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 June 27, 2003


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.

(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, 12th 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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No o

Indicate the number of shares outstanding of the registrant’s class of common stock, as of the latest practicable date. 55,904,964 shares as of the close of business July 25, 2003 (restated to reflect the effect of the two-for-one stock split to be effected as a stock dividend on August 15, 2003).

Page 1 of 25

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 2. Changes in Securities and Use of Proceeds
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATION
EXHIBIT 10.3
EXHIBIT 99.1

JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
JUNE 27, 2003


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition - June 27, 2003 (unaudited) and December 31, 2002		3
	Consolidated Statements of Earnings (unaudited) - Three Months and Six Months Ended June 27, 2003 and June 28, 2002		4
	Consolidated Statement of Changes in Stockholders’ Equity (unaudited) - Six Months Ended June 27, 2003		5
	Consolidated Statements of Cash Flows (unaudited) - Six Months Ended June 27, 2003 and June 28, 2002		6
	Notes to Consolidated Financial Statements (unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22
Item 4.	Controls and Procedures		22
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		22
Item 2.	Changes in Securities and Use of Proceeds		22
Item 4.	Submission of Matters to a Vote of Security Holders		23
Item 6.	Exhibits and Reports on Form 8-K		23
Signature			24
Certifications			24

Page 2 of 25

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)


					June 27,			December 31,
					2003			2002

					(unaudited)
ASSETS
Cash and cash equivalents					$	26,616		$	39,948
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations						245,791			288,576
Securities borrowed						6,954,632			5,119,352
Receivable from brokers, dealers and clearing organizations						194,610			102,371
Receivable from customers						349,651			206,329
Securities owned						715,669			452,375
Securities pledged to creditors						55,936			56,348
Investments						361,929			334,361
Premises and equipment						49,605			49,355
Goodwill						57,579			55,472
Other assets						255,111			194,204

					$	9,267,129		$	6,898,691

LIABILITIES AND STOCKHOLDERS’ EQUITY
Bank loans					$	164,000		$	12,000
Securities loaned						6,592,269			4,738,938
Payable to brokers, dealers and clearing organizations						201,390			109,077
Payable to customers						437,952			481,346
Securities sold, not yet purchased						450,121			239,285
Accrued expenses and other liabilities						277,314			236,922

						8,123,046			5,817,568
Long-term convertible debt						3,614			3,319
Long-term debt						456,031			449,287
Minority interest						1,123			—

						8,583,814			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 61,429,050 shares in 2003 and 58,282,296 shares in 2002					6			3
	Additional paid-in capital					263,088			226,787
	Retained earnings					526,605			496,418
	Less:
		Treasury stock, at cost, 6,287,464 shares in 2003 and 5,378,216 shares in 2002				(104,120	)		(90,817	)
		Accumulated other comprehensive loss:
			Currency translation adjustments			3,505			1,895
			Additional minimum pension liability			(5,769	)		(5,769	)

		Total accumulated other comprehensive loss				(2,264	)		(3,874	)

				Total stockholders’ equity		683,315			628,517

					$	9,267,129		$	6,898,691

See accompanying unaudited notes to consolidated financial statements.

Page 3 of 25

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


			Three Months Ended				Six Months Ended

			June 27,		June 28,		June 27,		June 28,
			2003		2002		2003		2002

Revenues:
	Commissions		$	69,770	$	63,063	$	126,427	$	127,636
	Principal transactions			80,437		67,288		139,126		133,955
	Investment banking			44,716		41,650		88,919		79,318
	Interest			30,701		24,447		52,200		46,076
	Asset management			3,010		2,724		5,687		6,211
	Other			1,575		1,705		3,149		3,023

		Total revenues		230,209		200,877		415,508		396,219
Interest expense				31,378		22,748		52,428		40,346

Revenues, net of interest expense				198,831		178,129		363,080		355,873

Non-interest expenses:
	Compensation and benefits			114,115		101,715		209,512		206,282
	Floor brokerage and clearing fees			12,483		13,442		23,295		27,590
	Technology and communications			14,153		13,998		28,624		25,393
	Occupancy and equipment rental			9,499		6,148		16,825		12,306
	Business development			5,519		5,686		11,569		11,990
	Other			10,760		7,243		17,696		12,451

		Total non-interest expenses		166,529		148,232		307,521		296,012

Earnings before income taxes and minority interest				32,302		29,897		55,559		59,861
Income taxes				11,640		12,282		20,712		24,574

Earnings before minority interest				20,662		17,615		34,847		35,287
Minority interest in earnings of consolidated subsidiaries, net				1,924		—		1,924		—

		Net earnings	$	18,738	$	17,615	$	32,923	$	35,287

Earnings per share:
	Basic		$	0.37	$	0.36	$	0.66	$	0.71
	Diluted		$	0.32	$	0.32	$	0.57	$	0.64
Weighted average shares:
	Basic			50,204		49,251		50,012		49,389
	Diluted			58,077		54,873		57,591		54,814
Fixed charge coverage ratio				4.8X		4.7X		4.4X		5.4X

See accompanying unaudited notes to consolidated financial statements.

Page 4 of 25

JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
SIX MONTHS ENDED JUNE 27, 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 (224,744 shares)			—		3,062			—			—			—			3,062
Purchase of treasury stock (149,130 shares)			—		—			—			(2,904	)		—			(2,904	)
Issuance of ESPP / SSPP shares (108,272 shares)			—		1,902			—			—			—			1,902
Issuance of restricted / deferred stock (1,053,620 shares), net of forfeitures, and additional vesting, including tax benefits			—		31,690			—			(10,399	)		—			21,291
Employee stock ownership plan amortization and stock purchases, net			—		(350	)		—			—			—			(350	)
Quarterly dividends ($.025 per share per quarter)			—		—			(2,736	)		—			—			(2,736	)
Comprehensive income:
	Net earnings		—		—			32,923			—			—			32,923
	Other comprehensive loss, net of tax:
	Translation adjustment		—		—			—			—			1,610			1,610

Comprehensive income			—		—			—			—			—			34,533
Two-for-one stock split			3		(3	)		—			—			—			—

Balance, June 27, 2003		$	6	$	263,088		$	526,605		$	(104,120	)	$	(2,264	)	$	683,315

See accompanying unaudited notes to consolidated financial statements.

Page 5 of 25

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


					Six Months Ended

					June 27,			June 28,
					2003			2002

Cash flows from operating activities:
	Net earnings				$	32,923		$	35,287

	Adjustments to reconcile net earnings to net cash used in operation activities:
		Depreciation and amortization				6,674			10,552
		(Increase) decrease in cash and securities segregated and on deposit for regulatory purposes				42,785			(22,697	)
		(Increase) decrease in receivables:
			Securities borrowed			(1,835,280	)		649,095
			Brokers, dealers and clearing organizations			(92,239	)		(63,622	)
			Customers			(143,322	)		(58,407	)
		Increase in securities owned				(263,294	)		(173,180	)
		Decrease in securities pledged to creditors				412			16,345
		Increase in investments				(27,568	)		(243,876	)
		Increase in other assets				(54,444	)		(9,804	)
		Increase (decrease) in operating payables:
			Securities loaned			1,853,331			(791,649	)
			Brokers, dealers and clearing organizations			92,313			92,623
			Customers			(43,394	)		30,679
		Increase in securities sold, not yet purchased				210,836			47,673
		Increase (decrease) in accrued expenses and other liabilities				40,392			(12,401	)

				Total adjustments		(212,798	)		(528,669	)

				Net cash used in operating activities		(179,875	)		(493,382	)

Continued on next page.

See accompanying unaudited notes to consolidated financial statements.

Page 6 of 25

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


					Six Months Ended

					June 27,			June 28,
					2003			2002

Cash flows from investing activities:
			Quarterdeck Investment Partners, LLC acquisition			(2,085	)		—
			Lawrence Helfant, Inc. acquisition			(22	)		—
			Purchase of premises and equipment			(6,993	)		(6,921	)

				Net cash flows used in investing activities		(9,100	)		(6,921	)

Cash flows from financing activities:
			Net proceeds from (payments on):
			Bank loans			152,000			71,000
			Issuance of 7 3/4% Senior Notes			—			315,315
			Retirement of 8 7/8% Senior Notes			—			(49,861	)
			Increase in minority interest			1,123			—
			Repurchase of treasury stock			(2,904	)		(37,080	)
			Dividends paid			(2,736	)		(2,673	)
			Exercise of stock options			3,062			2,126
			Issuance of ESPP / SSPP shares			1,902			1,957
			Issuance of common shares			—			370
			Issuance of restricted / deferred stock, net of forfeitures			21,291			23,246

				Net cash provided by financing activities		173,738			324,400

Effect of foreign currency translation on cash						1,905			2,603

				Net decrease in cash and cash equivalents		(13,332	)		(173,300	)
Cash and cash equivalents — beginning of period						39,948			188,106

Cash and cash equivalents — end of period					$	26,616		$	14,806

Supplemental disclosures of cash flow information:
	Cash paid during the period for:
		Interest			$	47,601		$	33,631

		Income taxes			$	33,193		$	30,185

See accompanying unaudited notes to consolidated financial statements.

Page 7 of 25

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 securities, 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 accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America 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 June 27, 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.

Common Stock

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

Additional Paid in Capital

The following is a summary of additional paid in capital as of June 27, 2003 and December 31, 2002 (in thousands of dollars):


	June 27,			Dec. 31,
	2003			2002

Gross additional paid in capital	$	335,198		$	272,020
Deferred compensation		(72,110	)		(45,233	)

Additional paid in capital	$	263,088		$	226,787

Page 8 of 25

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

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, the Company recorded compensation cost of $76,000 related to new stock option grants and $200,000 related to the employee stock purchase plan, which was based on the discount from market. The fair value of the 88,306 options granted in 2003 under the Company’s plans was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0.5%; expected volatility of 33.4%; risk-free interest rates of 3.1%; and expected lives of 5.7 years.

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						Six Months Ended

	June 27,			June 28,			June 27,			June 28,
	2003			2002			2003			2002

Net earnings, as reported	$	18,738		$	17,615		$	32,923		$	35,287
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		6,856			5,332			13,464			10,802
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(8,076	)		(6,648	)		(15,945	)		(13,029	)

Pro forma net earnings	$	17,518		$	16,299		$	30,442		$	33,060

Earnings per share:
Basic – as reported	$	0.37		$	0.36		$	0.66		$	0.71

Basic – pro forma	$	0.35		$	0.33		$	0.61		$	0.67

Diluted – as reported	$	0.32		$	0.32		$	0.57		$	0.64

Diluted – pro forma	$	0.30		$	0.30		$	0.53		$	0.60

Receivable from, and Payable to, Customers

Receivable from, and payable to, customers includes amounts receivable and payable on cash and margin

Page 9 of 25

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

transactions. Securities owned by customers and held as collateral for these receivables are not reflected in the accompanying unaudited consolidated financial statements.

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

The following is a summary of the market value of major categories of securities owned and securities sold, not yet purchased, as of June 27, 2003 and December 31, 2002 (in thousands of dollars):


	June 27, 2003				December 31, 2002

			Securities				Securities
			Sold,				Sold,
	Securities		Not Yet		Securities		Not Yet
	Owned		Purchased		Owned		Purchased

Corporate equity securities	$	201,878	$	101,749	$	115,895	$	83,769
High-yield securities		167,936		16,693		144,388		2,858
Corporate debt securities		277,384		261,021		176,067		117,072
U.S. Government and agency obligations		62,758		68,275		10,939		32,791
Options		5,713		2,383		5,086		2,795

	$	715,669	$	450,121	$	452,375	$	239,285

The following is a summary of the market value of major categories of securities pledged to creditors as of June 27, 2003 and December 31, 2002 (in thousands of dollars):


	June 27, 2003		December 31, 2002

Corporate equity securities	$	22,441	$	35,774
High-yield securities		22,158		2,602
Corporate debt securities		11,337		17,972

	$	55,936	$	56,348

Investments

Investments consisted of the following as of June 27, 2003 and December 31, 2002 (in thousands of dollars):


	June 27, 2003		December 31, 2002

Short-term bond funds	$	214,480	$	192,660
Debt and equity investments		21,064		36,246
Partnership interests		35,467		7,304
Equity and debt interests in affiliates		90,918		98,151

	$	361,929	$	334,361

Included in equity and debt interests in affiliates as of June 27, 2003 and December 31, 2002 is $59.0 million and $63.1 million, respectively, relating to the Company’s interest in the three high yield funds that the Company manages.

Page 10 of 25

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

Long-Term Convertible Debt and Long-Term Debt

The following summarizes long-term convertible debt and long-term debt outstanding as of June 27, 2003 and December 31, 2002 (in thousands of dollars):


	June 27, 2003		December 31, 2002

Long-Term Convertible Debt
Zero coupon, unsecured Euro denominated Convertible Loan Notes	$	3,614	$	3,319

Long-Term Debt
7 1/2% Senior Notes, due 2007, less unamortized discount of $116 (2003)	$	99,884	$	99,870
7 3/4% Senior Notes, due 2012, less unamortized discount of $6,896 (2003)		354,847		348,117
10% Subordinated Loans, due 2003		1,000		1,000
10% Subordinated Loans, due 2004		300		300

	$	456,031	$	449,287

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 7 3/4% 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 7 3/4% senior notes, after giving effect to the swaps, is 3.28%. The fair value of the mark to market of the swaps was positive $36.7 million as of June 27, 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 June 27, 2003 and December 31, 2002 (in thousands of dollars):


	June 27, 2003		December 31, 2002

Cash in banks	$	9,829	$	24,151
Short term investments		16,787		15,797

	$	26,616	$	39,948

Goodwill

Goodwill represents the excess of cost over net assets acquired and is included in other assets. Goodwill is no longer amortized, but is tested for impairment at least annually by comparing the fair value of a reporting unit with its carrying amount, including goodwill. In 2003, goodwill associated with the Quarterdeck acquisition increased approximately $2.1 million, mostly related to additional consideration.

Page 11 of 25

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

Earnings per Share

The following reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three-month and six-month periods ended June 27, 2003 and June 28, 2002 (in thousands, except per share amounts):


	Three Months Ended				Six Months Ended

	June 27,		June 28,		June 27,		June 28,
	2003		2002		2003		2002

Net earnings	$	18,738	$	17,615	$	32,923	$	35,287

Shares for basic and diluted calculations:
Average shares used in basic computation		50,204		49,251		50,012		49,389
Stock options		1,507		1,790		1,518		1,774
Restricted / deferred stock		6,366		3,832		6,061		3,651

Average shares used in diluted computation		58,077		54,873		57,591		54,814

Earnings per share:
Basic	$	0.37	$	0.36	$	0.66	$	0.71

Diluted	$	0.32	$	0.32	$	0.57	$	0.64

Asset Management

The following summarizes revenues from asset management for the three-month and six-month periods ended June 27, 2003 and June 28, 2002 (in thousands of dollars):


		Three Months Ended				Six Months Ended

		June 27,		June 28,		June 27,		June 28,
		2003		2002		2003		2002

High Yield (HY)
	Performance based	$	1,020	$	1,237	$	2,082	$	3,035
	Asset based		936		789		1,715		1,615
Non-HY Employee Funds			84		84		165		171
International			970		614		1,725		1,390

Total		$	3,010	$	2,724	$	5,687	$	6,211

Other Comprehensive Gain (Loss)

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


			Minimum			Accumulated
	Currency		Pension			Other
	Translation		Liability			Comprehensive
	Adjustments		Adjustment			Loss

Beginning at March 28, 2003	$	1,327	$	(5,769	)	$	(4,442	)
Change in second quarter of 2003		2,178		—			2,178

Ending at June 27, 2003	$	3,505	$	(5,769	)	$	(2,264	)

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

The following summarizes other comprehensive gain and accumulated other comprehensive loss at June 28, 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 March 29, 2002	$	(3,356	)	$	(2,301	)	$	(5,657	)
Change in second quarter of 2002		3,240			—			3,240

Ending at June 28, 2002	$	(116	)	$	(2,301	)	$	(2,417	)

Comprehensive income for the three-months ended June 27, 2003 and June 28, 2002 was as follows (in thousands of dollars):


	June 27,		June 28,
	2003		2002

Net earnings	$	18,738	$	17,615
Other comprehensive gain		2,178		3,240

Comprehensive income	$	20,916	$	20,855

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


			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 half of 2003		1,610		—			1,610

Ending at June 27, 2003	$	3,505	$	(5,769	)	$	(2,264	)

The following summarizes other comprehensive gain and accumulated other comprehensive loss at June 28, 2002 and for the six-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 half of 2002		2,287			—			2,287

Ending at June 28, 2002	$	(116	)	$	(2,301	)	$	(2,417	)

Comprehensive income for the six-months ended June 27, 2003 and June 28, 2002 was as follows (in thousands of dollars):


	June 27,		June 28,
	2003		2002

Net earnings	$	32,923	$	35,287
Other comprehensive gain		1,610		2,287

Comprehensive income	$	34,533	$	37,574

Page 13 of 25

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

Minority Interest

Minority interest represents the minority stockholders’ proportionate share of the equity of RTS Fund LLC (“RTS”), Bonds Direct Securities LLC (“Bonds Direct”), and Asymmetric Capital Management Limited (“ACM”). At June 27, 2003, Jefferies Group, Inc. owned approximately 46% of RTS, 55% of Bonds Direct, and 50% of ACM.

Net Capital Requirements

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

Net capital changes from day to day, but as of June 27, 2003, Jefferies’, Helfant’s and Bonds Direct’s net capital was $268.1 million, $7.5 million and $3.0 million, respectively, which exceeded minimum net capital requirements by $260.9 million, $7.3 million and $2.7 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.

Dividends per Common Share (declared and paid):


	1^st Qtr.		2^nd Qtr.

2003	$	.025	$	.025
2002	$	.025	$	.025

The Company also declared an increased quarterly dividend of $0.08 per share on a post-split basis, up from the $0.025 per share (post-split) paid in the prior quarter. The dividend will be payable on September 16, 2003 to stockholders of record as of August 26, 2003.

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

Page 14 of 25

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

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 $20.9 million at June 27, 2003, mostly to satisfy various collateral requirements in lieu of depositing cash or securities. These letters of credit have a current carrying amount of aggregate liability of $0.

As of June 27, 2003, the Company had outstanding guarantees of $33.1 million primarily relating to undrawn bank credit obligations of two associated 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 June 27, 2003, the Company had commitments to invest up to $9.8 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 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 approximately 10% of revenues and approximately 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,” “expect,” “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 $2,368.4 million from $6,898.7 million at December 31, 2002 to $9,267.1 million at June 27, 2003. The increase in total assets mostly relates to net increases of $1,835.3 million in securities borrowed. Total liabilities increased $2,313.6 million from $6,270.2 million at December 31, 2002 to $8,583.8 million at June 27, 2003. The increase in total liabilities mostly relates to net increases of $1,853.3 million in securities loaned. The increase in securities borrowed and securities loaned is mostly related to the Company’s Matched Book business.

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

Revenues by Source

The following provides a breakdown of total revenues by source for the three-month and six-month periods ended June 27, 2003 and June 28, 2002.


		Three Months Ended

		June 27, 2003					June 28, 2002

				% of					% of
				Total					Total
		Amount		Revenues			Amount		Revenues

				(Dollars in thousands)
Commissions and principal transactions:
	Equities	$	85,047		37	%	$	76,257		38	%
	International		25,618		11			19,563		10
	High Yield		9,434		4			9,826		5
	Convertibles		8,570		4			7,573		4
	Execution		5,946		3			8,262		4
	Bonds Direct		6,038		3			2,641		1
	Other proprietary trading		9,554		4			6,229		3

	Total		150,207		66			130,351		65
Investment banking			44,716		19			41,650		21
Interest			30,701		13			24,447		12
Asset management			3,010		1			2,724		1
Other			1,575		1			1,705		1

	Total revenues	$	230,209		100	%	$	200,877		100	%

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JEFFERIES GROUP, INC. AND SUBSIDIARIES


		Six Months Ended

		June 27, 2003					June 28, 2002

				% of					% of
				Total					Total
		Amount		Revenues			Amount		Revenues

				(Dollars in thousands)
Commissions and principal transactions:
	Equities	$	155,040		37	%	$	159,420		40	%
	International		41,849		10			36,548		9
	High Yield		20,269		5			20,089		5
	Convertibles		16,754		4			15,036		4
	Execution		11,035		3			17,088		4
	Bonds Direct		10,576		3			4,500		1
	Other proprietary trading		10,030		2			8,910		2

	Total		265,553		64			261,591		65
Investment banking			88,919		21			79,318		20
Interest			52,200		13			46,076		12
Asset management			5,687		1			6,211		2
Other			3,149		1			3,023		1

	Total revenues	$	415,508		100	%	$	396,219		100	%

Second Quarter 2003 Versus Second Quarter 2002

Revenues, net of interest expense, were up $20.7 million, or 12%, to $198.8 million, compared to $178.1 million for the second quarter of 2002. The increase was due primarily to a $19.9 million, or 15%, increase in trading revenues (commissions and principal transactions), a $3.1 million, or 7%, increase in investment banking, and a $286,000, or 10%, increase in asset management, partially offset by a $2.4 million decrease in net interest income (interest revenues less interest expense). Trading revenues increased mostly due to Equities and International. Investment banking revenues increased partly due to various high yield and related financings and advisory fees, including mergers and acquisition and restructuring. The Company completed 22 public and private debt transactions during the quarter and the advisory and restructuring business was strong as it worked on over 70 different assignments during the quarter. Net interest income was down largely due to decreased interest income on proprietary securities positions. Asset management revenues increased primarily related to the international funds.

Total non-interest expenses were up $18.3 million, or 12%, to $166.5 million, compared to $148.2 million for the second quarter of 2002. Compensation and benefits increased $12.4 million, or 12%, in line with the increase in revenues. The Company’s compensation / net revenues ratio was approximately 57% for both the second quarter of 2003 and 2002. This was possible even with increased headcount, due to the variable nature of the Company’s compensation structure. Floor brokerage and clearing fees decreased $1.0 million, or 7%, primarily due to increased trade volumes internally executed by Helfant. Other expenses increased $3.5 million, or 49%, largely due to higher than normal legal expenses in conjunction with several cases that were settled during the period. With more employees, more transactions, and more businesses, the Company does not expect legal fees to go down. In addition, with increased regulation and new corporate governance initiatives, the securities industry has seen an increase in legal costs, as the business becomes more complicated. Occupancy and equipment rental increased $3.4 million, or 55%, mostly due to a one-time $1.9 million expense associated with the sublease of space in the San Francisco office and office expansion. Technology and communications and business development expenses remained relatively unchanged as compared to the prior year’s quarter.

Earnings before income taxes and minority interest were up $2.4 million, or 8%, to $32.3 million, compared to $29.9 million for the same prior year period. The effective tax rate was approximately 36% for the second quarter of 2003 compared to 41% for the second quarter of 2002. The decrease in the tax rate was partially due to reductions in the effective state tax rates and partially due to the effect of increased minority interests in limited liability subsidiaries, which are not subject to tax. Net earnings were up $1.1 million, or 6%, to $18.7 million, compared to $17.6 million for the same prior year period.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Minority interest (approximately 42% of the earnings of RTS, 35% of the earnings of Bonds Direct, and 50% of the earnings of ACM) was $1.9 million for the second quarter of 2003. The increase in minority interest expense was due to earnings in RTS, Bonds Direct and ACM.

Basic net earnings per share were $0.37 for the second quarter of 2003 on 50,204,000 shares compared to $0.36 in the 2002 period on 49,251,000 shares. Diluted net earnings per share were $0.32 for the second quarter of 2003 on 58,077,000 shares compared to $0.32 in the comparable 2002 period on 54,873,000 shares.

First Half 2003 Versus First Half 2002

Revenues, net of interest expense, were up $7.2 million, or 2%, to $363.1 million, compared to $355.9 million for the first half of 2002. The increase was due primarily to a $9.6 million, or 12%, increase in investment banking, and a $4.0 million, or 2%, increase in trading revenues (commissions and principal transactions), partially offset by a $6.0 million decrease in net interest income (interest revenues less interest expense), and a $524,000, or 8%, decrease in asset management. Trading revenues increased mostly due to Bonds Direct and International. Investment banking revenues increased partly due to various high yield and related financings and advisory fees, including mergers and acquisition and restructuring. The Company completed 31 public and private debt transactions during the period and the advisory and restructuring business was strong as it worked on over 110 different assignments during the period. 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 up $11.5 million, or 4%, to $307.5 million, compared to $296.0 million for the first half of 2002. Compensation and benefits increased $3.2 million, or 2%, in line with the increase in revenues. The Company was able to maintain its compensation / net revenues ratio at approximately 58%. This was possible even with increased headcount, due to the variable nature of the Company’s compensation structure. Floor brokerage and clearing fees decreased $4.3 million, or 16%, primarily due to increased trade volumes internally executed by Helfant. Other expenses increased $5.2 million, or 42%, largely due to higher than normal legal expenses in conjunction with several cases that were settled during the period. With more employees, more transactions, and more businesses, the Company does not expect legal fees to go down. In addition, with increased regulation and new corporate governance initiatives, the securities industry has seen an increase in legal costs, as the business becomes more complicated. Technology and communications increased $3.2 million, or 13%, 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 $4.5 million, or 37%, mostly due to a one-time $1.9 million expense associated with the sublease of space in the San Francisco office and office expansion. Business development expenses remained relatively unchanged as compared to the prior year’s period.

Earnings before income taxes and minority interest were down 7% to $55.6 million, compared to $59.9 million for the same prior year period. The effective tax rate was approximately 37% for the first half of 2003 compared to 41% for the first half of 2002. The decrease in the tax rate was partially due to reductions in the effective state tax rates and partially due to the effect of increased minority interests in limited liability subsidiaries, which are not subject to tax. Net earnings were down $2.4 million, or 7%, to $32.9 million, compared to $35.3 million for the same prior year period.

Minority interest (approximately 42% of the earnings of RTS, 35% of the earnings of Bonds Direct, and 50% of the earnings of ACM) was $1.9 million for the first half of 2003. The increase in minority interest expense was due to earnings in RTS, Bonds Direct and ACM.

Basic net earnings per share were $0.66 for the first half of 2003 on 50,012,000 shares compared to $0.71 in the 2002 period on 49,389,000 shares. Diluted net earnings per share were $0.57 for the first half of 2003 on 57,591,000 shares compared to $0.64 in the comparable 2002 period on 54,814,000 shares.

Page 18 of 25

JEFFERIES GROUP, INC. AND SUBSIDIARIES

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 $255.0 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 $20.9 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, Helfant and Bonds Direct 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, Helfant and Bonds Direct have consistently operated in excess of the minimum requirements. As of June 27, 2003, Jefferies’, Helfant’s and Bonds Direct’s net capital was $268.1 million, $7.5 million and $3.0 million, respectively, which exceeded minimum net capital requirements by $260.9 million, $7.3 million and $2.7 million, respectively. Jefferies, Helfant and Bonds Direct use the alternative method of calculation.

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

During the six months ended June 27, 2003, the Company purchased 149,130 shares of its common stock for $2.9 million, at prices ranging from $16.69 to $24.55 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 re-evaluated, 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

Page 19 of 25

JEFFERIES GROUP, INC. AND SUBSIDIARIES

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 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

Page 20 of 25

JEFFERIES GROUP, INC. AND SUBSIDIARIES

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.

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. Additionally, the Company’s expansion into private client services involves an aspect of the business that has historically had a heightened risk of more litigation than the Company’s institutional business. The risks associated with potential legal liabilities 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.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

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.

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 2. Changes in Securities and Use of Proceeds

On March 31, 2003, the Company credited to deferral accounts of certain officers and qualified employees of the Company an aggregate of approximately 133,375 deferred shares of common stock and options to purchase 28,525 shares of common stock pursuant to deferral of compensation and notional dividend reinvestments under the Company’s Deferred Compensation Plan. These deferrals generally do not constitute the sale of a security or a public offering, and, if any sale of a security were deemed to be involved, the transaction would be exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

Page 22 of 25

JEFFERIES GROUP, INC. AND SUBSIDIARIES

Item 4. Submission of Matters to a Vote of Security Holders

An annual meeting of the Company’s shareholders was held on May 5, 2003. At the meeting, with respect to the matters under consideration, the following votes (share count was not restated to retroactively reflect the effect of the stock dividend declared on July 14, 2003) were cast in the following manner:


	For		Withheld		Non-vote

Election of Directors
W. Patrick Campbell		21,672,503		1,249,671		0
Richard G. Dooley		21,672,503		1,249,671		0
Richard B. Handler		21,960,528		961,646		0
Frank J. Macchiarola		21,814,976		1,107,198		0
John C. Shaw, Jr.		22,461,015		461,159		0


	For		Against		Abstain		Non-vote

Approval of Company’s 2003 Incentive Compensation Plan
Company’s 2003 Incentive Compensation Plan		11,605,967		8,011,791		292,647		3,011,769

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. Deferred Compensation Plan, as Amended and Restated as of January 1, 2003 is incorporated by reference to Exhibit 4.1 of Registrant’s Form S-8 filed on July 12, 2003.
10.2		Jefferies Group, Inc. 2003 Incentive Compensation Plan is incorporated by reference to Appendix 4 of Registrant’s Proxy Statement filed on April 4, 2003.
10.3*		Jefferies Group, Inc. 1999 Incentive Compensation Plan as Amended and Restated as of October 22, 2002.
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.

Exhibits 10.1, 10.2 and 10.3 are management contracts or compensatory plans or arrangements.

(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.

On July 15, 2003, Jefferies Group, Inc. furnished its press release announcing financial results for the quarter ended June 27, 2003 on Form 8-K.

Page 23 of 25

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:	August 8, 2003	By:	/s/ Joseph A. Schenk

			Joseph A. Schenk
			Chief Financial Officer

CERTIFICATION

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.

Page 24 of 25

CERTIFICATION

I, Richard B. Handler, certify that:

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

Page 25 of 25

August 8, 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