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

UNITED STATES
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 September 26, 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		(I.R.S. Employer
incorporation or organization)		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. 56,276,576 shares as of the close of business October 28, 2003.

Page 1 of 27

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONSOLIDATED STATEMENTS OF EARNINGS
		CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		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 6.Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 26, 2003


			Page

PART I.		FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Statements of Financial Condition - September 26, 2003 (unaudited) and December 31, 2002		3
		Consolidated Statements of Earnings (unaudited) - Three Months and Nine Months Ended September 26, 2003 and September 27, 2002		4
		Consolidated Statement of Changes in Stockholders’ Equity (unaudited) - Nine Months Ended September 26, 2003		5
		Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 26, 2003 and September 27, 2002		6
		Notes to Consolidated Financial Statements (unaudited)		8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
	Item 4.	Controls and Procedures		25
PART II.		OTHER INFORMATION
	Item 1.	Legal Proceedings		25
	Item 2.	Changes in Securities and Use of Proceeds		25
	Item 6.	Exhibits and Reports on Form 8-K		26
	Signature			27

Page 2 of 27

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)


					September 26,			December 31,
					2003			2002

					(unaudited)
ASSETS
Cash and cash equivalents					$	49,728		$	39,948
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations						140,061			288,576
Securities borrowed						8,478,058			5,119,352
Receivable from brokers, dealers and clearing organizations						238,173			102,371
Receivable from customers						131,736			206,329
Securities owned						598,794			452,375
Securities pledged to creditors						312,326			56,348
Investments						369,639			334,361
Premises and equipment						50,511			49,355
Goodwill						57,579			55,472
Other assets						261,290			194,204

					$	10,687,895		$	6,898,691

LIABILITIES AND STOCKHOLDERS’ EQUITY
Bank loans					$	58,000		$	12,000
Securities loaned						8,040,707			4,738,938
Payable to brokers, dealers and clearing organizations						167,620			109,077
Payable to customers						347,078			481,346
Securities sold, not yet purchased						570,907			239,285
Accrued expenses and other liabilities						299,317			236,922

						9,483,629			5,817,568
Long-term convertible debt						—			3,319
Long-term debt						445,411			449,287
Minority interest						42,554			—

						9,971,594			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 62,869,446 shares in 2003 and 58,282,296 shares in 2002					6			3
	Additional paid-in capital					283,288			226,787
	Retained earnings					542,624			496,418
	Less:
		Treasury stock, at cost, 6,444,352 shares in 2003 and 5,378,216 shares in 2002				(106,694	)		(90,817	)
		Accumulated other comprehensive loss:
			Currency translation adjustments			2,846			1,895
			Additional minimum pension liability			(5,769	)		(5,769	)

		Total accumulated other comprehensive loss				(2,923	)		(3,874	)

				Total stockholders’ equity		716,301			628,517

					$	10,687,895		$	6,898,691

See accompanying unaudited notes to consolidated financial statements.

Page 3 of 27

JEFFERIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, except per share and ratio amounts)


			Three Months Ended				Nine Months Ended

			Sept. 26,		Sept. 27,		Sept. 26,		Sept. 27,
			2003		2002		2003		2002

Revenues:
	Commissions		$	59,379	$	72,183	$	185,806	$	199,819
	Principal transactions			86,749		48,260		225,875		182,215
	Investment banking			42,000		29,451		130,919		108,769
	Interest			23,582		25,091		75,782		71,167
	Asset management			4,891		2,390		10,578		8,601
	Other			5,346		1,776		8,495		4,799

		Total revenues		221,947		179,151		637,455		575,370
Interest expense				21,117		20,242		73,545		60,588

Revenues, net of interest expense				200,830		158,909		563,910		514,782

Non-interest expenses:
	Compensation and benefits			115,996		91,878		325,508		298,160
	Floor brokerage and clearing fees			12,323		14,542		35,618		42,132
	Technology and communications			13,998		13,446		42,622		38,839
	Occupancy and equipment rental			7,824		6,711		24,649		19,017
	Business development			6,022		5,445		17,591		17,435
	Other			8,527		7,573		26,223		20,024

		Total non-interest expenses		164,690		139,595		472,211		435,607

Earnings before income taxes and minority interest				36,140		19,314		91,699		79,175
Income taxes				12,906		7,532		33,618		32,106

Earnings before minority interest				23,234		11,782		58,081		47,069
Minority interest in earnings of consolidated subsidiaries, net				2,702		—		4,626		—

		Net earnings	$	20,532	$	11,782	$	53,455	$	47,069

Earnings per share:
	Basic		$	0.41	$	0.24	$	1.06	$	0.95
	Diluted		$	0.35	$	0.21	$	0.92	$	0.86
Weighted average shares:
	Basic			50,642		49,291		50,225		49,356
	Diluted			59,502		55,237		58,269		54,957
Fixed charge coverage ratio				5.7X		3.5X		4.8X		4.7X

See accompanying unaudited notes to consolidated financial statements.

Page 4 of 27

JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
NINE MONTHS ENDED SEPTEMBER 26, 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 (436,306 shares)			—		5,670			—			—			—			5,670
Purchase of treasury stock (149,130 shares)			—		—			—			(2,904	)		—			(2,904	)
Issuance of ESPP / SSPP shares (283,602 shares)			—		5,027			—			—			—			5,027
Issuance of restricted / deferred stock (1,760,854 shares), net of forfeitures, and additional vesting, including tax benefits			—		42,566			—			(12,973	)		—			29,593
Conversion of convertible debt into stock (219,472 shares)			—		3,591			—			—			—			3,591
Employee stock ownership plan amortization and stock purchases, net			—		(350	)		—			—			—			(350	)
Dividends ($.13 per share total)			—		—			(7,249	)		—			—			(7,249	)
Comprehensive income:
	Net earnings		—		—			53,455			—			—			53,455
	Other comprehensive loss, net of tax:
	Translation adjustment		—		—			—			—			951			951

Comprehensive income			—		—			—			—			—			54,406
Two-for-one stock split			3		(3	)		—			—			—			—

Balance, September 26, 2003		$	6	$	283,288		$	542,624		$	(106,694	)	$	(2,923	)	$	716,301

See accompanying unaudited notes to consolidated financial statements.

Page 5 of 27

JEFFERIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)


					Nine Months Ended

					Sept. 26,			Sept. 27,
					2003			2002

Cash flows from operating activities:
	Net earnings				$	53,455		$	47,069

	Adjustments to reconcile net earnings to net cash used in operation activities:
		Depreciation and amortization				10,468			15,165
		(Increase) decrease in cash and securities segregated and on deposit for regulatory purposes				148,515			(99,125	)
		(Increase) decrease in receivables:
			Securities borrowed			(3,358,706	)		(848,760	)
			Brokers, dealers and clearing organizations			(135,802	)		78,647
			Customers			74,593			18,454
		Increase in securities owned				(146,419	)		(126,308	)
		(Increase) decrease in securities pledged to creditors				(255,978	)		56,452
		Increase in investments				(35,278	)		(204,742	)
		(Increase) decrease in other assets				(70,389	)		4,586
		Increase (decrease) in operating payables:
			Securities loaned			3,301,769			687,919
			Brokers, dealers and clearing organizations			58,543			12,358
			Customers			(134,268	)		58,101
		Increase in securities sold, not yet purchased				331,622			58,397
		Increase in accrued expenses and other liabilities				62,395			4,069
		Increase in minority interest				42,554			—

				Total adjustments		(106,381	)		(284,787	)

				Net cash used in operating activities		(52,926	)		(237,718	)

Continued on next page.

See accompanying unaudited notes to consolidated financial statements.

Page 6 of 27

JEFFERIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited)
(Dollars in thousands)


					Nine Months Ended

					Sept. 26,			Sept. 27,
					2003			2002

Cash flows from investing activities:
			Quarterdeck Investment Partners, LLC acquisition			(2,085	)		—
			Lawrence Helfant, Inc. acquisition			(22	)		—
			Purchase of premises and equipment			(11,547	)		(11,170	)

				Net cash flows used in investing activities		(13,654	)		(11,170	)

Cash flows from financing activities:
			Net proceeds from (payments on):
			Bank loans			46,000			(50,000	)
			Retirement of 10% Senior Notes			(1,000	)		—
			Issuance of 7¾% Senior Notes			—			315,315
			Retirement of 8⁷/₈% Senior Notes			—			(49,861	)
			Repurchase of treasury stock			(2,904	)		(44,714	)
			Dividends paid			(7,249	)		(4,017	)
			Exercise of stock options			5,670			2,219
			Issuance of ESPP / SSPP shares			5,027			5,279
			Issuance of common shares			—			370
			Issuance of restricted / deferred stock, net of forfeitures			29,593			31,170

				Net cash provided by financing activities		75,137			205,761

Effect of foreign currency translation on cash						1,223			2,932

				Net increase (decrease) in cash and cash equivalents		9,780			(40,195	)
Cash and cash equivalents – beginning of period						39,948			188,106

Cash and cash equivalents – end of period					$	49,728		$	147,911

Supplemental disclosures of cash flow information:
	Cash paid during the period for:
		Interest			$	78,210		$	61,544

		Income taxes			$	45,284		$	39,460

See accompanying unaudited notes to consolidated financial statements.

Page 7 of 27

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”), Bonds Direct Securities LLC (“Bonds Direct”) and all other entities in which the Company has a controlling financial interest. 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 usual condition for a controlling financial interest in an entity is ownership of a majority of the voting interest. Accordingly, the Company consolidates entities in which it has all, or a majority of the voting interest. Additionally, the Company consolidates variable interest entities if the Company is the “primary beneficiary”. When the Company does not have a controlling financial interest in an entity but exerts significant influence over the entity’s operating and financial policies (generally a voting or economic interest of 20% to 50%), the Company accounts for its investment in accordance with the equity method of accounting as required by Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” If the Company does not have a controlling financial interest in, or exert significant influence over, the entity, the company accounts for the investment at fair value.

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 nine-month period ended September 26, 2003 is not necessarily indicative of the results that may be expected for the year ending 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.

New Accounting Standards on Consolidations

In January 2003, the Financial Accounting Standard Board (“FASB”) issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by companies of variable interest entities as defined in the Interpretation. A company is required to consolidate a variable interest entity if that company is the “primary beneficiary” as defined by the Interpretation. For purposes of determining whether it is the primary beneficiary, a company is required to treat variable interests in the variable interest entity held by its related parties as its own interests. The Company together with its employees (related parties) is the primary beneficiary of Jefferies Employees Opportunity Fund (“JEOF”), one of the three high yield funds that the Company manages. Therefore, JEOF starting in the third quarter of 2003 is consolidated into the Company and is no longer treated as an investment.

The Company also owns significant variable interests in a variable interest entity related to collateralized debt obligations for which the Company is not the primary beneficiary and therefore does not consolidate this entity. In aggregate, this variable interest entity has assets approximating $200 million. The Company’s maximum exposure to loss from this entity is approximately $19 million at September 26, 2003.

Page 8 of 27

New Accounting Standards for Certain Financial Instruments With Characteristics of both Liabilities and Equity

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” FASB No. 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. FASB No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted FASB No. 150 as required in the third quarter of 2003. The adoption of FASB No. 150 did not have a material impact on the consolidated financial statements.

Commissions

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

Principal Transactions

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

Investment Banking

Underwriting revenues are recognized when the underlying transaction is consummated. Revenue from restructuring and advisory engagements is recognized as the services are provided. Success fees from restructuring engagements are recognized when the transaction is consummated. Expenses associated with these transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded.

Interest

Jefferies derives a substantial portion of its interest revenues, and incurs a substantial portion of its interest expenses, in connection with its securities borrowed / securities loaned activity. Jefferies also earns interest on its securities portfolio, on its operating and segregated balances, on its margin lending activity and on certain of its investments, including its investment in short-term bond funds.

Asset Management

The Company receives asset management fees from its management of two High Yield funds domestically and over twenty funds internationally. Investors in the High Yield funds include institutional investors, employees of Jefferies and Jefferies itself.

The following summarizes revenues from asset management for the three-month and nine-month periods ended September 26, 2003 and September 27, 2002 (in thousands of dollars):


		Three Months Ended				Nine Months Ended

		Sept. 26,		Sept. 27,		Sept. 26,		Sept. 27,
		2003		2002		2003		2002

High Yield (HY)
	Performance based	$	1,249	$	798	$	3,331	$	3,833
	Asset based		753		783		2,408		2,398
International			2,686		725		4,411		2,115
Other			203		84		428		255

Total		$	4,891	$	2,390	$	10,578	$	8,601

Page 9 of 27

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

Common Stock

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

Additional Paid in Capital

The following is a summary of additional paid in capital as of September 26, 2003 and December 31, 2002 (in thousands of dollars):


	Sept. 26,			Dec. 31,
	2003			2002

Gross additional paid in capital	$	347,141		$	272,020
Deferred compensation		(63,853	)		(45,233	)

Additional paid in capital	$	283,288		$	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 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 expense, net of forfeitures, of $138,000 related to stock option grants and $1.2 million related to the employee stock purchase plan, the latter was based on a discount from market. The fair value of the 105,208 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 33.3%; risk-free interest rates of 3.0%; and expected lives of 5.6 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.

Page 10 of 27

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

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


	Three Months Ended						Nine Months Ended

	Sept. 26,			Sept. 27,			Sept. 26,			Sept. 27,
	2003			2002			2003			2002

Net earnings, as reported	$	20,532		$	11,782		$	53,455		$	47,069
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		7,648			5,512			21,112			16,314
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(8,857	)		(6,620	)		(24,802	)		(19,649	)

Pro forma net earnings	$	19,323		$	10,674		$	49,765		$	43,734

Earnings per share:
Basic – as reported	$	0.41		$	0.24		$	1.06		$	0.95

Basic – pro forma	$	0.38		$	0.22		$	0.99		$	0.89

Diluted – as reported	$	0.35		$	0.21		$	0.92		$	0.86

Diluted – pro forma	$	0.32		$	0.19		$	0.85		$	0.80

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.

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 September 26, 2003 and December 31, 2002 (in thousands of dollars):


	September 26, 2003				December 31, 2002

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

Corporate equity securities	$	178,577	$	133,934	$	115,895	$	83,769
High-yield securities		249,773		30,104		144,388		2,858
Corporate debt securities		98,088		298,002		176,067		117,072
U.S. Government and agency obligations		67,941		107,020		10,939		32,791
Options		4,415		1,847		5,086		2,795

	$	598,794	$	570,907	$	452,375	$	239,285

Page 11 of 27

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

The following is a summary of the market value of major categories of securities pledged to creditors as of September 26, 2003 and December 31, 2002 (in thousands of dollars):


	September 26, 2003		December 31, 2002

Corporate equity securities	$	10,682	$	35,774
High-yield securities		18,185		2,602
Corporate debt securities		264,647		17,972
U.S. Government and agency obligations		18,812		—

	$	312,326	$	56,348

Investments

Investments consisted of the following as of September 26, 2003 and December 31, 2002 (in thousands of dollars):


	September 26, 2003		December 31, 2002

Short-term bond funds	$	215,089	$	192,660
Debt and equity investments		42,357		7,304
Partnership interests		31,758		36,246
Equity and debt interests in affiliates		80,435		98,151

	$	369,639	$	334,361

Included in equity and debt interests in affiliates as of September 26, 2003 and December 31, 2002 is $50.0 million and $63.1 million, respectively, relating to the Company’s interest in the unconsolidated 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 September 26, 2003 and December 31, 2002 (in thousands of dollars):


	September 26, 2003		December 31, 2002

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

Long-Term Debt
7½% Senior Notes, due 2007, less unamortized discount of $109 (2003)	$	99,891	$	99,870
7¾% Senior Notes, due 2012, less unamortized discount of $6,757 (2003)		345,220		348,117
10% Subordinated Loans, due 2003		—		1,000
10% Subordinated Loans, due 2004		300		300

	$	445,411	$	449,287

During the third quarter of 2003, approximately $3.6 million in zero coupon unsecured Euro denominated convertible loan notes were converted into 219,472 shares of the Company’s common stock. The conversion price for the notes was approximately 14.40 Euros (as of August 4, 2003, this was equivalent to approximately $16.36).

Also, during the third quarter of 2003, $1.0 million in 10% Subordinated Loans to Bonds Direct Securities LLC (“Bonds Direct”) matured.

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

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

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 3.3%. The fair value of the mark to market of the swaps was positive $27.0 million as of September 26, 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 September 26, 2003 and December 31, 2002 (in thousands of dollars):


	September 26, 2003		December 31, 2002

Cash in banks	$	30,195	$	24,151
Short term investments		19,533		15,797

	$	49,728	$	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.

Earnings per Share

The following reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three-month and nine-month periods ended September 26, 2003 and September 27, 2002 (in thousands, except per share amounts):


	Three Months Ended				Nine Months Ended

	Sept. 26,		Sept. 27,		Sept. 26,		Sept. 27,
	2003		2002		2003		2002

Net earnings	$	20,532	$	11,782	$	53,455	$	47,069

Shares for basic and diluted calculations:
Average shares used in basic computation		50,642		49,291		50,225		49,356
Stock options		2,164		1,555		1,771		1,704
Restricted / deferred stock		6,696		4,391		6,273		3,897

Average shares used in diluted computation		59,502		55,237		58,269		54,957

Earnings per share:
Basic	$	0.41	$	0.24	$	1.06	$	0.95

Diluted	$	0.35	$	0.21	$	0.92	$	0.86

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

Other Comprehensive Gain (Loss)

The following summarizes other comprehensive loss and accumulated other comprehensive loss at September 26, 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 June 27, 2003	$	3,505		$	(5,769	)	$	(2,264	)
Change in third quarter of 2003		(659	)		—			(659	)

Ending at September 26, 2003	$	2,846		$	(5,769	)	$	(2,923	)

The following summarizes other comprehensive gain and accumulated other comprehensive loss at September 27, 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 June 28, 2002	$	(116	)	$	(2,301	)	$	(2,417	)
Change in third quarter of 2002		360			—			360

Ending at September 27, 2002	$	244		$	(2,301	)	$	(2,057	)

Comprehensive income for the three-months ended September 26, 2003 and September 27, 2002 was as follows (in thousands of dollars):


	September 26,			September 27,
	2003			2002

Net earnings	$	20,532		$	11,782
Other comprehensive gain (loss)		(659	)		360

Comprehensive income	$	19,873		$	12,142

The following summarizes other comprehensive gain and accumulated other comprehensive loss at September 26, 2003 and for the nine-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 three quarters of 2003		951		—			951

Ending at September 26, 2003	$	2,846	$	(5,769	)	$	(2,923	)

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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 September 27, 2002 and for the nine-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 three quarters of 2002		2,647			—			2,647

Ending at September 27, 2002	$	244		$	(2,301	)	$	(2,057	)

Comprehensive income for the nine-months ended September 26, 2003 and September 27, 2002 was as follows (in thousands of dollars):


	September 26,		September 27,
	2003		2002

Net earnings	$	53,455	$	47,069
Other comprehensive gain		951		2,647

Comprehensive income	$	54,406	$	49,716

Minority Interest

Minority interest represents the minority stockholders’ proportionate share of the equity of JEOF, RTS Fund LLC (“RTS”), Bonds Direct, and Asymmetric Capital Management Limited (“ACM”). At September 26, 2003, Jefferies Group, Inc. owned approximately 28% of JEOF, 59% 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 September 26, 2003, Jefferies’, Helfant’s, and Bonds Direct’s net capital was $237.8 million, $7.8 million, and $5.1 million, respectively, which exceeded minimum net capital requirements by $228.5 million, $7.6 million, and $4.9 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.		3^rd Qtr.

2003	$	.025	$	.025	$	.080
2002	$	.025	$	.025	$	.025

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

each one share outstanding on the record date.

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 was paid 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 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 also has entered into a fair value hedge with no ineffectiveness using interest rate swaps in order to convert $200 million aggregate principal amount of unsecured 7¾% senior notes due March 15, 2012 into floating rates based upon LIBOR. The effective interest rate on the $200 million aggregate principal amount of unsecured 7¾% senior notes, after giving effect to the swaps, is 3.3%. The fair value of the mark to market of the swaps was positive $27.0 million as of September 26, 2003, which was recorded as an increase in the book value of the debt and an increase in other assets.

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 $20.5 million at September 26, 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 September 26, 2003, the Company had outstanding guarantees of $26.0 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. These guarantees on behalf on JIL amounted to over $600 million as of September 26, 2003. In addition, as of September 26, 2003, the Company had commitments to invest up to $61.1 million in various investments.

Credit Risk

In the normal course of business, the Company is involved in the execution, settlement and financing of various

Page 16 of 27

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

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.

Page 17 of 27

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 $3,789.2 million from $6,898.7 million at December 31, 2002 to $10,687.9 million at September 26, 2003. The increase in total assets mostly relates to net increases of $3,358.7 million in securities borrowed and $402.4 million increase in securities owned and securities pledged to creditors. Total liabilities increased $3,701.4 million from $6,270.2 million at December 31, 2002 to $9,971.6 million at September 26, 2003. The increase in total liabilities mostly relates to net increases of $3,301.8 million in securities loaned and $331.6 million in securities sold, not yet purchased. The net increases in securities borrowed and securities loaned are mostly related to the Company’s Matched Book business. The net increases in securities owned and securities pledged to creditors and securities sold, not yet purchased are mostly related to the expansion of Bonds Direct. Bonds Direct’s securities positions are mostly highly rated corporate debt and U.S. Treasury securities.

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

Page 18 of 27

JEFFERIES GROUP, INC. AND SUBSIDIARIES

Revenues by Source

The following provides a breakdown of total revenues by source for the three-month and nine-month periods ended September 26, 2003 and September 27, 2002.


		Three Months Ended

		Sept. 26, 2003					Sept. 27, 2002

				% of						% of
				Total						Total
		Amount		Revenues			Amount			Revenues

				(Dollars in thousands)
Commissions and principal transactions:
	Equities	$	85,142		38	%	$	81,613			45	%
	International		21,951		10			21,602			12
	High Yield		10,843		5			6,502			4
	Convertibles		5,146		2			6,823			4
	Execution		6,210		3			6,380			4
	Bonds Direct		8,066		4			3,723			2
	Other proprietary trading		8,770		4			(6,200	)		(3	)

	Total		146,128		66			120,443			68
Investment banking			42,000		19			29,451			16
Interest			23,582		11			25,091			14
Asset management			4,891		2			2,390			1
Other			5,346		2			1,776			1

	Total revenues	$	221,947		100	%	$	179,151			100	%


		Nine Months Ended

		Sept. 26, 2003					Sept. 27, 2002

				% of					% of
				Total					Total
		Amount		Revenues			Amount		Revenues

				(Dollars in thousands)
Commissions and principal transactions:
	Equities	$	240,182		38	%	$	241,033		42	%
	International		63,800		10			58,150		10
	High Yield		31,112		5			26,591		5
	Convertibles		21,900		3			21,859		4
	Execution		17,245		3			23,468		4
	Bonds Direct		18,642		3			8,223		1
	Other proprietary trading		18,800		3			2,710		0

	Total		411,681		65			382,034		66
Investment banking			130,919		20			108,769		19
Interest			75,782		12			71,167		12
Asset management			10,578		2			8,601		2
Other			8,495		1			4,799		1

	Total revenues	$	637,455		100	%	$	575,370		100	%

Third Quarter 2003 Versus Third Quarter 2002

Revenues, net of interest expense, were up $41.9 million, or 26%, to $200.8 million, compared to $158.9 million for the third quarter of 2002. The increase was due primarily to a $25.7 million, or 21%, increase in trading revenues (commissions and principal transactions), a $12.5 million, or 43%, increase in investment banking, a $3.6 million, or 201%, increase in other revenues, and a $2.5 million, or 105%, increase in asset management, partially offset by a $2.4 million decrease in net interest income (interest revenues less interest expense). Commission revenues decreased mostly due to a reduction in the listed Equities business. Principal transaction revenues increased mostly due to other proprietary, Bonds Direct, High Yield, and Equities. Other proprietary trading, in the third quarter of 2003, mostly consists of gains in

Page 19 of 27

JEFFERIES GROUP, INC. AND SUBSIDIARIES

various investment funds in which the Company has an interest. Other proprietary trading, in the third quarter of 2002, mostly consisted of losses in largely different investments in which the Company had an interest. Principal transaction revenues from Equities increased due to Nasdaq, OTC Bulletin Board, and pink sheet securities. Investment banking revenues increased partly due to various high yield and related financings and advisory fees, including mergers and acquisition and restructuring. During the quarter, the Company completed 11 public and private debt transactions, 12 private and public equity transactions, and the advisory and restructuring business was strong as it worked on nearly 60 different assignments. Other revenues primarily increased due to proceeds from a business interruption insurance settlement. Asset management revenues increased primarily related to the international funds. Net interest income was down largely due to decreased interest income on proprietary securities positions.

Total non-interest expenses were up $25.1 million, or 18%, to $164.7 million, compared to $139.6 million for the third quarter of 2002. Compensation and benefits increased $24.1 million, or 26%, in line with the increase in revenues. The Company’s compensation / net revenues ratio was approximately 58% for both the third 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 $2.2 million, or 15%, primarily due to increased trade volumes internally executed by Helfant and less conversion fees related to American Depositary Receipts. Occupancy and equipment rental increased $1.1 million, or 17%, mostly due to office expansion. Other expenses increased $954,000, or 13%, mostly due to higher business insurance and general consulting costs. 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 $16.8 million, or 87%, to $36.1 million, compared to $19.3 million for the same prior year period. The effective tax rate was approximately 36% for the third quarter of 2003 compared to 39% for the third 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 $8.8 million, or 74%, to $20.5 million, compared to $11.8 million for the same prior year period.

Minority interest (approximately 45% of the earnings of Bonds Direct, 72% of JEOF, 63% of the earnings of RTS, and 50% of the earnings of ACM) was $2.7 million for the third quarter of 2003. The increase in minority interest expense was due to earnings in Bonds Direct, JEOF, RTS, and ACM.

Basic net earnings per share were $0.41 for the third quarter of 2003 on 50,642,000 shares compared to $0.24 in the 2002 period on 49,291,000 shares. Diluted net earnings per share were $0.35 for the third quarter of 2003 on 59,502,000 shares compared to $0.21 in the comparable 2002 period on 55,237,000 shares.

First Nine Months 2003 Versus First Nine Months 2002

Revenues, net of interest expense, were up $49.1 million, or 10%, to $563.9 million, compared to $514.8 million for the first nine months of 2002. The increase was due primarily to a $29.6 million, or 8%, increase in trading revenues (commissions and principal transactions), a $22.2 million, or 20%, increase in investment banking, a $3.7 million, or 77%, increase in other revenues, and a $2.0 million, or 23%, increase in asset management, partially offset by a $8.3 million decrease in net interest income (interest revenues less interest expense). Trading revenues increased mostly due to other proprietary, Bonds Direct, International and High Yield, partially offset by reduced execution revenues. Investment banking revenues increased partly due to various high yield and related financings and advisory fees, including mergers and acquisition and restructuring. During the first nine months of 2003, the Company completed 42 public and private debt transactions, 26 private and public equity transactions, and the advisory and restructuring business was strong as it worked on many different assignments. Other revenues primarily increased due to proceeds from a business interruption insurance settlement. Asset management revenues increased primarily related to the international funds. Net interest income was down largely due to decreased interest income on proprietary securities positions.

Total non-interest expenses were up $36.6 million, or 8%, to $472.2 million, compared to $435.6 million for the first nine months of 2002. Compensation and benefits increased $27.3 million, or 9%, in line with the increase in revenues. The Company’s compensation / net revenues ratio was approximately 58% for both the 2003 and 2002 periods. This was

Page 20 of 27

JEFFERIES GROUP, INC. AND SUBSIDIARIES

possible even with increased headcount, due to the variable nature of the Company’s compensation structure. Floor brokerage and clearing fees decreased $6.5 million, or 15%, primarily due to increased trade volumes internally executed by Helfant. Other expenses increased $6.2 million, or 31%, mostly due to higher legal expenses in conjunction with several cases that were settled during the period and higher business insurance costs. 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 $5.6 million, or 30%, mostly due to office expansion and a one-time $1.9 million expense associated with the sublease of space in the San Francisco office. Technology and communications increased $3.8 million, or 10%, largely due to new services related to program trading, increased headcount and certain one time technology related reversals in the prior year. Business development expenses remained relatively unchanged as compared to the prior year’s period.

Earnings before income taxes and minority interest were up 16% to $91.7 million, compared to $79.2 million for the same prior year period. The effective tax rate was approximately 37% for the first nine months of 2003 compared to 41% for the first nine months 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 $6.4 million, or 14%, to $53.5 million, compared to $47.1 million for the same prior year period.

Minority interest (approximately 41% of the earnings of Bonds Direct, 47% of the earnings of RTS, 72% of JEOF, and 50% of the earnings of ACM) was $4.6 million for the first nine months of 2003. The increase in minority interest expense was due to earnings in Bonds Direct, RTS, JEOF, and ACM.

Basic net earnings per share were $1.06 for the first nine months of 2003 on 50,225,000 shares compared to $0.95 in the 2002 period on 49,356,000 shares. Diluted net earnings per share were $0.92 for the first nine months of 2003 on 58,269,000 shares compared to $0.86 in the comparable 2002 period on 54,957,000 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. Receivable from customers includes 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 $245 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 $20.5 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 September 26, 2003, Jefferies’, Helfant’s, and Bonds Direct’s net capital was $237.8 million, $7.8 million, and $5.1 million, respectively, which exceeded minimum net capital requirements by $228.5 million, $7.6 million, and $4.9 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.

Page 21 of 27

JEFFERIES GROUP, INC. AND SUBSIDIARIES

During the nine months ended September 26, 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. The Company typically repurchases its own common stock in open market transactions in accordance with Rule 10b-18 and on occasion, in transactions directly with stockholders. These repurchases are generally to cover future common stock commitments under the Company’s various stock based compensation and incentive plans. The Company believes that it has sufficient liquidity and capital resources to make these repurchases without any material adverse effect on the Company.

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 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.

Page 22 of 27

JEFFERIES GROUP, INC. AND SUBSIDIARIES

Recent Accounting Developments

New Accounting Standards on Consolidations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by companies of variable interest entities as defined in the Interpretation. A company is required to consolidate a variable interest entity if that company is the “primary beneficiary” as defined by the Interpretation. For purposes of determining whether it is the primary beneficiary, a company is required to treat variable interests in the variable interest entity held by its related parties as its own interests. The Company together with its employees (related parties) is the primary beneficiary of JEOF, one of the three high yield funds that the Company manages. Therefore, JEOF starting in the third quarter of 2003 is consolidated into the Company and is no longer treated as an investment.

New Accounting Standards for Certain Financial Instruments With Characteristics of both Liabilities and Equity.

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 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;

• 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; and

• adverse changes in the market could lead to a reduction in revenues from principal transactions, commissions and asset management fees.

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, equity securities, futures and commodities 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.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

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. Increased competition or an adverse change in the Company’s competitive position could lead to a reduction of business and therefore a reduction of revenues and profits. 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 key 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 ability to conduct its business, including the handling of investment banking transactions and 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

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

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.

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

Except for the net increases in securities owned and securities pledged to creditors and securities sold, not yet purchased which are mostly related to the expansion of Bonds Direct, the Company’s market risk is largely unchanged from December 31, 2002. Bonds Direct’s securities positions are mostly highly rated corporate debt and U.S. Treasury securities.

Item 4. Controls and Procedures

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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the end of the period covered by this quarterly report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. In addition, no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 June 30, 2003, the Company credited to deferral accounts of certain officers and qualified employees of the Company an aggregate of approximately 97,712 deferred shares of common stock and options to purchase 8,451 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.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

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 is incorporated by reference to Exhibit 10.3 of Registrant’s Form 10-Q filed on August 8, 2003.

31.1*		Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer

31.2*		Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer

32*		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.

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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:	November 7, 2003	By:	/s/		Joseph A. Schenk

					Joseph A. Schenk
					Chief Financial Officer

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•		a 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;

•		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; and

•		adverse changes in the market could lead to a reduction in revenues from principal transactions, commissions and asset management fees.