212	)		(62,417	)
			Customers				16,505			(107,983	)
		Increase in securities owned					(27,144	)		(170,896	)
		Increase in securities pledged to creditors					(28,464	)		(3,671	)
		Increase in investments					(17,560	)		(293,599	)
		Increase in other assets					(57,157	)		(417	)
		Increase (decrease) in operating payables:
			Securities loaned				2,471,540			59,376
			Brokers, dealers and clearing organizations				(7,872	)		(23,266	)
			Customers				(125,253	)		43,236
		Increase in securities sold, not yet purchased					32,082			57,208
		Increase (decrease) in accrued expenses and other liabilities					4,221			(30,572	)

				Total adjustments			(59,791	)		(615,308	)

				Net cash used in operating activities			(45,606	)		(597,636	)

Continued on next page.

See accompanying unaudited notes to consolidated financial statements.

Page 6 of 22

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


					Three Months Ended

					March 28,			March 29,
					2003			2002

Cash flows from investing activities:
			Quarterdeck Investment Partners, LLC acquisition			(1,828	)		—
			Lawrence Helfant, Inc. acquisition			(22	)		—
			Purchase of premises and equipment			(4,153	)		(3,032	)

				Net cash flows used in investing activities		(6,003	)		(3,032	)

Cash flows from financing activities:
			Net proceeds from (payments on):
			Bank loans			30,000			134,000
			Issuance of 8 7/8% Senior Notes			—			315,315
			Repurchase of treasury stock			(2,097	)		(27,725	)
			Dividends paid			(1,350	)		(1,312	)
			Exercise of stock options			551			264
			Issuance of ESPP / SSPP shares			1,902			1,957
			Issuance of restricted stock, net of forfeitures			19,597			14,668

				Net cash provided by financing activities		48,603			437,167

Effect of foreign currency translation on cash						(480	)		(1,018	)

				Net decrease in cash and cash equivalents		(3,486	)		(164,519	)
Cash and cash equivalents - beginning of period						39,948			188,106

Cash and cash equivalents - end of period					$	36,462		$	23,587

Supplemental disclosures of cash flow information:
	Cash paid during the period for:
		Interest			$	13,787		$	16,255

		Income taxes			$	16,471		$	12,456

See accompanying unaudited notes to consolidated financial statements.

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

Consolidated Financial Statements

The accompanying unaudited consolidated financial statements include the accounts of Jefferies Group, Inc. (“Group”) and all its subsidiaries (collectively, “the Company”), including Jefferies & Company, Inc. (“Jefferies”) and Helfant Group, Inc. (“Helfant”). The Company and its subsidiaries operate and are managed as a single business segment, that of a securities broker-dealer, which includes several types of financial services, such as principal and agency transactions in equity, convertible debt and high yield, as well as investment banking, fundamental research and asset management activities. Since the Company’s services are provided using the same distribution channels, support services and facilities and all are provided to meet client needs, the Company does not identify assets or allocate all expenses to any service, or class of service as a separate business segment.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 interim periods ended March 28, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. 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, 2002.

Securities Transactions

All transactions in securities, commission revenues and related expenses are recorded on a trade-date basis.

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

Additional Paid in Capital

The following is a summary of additional paid in capital as of March 28, 2003 and December 31, 2002 (in thousands of dollars):


	March 28,			Dec. 31,
	2003			2002

Gross additional paid in capital	$	328,687		$	272,020
Deferred compensation		(79,404	)		(45,233	)

Additional paid in capital	$	249,283		$	226,787

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 Financial Accounting Standard Board (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 2003, there were no new stock option grants, however, the Company recorded compensation cost related to the employee stock purchase plan which was based on the discount from market.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

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 2003 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.

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):


	Three Months Ended

	March 28,			March 29,
	2003			2002

Net earnings, as reported	$	14,185		$	17,672
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		6,608			5,470
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(7,869	)		(6,381	)

Pro forma net earnings	$	12,924		$	16,761

Earnings per share:
Basic – as reported	$	0.57		$	0.71

Basic – pro forma	$	0.52		$	0.68


Diluted – as reported	$	0.50		$	0.65

Diluted – pro forma	$	0.45		$	0.61

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.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

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 March 28, 2003 (in thousands of dollars):


			Securities
			Sold,
	Securities		Not Yet
	Owned		Purchased

Corporate equity securities	$	113,962	$	89,634
High-yield securities		151,059		5,360
Corporate debt securities		174,483		138,505
U.S. Government and agency obligations		33,824		35,951
Options		6,191		1,917

	$	479,519	$	271,367

The following is a summary of the market value of major categories of securities pledged to creditors as of March 28, 2003 (in thousands of dollars):


Corporate equity securities	$	3,095
High-yield securities		79,183
Corporate debt securities		2,534

	$	84,812

Investments

Investments consisted of the following as of March 28, 2003 (in thousands of dollars):


Short-term bond funds	$	218,094
Debt and equity investments		7,167
Partnership interests		36,003
Equity and debt interests in affiliates		90,657

	$	351,921

Included in equity and debt interests in affiliates as of March 28, 2003 is $56.5 million, relating to the Company’s interest in the three high yield funds that the Company manages.

Long-Term Convertible Debt and Long-Term Debt

The following summarizes long-term convertible debt and long-term debt outstanding as of March 28, 2003 (in thousands of dollars):


Long-Term Convertible Debt
Zero coupon, unsecured Euro denominated Convertible Loan Notes	$	3,407

Long-Term Debt
7½% Senior Notes, due 2007, less unamortized discount of $123	$	99,877
7¾% Senior Notes, due 2012, less unamortized discount of $7,031		346,484
10% Subordinated Loans, due 2003		1,000
10% Subordinated Loans, due 2004		300

	$	447,661

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,

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

after giving effect to the swaps, is 3.42%. The fair value of the mark to market of the swaps was positive $28.5 million as of March 28, 2003, which was recorded as an increase in the book value of the debt and an increase in other assets.

Cash and Cash Equivalents

Cash and cash equivalents include cash in banks and short term investments. Cash equivalents are part of the cash management activities of the Company and generally mature within 90 days. The following is a summary of cash and cash equivalents as of March 28, 2003 (in thousands of dollars):


Cash in banks	$	20,277
Short term investments		16,185

	$	36,462

Goodwill

Goodwill represents the excess of cost over net assets acquired and is included in other assets. Goodwill is no longer amortized, but will be tested for impairment at least annually by comparing the fair value of a reporting unit with its carrying amount, including goodwill. In the first quarter of 2003, goodwill associated with the Quarterdeck acquisition increased approximately $1.8 million, mostly related to additional consideration.

Earnings per Share

The following reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three-month ended March 28, 2003 and March 29, 2002 (in thousands, except per share amounts):


	Three Months Ended

	Mar. 28,		Mar. 29,
	2003		2002

Net earnings	$	14,185	$	17,672

Shares for basic and diluted calculations:
Average shares used in basic computation		24,905		24,766
Stock options		779		879
Restricted / deferred stock		2,878		1,735

Average shares used in diluted computation		28,562		27,380

Earnings per share:
Basic	$	0.57	$	0.71

Diluted	$	0.50	$	0.65

Asset Management

The following summarizes revenues from asset management for the three-month periods ended March 28, 2003 and March 29, 2002 (in thousands of dollars):


		Three Months Ended

		March 28,		March 29,
		2003		2002

High Yield (HY)
	Performance based	$	1,062	$	1,798
	Asset based		779		826
Non-HY Employee Funds			81		86
International			755		777

Total		$	2,677	$	3,487

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Other Comprehensive Gain (Loss)

The following summarizes other comprehensive loss and accumulated other comprehensive loss at March 28, 2003 and for the three-months then ended (in thousands of dollars):


				Minimum			Accumulated
	Currency			Pension			Other
	Translation			Liability			Comprehensive
	Adjustments			Adjustment			Loss

Beginning at December 31, 2002	$	1,895		$	(5,769	)	$	(3,874	)
Change in first quarter of 2003		(568	)		—			(568	)

Ending at March 28, 2003	$	1,327		$	(5,769	)	$	(4,442	)

The following summarizes other comprehensive loss and accumulated other comprehensive loss at March 29, 2002 and for the three-months then ended (in thousands of dollars):


				Minimum			Accumulated
	Currency			Pension			Other
	Translation			Liability			Comprehensive
	Adjustments			Adjustment			Loss

Beginning at December 31, 2001	$	(2,403	)	$	(2,301	)	$	(4,704	)
Change in first quarter of 2002		(953	)		—			(953	)

Ending at March 29, 2002	$	(3,356	)	$	(2,301	)	$	(5,657	)

Comprehensive income for the three-months ended March 28, 2003 and March 29, 2002 was as follows (in thousands of dollars):


	March 28,			March 29,
	2003			2002

Net earnings	$	14,185		$	17,672
Other comprehensive loss		(568	)		(953	)

Comprehensive income	$	13,617		$	16,719

Net Capital Requirements

As registered broker-dealers, Jefferies and Helfant 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 and Helfant 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.

Net capital changes from day to day, but as of March 28, 2003, Jefferies’ and Helfant’s net capital was $269.8 million and $7.3 million, respectively, which exceeded minimum net capital requirements by $264.8 million and $7.0 million, respectively.

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.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Dividends per Common Share (declared and paid):


	1^st Qtr.

2003	$	.05
2002	$	.05

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, 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.

The Company has derivative financial instrument positions in foreign exchange forward contracts, option contracts, and index 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 in which offsetting equity positions are taken. The index futures positions are taken as a hedge against securities positions.

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 $33.7 million at March 28, 2003, to satisfy various collateral requirements in lieu of depositing cash or securities. Substantially all of these letters of credit were issued before December 31, 2002 and the current carrying amount of the aggregate liability is $0.

As of March 28, 2003, the Company had outstanding guarantees of $35.6 million primarily relating to undrawn bank credit obligations of two affiliated investment funds in which the Company has an interest. Also, the Company has guaranteed collateralized obligations of Jefferies International Limited (“JIL”) to various banks which provide clearing and credit services to JIL and to counterparties of JIL in JIL’s securities borrowed business. In addition, as of March 28, 2003, the Company had commitments to invest up to $19.7 million in various investments.

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

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

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. The Company’s business is predominantly in the United States with under 10% of revenues and under 2% of assets attributable to international operations.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

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

There are included or incorporated by reference in this report statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements about the Company’s future and statements that are not historical facts. These forward-looking statements are usually preceded by the words “believes,” “could”, “may,” “will,” or similar expressions, whether in the negative or affirmative. These forward-looking statements represent only the Company’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside of the Company’s control. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Information regarding important factors that could cause actual results to differ, perhaps materially, from those in our forward-looking statements is contained in this report, particularly under the heading “Factors Affecting the Company’s Business” and in documents incorporated by reference in this report. The Company does not assume any obligation to update any forward-looking statement it makes.

Analysis of Financial Condition

Total assets increased $2,435.0 million from $6,898.7 million at December 31, 2002 to $9,333.7 million at March 28, 2003. The increase in total assets mostly relates to net increases of $2,311.2 million in securities borrowed. Total liabilities increased $2,403.2 million from $6,270.2 million at December 31, 2002 to $8,673.4 million at March 28, 2003. The increase in total liabilities mostly relates to net increases of $2,471.5 million in securities loaned. The increase in securities borrowed and securities loaned is mostly related to the Company’s Matched Book business.

Revenues by Source

The following provides a breakdown of total revenues by source for the three months ended March 28, 2003 and March 29, 2002.


		Three Months Ended

		March 28, 2003					March 29, 2002

				% of					% of
				Total					Total
		Amount		Revenues			Amount		Revenues

		(Dollars in thousands)
Commissions and principal transactions:
	Equities	$	69,993		38	%	$	83,163		43	%
	International		16,231		9			16,985		9
	High Yield		10,835		6			10,263		5
	Convertibles		8,184		4			7,463		4
	Execution		5,089		3			8,826		4
	Other proprietary trading		5,014		2			4,540		2

	Total		115,346		62			131,240		67
Investment banking			44,203		24			37,668		19
Interest			21,499		12			21,629		11
Asset management			2,677		1			3,487		2
Other			1,574		1			1,318		1

	Total revenues	$	185,299		100	%	$	195,342		100	%

First Quarter 2003 Versus First Quarter 2002

Revenues, net of interest expense, were down $13.5 million, or 8%, to $164.2 million, compared to $177.7 million for the first quarter of 2002. The decrease was due primarily to a $15.9 million, or 12%, decrease in trading revenues (commissions and principal transactions), a $3.6 million decrease in net interest income (interest revenues less interest

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

expense), and a $810,000,or 23%, decrease in asset management, partially offset by a $6.5 million, or 17%, increase in investment banking. Trading revenues decreased mostly due to Equities and the Helfant execution business. Investment banking revenues increased partly due to over $24 million in various high yield and related financings and more than $18 million in advisory fees, including mergers and acquisition and restructuring. The Company completed nine public and private debt transactions during the quarter and the advisory and restructuring business was strong as it worked on over 40 different assignments during the quarter. Net interest income was down largely due to increased interest expense on long term debt. Asset management revenues decreased primarily as a result of the slowdown in the high yield market and the related decrease in performance fees for funds under management.

Total non-interest expenses were down $6.8 million, or 5%, to $141.0 million, compared to $147.8 million for the first quarter of 2002. Compensation and benefits decreased $9.2 million, or 9%, in line with the decrease in revenues. The Company was able to maintain its compensation/net revenues ratio at approximately 58%. This was possible even with reduced revenues and increased headcount, due to the variable nature of the Company’s compensation structure. Floor brokerage and clearing fees decreased $3.3 million, or 24%, primarily due to reduced trading volumes of Equities and Helfant. Other expense increased $1.7 million, or 33%, largely due to higher legal expenses. Technology and communications increased $3.1 million, or 27%, largely due to new services related to program trading, increased headcount and certain one time technology related reversals in the prior year. Occupancy and equipment rental increased $1.2 million, or 19%, mostly due to office expansion. Business development expense remained relatively unchanged as compared to the prior year’s quarter.

Earnings before income taxes were down 22% to $23.3 million, compared to $30.0 million for the same prior year period. The effective tax rate was approximately 39% for the first quarter of 2003 compared to 41% for the first quarter of 2002. The mix of business (geographically and by product) favorably impacted the effective tax rate for 2003. Net earnings were down $3.5 million, or 20%, to $14.2 million, compared to $17.7 million for the same prior year period.

Basic net earnings per share were $0.57 for the first quarter of 2003 on 24,905,000 shares compared to $0.71 in the 2002 period on 24,766,000 shares. Diluted net earnings per share were $0.50 for the first quarter of 2003 on 28,562,000 shares compared to $0.65 in the comparable 2002 period on 27,380,000 shares.

Liquidity and Capital Resources

A substantial portion of the Company’s assets is 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 temporary (usually overnight) secured and unsecured short-term borrowings, which are generally payable on demand. The Company has arrangements with banks for unsecured financing of $215.0 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 $33.7 million in letters of credit outstanding, which are used in the normal course of business mostly to satisfy various collateral requirements in lieu of depositing cash or securities.

Jefferies and Helfant Group 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. Jefferies and Helfant Group have consistently operated in excess of the minimum requirements. As of March 28, 2003, Jefferies’ and Helfant Group’s net capital was $269.8 million and $7.3 million, respectively, which exceeded minimum net capital requirements by $264.8 million and $7.0 million, respectively. Jefferies and Helfant Group use the alternative method of calculation.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

The Company’s liquidity and capital resources are largely unchanged since December 31, 2002.

During the three months ended March 28, 2003, the Company purchased 56,092 shares of stock for $2.1 million, at prices ranging from $33.39 to $38.01 per share.

Critical Accounting Policies

The unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and related notes. Actual results will inevitably differ from estimates. These differences could be material to the financial statements.

The Company believes its application of accounting policies and the estimates required therein are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, the Company has found its application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

Management believes its critical accounting policies (policies that are both material to the financial condition and results of operations and require management’s most difficult, subjective or complex judgments) are its valuation methodologies applied to investments and to securities positions.

Investments are stated at estimated fair value as determined in good faith by management. Generally, the Company initially values these investments at cost and requires that changes in value be established by meaningful third-party transactions or a significant impairment in the financial condition or operating performance of the issuer, unless meaningful developments occur that otherwise warrant a change in the valuation of an investment. Factors considered in valuing individual investments include, without limitation, available market prices, reported net asset values, type of security, purchase price, purchases of the same or similar securities by other investors, marketability, restrictions on disposition, current financial position and operating results, and other pertinent information.

Furthermore, judgment is used to value certain securities (e.g., private securities, 144A securities, less liquid securities), if quoted market prices are not available. These valuations are made with consideration for various assumptions, including time value, yield curve, volatility factors, liquidity, market prices on comparable securities and other factors. The subjectivity involved in this process makes these valuations inherently less reliable than quoted market prices. The Company believes that its comprehensive risk management policies and procedures serve to monitor the appropriateness of the assumptions used. The use of different assumptions, however, could produce materially different estimates of fair value.

Factors Affecting the Company’s Business

In addition to the factors mentioned in the rest of this report, the Company is also affected by changes in general economic and business conditions, acts of war, terrorism and natural disasters.

Changing Conditions in Financial Markets and the Economy Could Result in Decreased Revenues.

As an investment banking and securities firm, changes in the financial markets or economic conditions, in the United

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

States and elsewhere in the world, could adversely affect the Company in many ways, including the following:

• a further market downturn could lead to a decline in the volume of transactions executed for customers and, therefore, to a decline in the revenues received from commissions and spreads; and

• unfavorable financial or economic conditions would likely reduce the number and size of transactions in underwriting, financial advisory and other services. Investment banking revenues, in the form of financial advisory and underwriting fees, are directly related to the number and size of the transactions in which the Company participates and would therefore be adversely affected by a sustained market downturn.

Proprietary Trading Activities Expose the Company to Risk of Loss.

A significant amount of the Company’s revenues are derived from proprietary trading in which the Company acts as principal. The Company may incur trading losses relating to the purchase, sale or short sale of high yield, international, convertible and equity securities for its own account and from other program or proprietary trading. In any period, the Company may experience losses as a result of price declines, lack of trading volume, and illiquidity. From time to time, the Company may have large position concentrations in a single security, securities of a single issuer or issuers engaged in a specific industry. In general, because the Company’s inventory of securities is marked to market on a daily basis, any downward price movement in those securities will result in a reduction of the Company’s operating profits.

Reduced Spreads in Securities Trading Activities Could Harm Our Business.

Since early 2001, the differences, or spreads, between bid and ask prices for securities traded on the national securities exchanges and in the Nasdaq Stock Market have narrowed, resulting in a reduction in revenues per transaction earned from the Company’s trading operations in which it acts as principal. A further reduction in spreads could have a material adverse impact on the Company’s revenues from principal transactions.

Increased Competition May Adversely Affect the Company’s Revenues and Profitability.

All aspects of the Company’s business 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, including automated trading and other services based on technological innovations. Competition also extends to the hiring and retention of highly skilled employees. A competitor may be successful in hiring away an employee or group of employees, which may result in the Company losing business formerly serviced by such employee or employees. Competition can also raise the Company’s costs of hiring and retaining the key employees it needs to effectively execute its business plan.

The Company’s Business is Substantially Dependent on the Company’s Chief Executive Officer.

The Company’s future success depends to a significant degree on the skills, experience and efforts of Richard B. Handler, the Company’s Chief Executive Officer. The Company does not have an employment agreement with Mr. Handler. The loss of his services could compromise the Company’s ability to effectively operate its business. In addition, in the event that Mr. Handler ceases to actively manage the three funds that invest on a pari passu basis with the Company’s High Yield Division, investors in those funds would have the right to withdraw from the funds. Although the Company has substantial key man life insurance covering Mr. Handler, the proceeds from the policy may not be sufficient to offset any loss in business.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

The Company’s Business Depends on its Ability to Maintain Adequate Levels of Personnel

The Company has recently made substantial increases in the number of its personnel. If a significant number of the Company’s personnel leave, or if the Company’s business volume increases significantly over current volume, the Company could be compelled to hire additional personnel. At that time, there could be a shortage of qualified and, in some cases, licensed personnel whom the Company could hire. This could hinder the Company’s ability to expand or cause a backlog in the Company’s handling of investment banking transactions or the processing of brokerage orders, all of which could harm the Company’s business, financial condition and operating results.

Extensive Regulation of the Company’s Business Limits its Activities and, if it Violates These Regulations, May Subject it to Significant Penalties.

The securities industry in the United States is subject to extensive regulation under both federal and state laws. The Securities and Exchange Commission is the federal agency responsible for the administration of federal securities laws. In addition, self-regulatory organizations, principally NASD and the securities exchanges, are actively involved in the regulation of broker-dealers. Securities firms are also subject to regulation by state securities commissions and state attorneys general in those states in which they do business. 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 structure of securities firms, record-keeping and the conduct of directors, officers and employees. The Commission, self-regulatory organizations, state securities commissions and state attorneys general may conduct administrative proceedings which can result in censure, fine, suspension, expulsion of a broker-dealer, its officers or employees, or revocation of broker-dealer licenses. Additional legislation, changes in rules promulgated by the Commission and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the Company’s mode of operation and its profitability.

Legal Liability May Harm the Company’s Business.

Many aspects of the Company’s business involve substantial risks of liability, and in the normal course of business, the Company has been named as a defendant or co-defendant in lawsuits involving primarily claims for damages. Some of these risks include potential liability under securities or other laws for materially false or misleading statements made in connection with securities and other transactions, potential liability for the advice the Company provides to participants in corporate transactions and disputes over the terms and conditions of complex trading arrangements. These risks often may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. Substantial legal liability against the Company could have a material financial effect or cause significant reputational harm to the Company, which in turn could seriously harm its business prospects.

Operational Risks May Disrupt the Company’s Business, Result in Regulatory Action Against it or Limit its Growth.

The Company faces operational risks arising from mistakes made in the confirmation or settlement of transactions or from transactions not being properly recorded, evaluated or accounted. The Company’s business is highly dependent on its ability to process, on a daily basis, a large number of transactions across numerous and diverse markets, and the transactions it processes have become increasingly complex. Consequently, the Company relies heavily on its financial, accounting and other data processing systems. If any of these systems do not operate properly or are disabled, the Company could suffer financial loss, a disruption of our business, liability to clients, regulatory intervention or reputational damage. The inability of the Company’s systems to accommodate an increasing volume of transactions could also constrain its ability to expand its business.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s market risk is largely unchanged from December 31, 2002.

Item 4. Controls and Procedures

Within 90 days prior to the filing of this quarterly report, the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of Company’s disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.

PART II. OTHER INFORMATION

Item 1. 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 will not have a material adverse effect on the Company.

Item 6. Exhibits and Reports on Form 8-K


(a) Exhibits

3.1		Registrant’s Amended and Restated Certificate of Incorporation is incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on April 30, 1999.

3.2		Registrant’s By-Laws are incorporated by reference to Exhibit 3.2 of Registrant’s Form 10-K filed on March 28, 2003.

10.1*		Jefferies Group, Inc. Stock Option Gain and Stock Award Deferral Program dated effective as of January 21, 2003.

99.1*		Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

Exhibit 10.1 is a management contract or compensatory plan or arrangement.

(b) Reports on 8-K

On April 15, 2003, Jefferies Group, Inc. furnished its press release announcing financial results for the quarter ended March 28, 2003 on Form 8-K.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

SIGNATURE

Pursuant to the requirements 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.


			JEFFERIES GROUP, INC.

			(Registrant)

Date:	May 9, 2003	By:	/s/ Joseph A. Schenk

			Joseph A. Schenk
			Chief Financial Officer

CERTIFICATIONS

I, Joseph A. Schenk, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Jefferies Group, Inc.;

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

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

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

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

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

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

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

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

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

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

I, Richard B. Handler, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Jefferies Group, Inc.;

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May 9, 2003

/s/ Joseph A. Schenk

Joseph A. Schenk

Chief Financial Officer

•		a further market downturn could lead to a decline in the volume of transactions executed for customers and, therefore, to a decline in the revenues received from commissions and spreads; and

•		unfavorable financial or economic conditions would likely reduce the number and size of transactions in underwriting, financial advisory and other services. Investment banking revenues, in the form of financial advisory and underwriting fees, are directly related to the number and size of the transactions in which the Company participates and would therefore be adversely affected by a sustained market downturn.

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

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

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

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

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