10-Q

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 30, 2004
	OR
[  ]	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 [  ]

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. 57,175,302 shares as of the close of business October 29, 2004.

Page 1 of 39

JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2004

	Page
PART I.FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Statements of Financial Condition - September 30, 2004 (unaudited) and December 31, 2003		3
Consolidated Statements of Earnings (unaudited) - Three Months and Nine Months Ended September 30, 2004 and September 26, 2003		4
Consolidated Statement of Changes in Stockholders’ Equity (unaudited) - Nine Months Ended September 30, 2004		5
Consolidated Statements of Cash Flows (unaudited) - Three Months and Nine Months Ended September 30, 2004 and September 26, 2003		6
Notes to Consolidated Financial Statements (unaudited)		8
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3.Quantitative and Qualitative Disclosures About Market Risk		37
Item 4. Controls and Procedures		37
PART II.OTHER INFORMATION
Item 1.Legal Proceedings		37
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 5.Other Information		38
Item 6.Exhibits		38
Signature		39
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Page 2 of 39

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 30,			December 31,
	2004			2003
	(unaudited)
ASSETS
Cash and cash equivalents	$	235,524		$	107,876
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations		416,162			182,641
Short term bond funds		194,780			215,790
Investments		88,006			85,963
Investments in managed funds		184,484			127,186
Securities borrowed		10,417,430			8,368,357
Receivable from brokers, dealers and clearing organizations		511,954			292,603
Receivable from customers		407,144			283,591
Securities owned		547,673			351,149
Securities pledged to creditors		625,628			557,727
Premises and equipment		54,766			54,513
Goodwill		106,537			100,596
Other assets		293,964			264,291
	$	14,084,052		$	10,992,283
LIABILITIES AND STOCKHOLDERS’ EQUITY
Bank loans	$	176,000		$	—
Securities loaned		9,544,552			8,086,583
Payable to brokers, dealers and clearing organizations		545,374			113,349
Payable to customers		701,773			490,697
Securities sold, not yet purchased		1,025,991			673,222
Accrued expenses and other liabilities		297,619			296,993
		12,291,309			9,660,844
Long-term debt		788,905			443,148
Minority interest		35,688			49,920
		13,115,902			10,153,912
Stockholders’ equity:
Preferred stock, $.0001 par value. Authorized 10,000,000 shares; none issued		—			—
Common stock, $.0001 par value. Authorized 500,000,000 shares; issued 66,566,210 shares in 2004 and 63,734,476 shares in 2003		7			6
Additional paid-in capital		481,919			364,774
Retained earnings		648,063			567,632
Less:
Treasury stock, at cost, 9,694,104 shares in 2004 and 7,032,419 shares in 2003		(159,148	)		(91,908	)
Accumulated other comprehensive loss:
Currency translation adjustments		4,773			5,331
Additional minimum pension liability		(7,464	)		(7,464	)
Total accumulated other comprehensive loss		(2,691	)		(2,133	)
Total stockholders’ equity		968,150			838,371
	$	14,084,052		$	10,992,283

See accompanying unaudited notes to consolidated financial statements.

Page 3 of 39

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. 30,		Sept. 26,		Sept. 30,		Sept. 26,
	2004		2003		2004		2003
Revenues:
Commissions	$	62,020	$	59,379	$	200,325	$	185,806
Principal transactions		109,000		81,936		277,441		216,162
Investment banking		72,122		42,000		247,066		130,919
Asset management fees and investment income from managed funds		11,630		9,704		54,258		20,291
Interest		35,948		23,582		85,132		75,782
Other		2,382		5,346		9,144		8,495
Total revenues		293,102		221,947		873,366		637,455
Interest expense		39,316		21,117		93,206		73,545
Revenues, net of interest expense		253,786		200,830		780,160		563,910
Non-interest expenses:
Compensation and benefits		141,434		115,996		436,191		325,508
Floor brokerage and clearing fees		12,770		12,323		39,750		35,618
Technology and communications		16,029		13,998		48,632		42,622
Occupancy and equipment rental		10,250		7,824		29,306		24,649
Business development		7,189		6,022		24,529		17,591
Other		11,164		8,527		30,907		26,223
Total non-interest expenses		198,836		164,690		609,315		472,211
Earnings before income taxes and minority interest		54,950		36,140		170,845		91,699
Income taxes		21,516		12,906		63,980		33,618
Earnings before minority interest		33,434		23,234		106,865		58,081
Minority interest in earnings of consolidated subsidiaries, net		1,159		2,702		10,895		4,626
Net earnings	$	32,275	$	20,532	$	95,970	$	53,455
Earnings per share:
Basic	$	0.56	$	0.38	$	1.68	$	1.01
Diluted	$	0.51	$	0.35	$	1.51	$	0.92
Weighted average shares:
Basic		57,833		53,534		57,233		52,738
Diluted		63,867		59,502		63,616		58,269
Fixed charge coverage ratio		4.8X		5.7X		5.6X		4.8X

See accompanying unaudited notes to consolidated financial statements.

Page 4 of 39

JEFFERIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2004

(Dollars in thousands, except per share amounts)

			Additional Paid-in Capital
			Gross											Accumulated			Total
			Additional											Other			Stock-
	Common		Paid-in		Deferred			Retained			Treasury			Comprehensive			holders’
	Stock		Capital		Compensation			Earnings			Stock			Loss			Equity
Balance, December 31, 2003	$	6	$	443,022	$	(78,248	)	$	567,632		$	(91,908	)	$	(2,133	)	$	838,371
Exercise of stock options, including tax benefits (765,374 shares)		1		15,535		—			—			—			—			15,536
Purchase of treasury stock (1,886,430 shares)		—		—		—			—			(59,382	)		—			(59,382	)
Incentive plan, ESOP, ESPP, SSPP, and Director Plan stock, restricted stock, or restricted stock unit issuances (2,066,360 shares), net of forfeitures and conversions into restricted stock units (775,255 treasury shares)		—		143,191		(41,581	)		—			(7,858	)		—			93,752
Dividends ($.26 per share total)		—		—		—			(15,539	)		—			—			(15,539	)
Comprehensive income:
Net earnings		—		—		—			95,970			—			—			95,970
Other comprehensive loss, net of tax:
Translation adjustment		—		—		—			—			—			(558	)		(558	)
Comprehensive income		—		—		—			—			—			—			95,412
Balance, September 30, 2004	$	7	$	601,748	$	(119,829	)	$	648,063		$	(159,148	)	$	(2,691	)	$	968,150

See accompanying unaudited notes to consolidated financial statements.

Page 5 of 39

JEFFERIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Nine Months Ended
	Sept. 30,			Sept. 26,
	2004			2003
Cash flows from operating activities:
Net earnings	$	95,970		$	53,455
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		10,959			10,468
Accruals related to various benefit plans, stock issuances, net of forfeitures		93,752			34,620
(Increase) decrease in cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations		(233,521	)		148,515
(Increase) decrease in receivables:
Securities borrowed		(2,049,073	)		(3,358,706	)
Brokers, dealers and clearing organizations		(219,351	)		(135,802	)
Customers		(123,553	)		74,593
Increase in securities owned		(196,524	)		(146,419	)
Increase in securities pledged to creditors		(67,901	)		(255,978	)
Increase in other assets		(31,979	)		(70,389	)
Increase (decrease) in operating payables:
Securities loaned		1,457,969			3,301,769
Brokers, dealers and clearing organizations		432,025			58,543
Customers		211,076			(134,268	)
Increase in securities sold, not yet purchased		352,769			331,622
Increase in accrued expenses and other liabilities		7,203			62,395
Increase (decrease) in minority interest		(14,232	)		42,554
Total adjustments		(370,381	)		(36,483	)
Net cash provided by (used in) operating activities		(274,411	)		16,972

Continued on next page.

See accompanying unaudited notes to consolidated financial statements.

Page 6 of 39

JEFFERIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED (Unaudited)

(Dollars in thousands)

	Nine Months Ended
	Sept. 30,			Sept. 26,
	2004			2003
Cash flows from investing activities:
(Increase) decrease in short term bond funds		21,010			(22,429	)
(Increase) decrease in investments		(2,043	)		4,425
Increase in investments in managed funds		(57,298	)		(17,274	)
Net additional acquisition payments		(5,941	)		(2,107	)
Purchase of premises and equipment		(10,658	)		(11,547	)
Net cash used in investing activities		(54,930	)		(48,932	)
Cash flows from financing activities:
Net proceeds from (payments on):
Bank loans		176,000			46,000
Issuance of 5½% Senior Notes		347,809			—
Retirement of 10% Senior Notes		(300	)		(1,000	)
Repurchase of treasury stock		(59,382	)		(2,904	)
Dividends		(15,539	)		(7,249	)
Exercise of stock options, not including tax benefits		8,959			5,670
Net cash provided by financing activities		457,547			40,517
Effect of foreign currency translation on cash		(558	)		1,223
Net increase in cash and cash equivalents		127,648			9,780
Cash and cash equivalents – beginning of period		107,876			39,948
Cash and cash equivalents – end of period	$	235,524		$	49,728
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	92,845		$	78,210
Income taxes	$	59,045		$	45,284

See accompanying unaudited notes to consolidated financial statements.

Page 7 of 39

JEFFERIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Summary of Significant Accounting Policies

The accompanying consolidated financial statements include the accounts of Jefferies Group, Inc. and all its subsidiaries (together, the “Company”), including Jefferies & Company, Inc. (“Jefferies”), Jefferies Execution Services, Inc., formerly known as Helfant Group, Inc. (“Jefferies Execution”), Jefferies International Limited, Bonds Direct Securities LLC (“Bonds Direct”), Jefferies Asset Management, LLC, Jefferies Financial Products, LLC and all other entities in which the Company has a controlling financial interest or is the “primary beneficiary”, including Jefferies Employees Opportunity Fund, LLC (“JEOF”). The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Certain reclassifications have been made to previously reported balances to conform to the current presentation. Operating results for the three-month period or nine-month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the audited consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Change in Quarter End

Beginning with this quarter ended September 30, 2004, the Company changed its quarter end to the last day of the calendar quarter from the last Friday of the quarter. With the expansion of our businesses and products, the Company believes calendar period reporting is more consistent with its operating cycle, as well as the reporting periods of other industry peers. Due to the change, there were four additional trading days, thus this quarter is not necessarily comparable to other quarters. Management believes the impact of the change on the results of operations for the quarter ended September 30, 2004 is not material.

Subsequent Events

On September 22, 2004, the Company announced that it had signed a definitive agreement to acquire the minority interest of Bonds Direct Securities LLC not already owned by the Company. The transaction was consummated in October 2004 with a combination of stock and cash totaling approximately $20.5 million and resulted in approximately $20.5 million in goodwill.

On October 7, 2004, the Company entered into an agreement with Babson Capital Management LLC (“Babson Capital”) and Massachusetts Mutual Life Insurance Company (“MassMutual”) to form Jefferies Babson Finance LLC, a joint venture entity created for the purpose of offering senior loans to middle market and growth companies. Jefferies Babson Finance LLC will be capitalized over time with $250 million in equity commitments, provided equally by Jefferies Group, Inc. and Babson Capital’s parent, MassMutual, and will be leveraged. Loans are expected to be originated primarily through the investment banking efforts of Jefferies & Company, Inc., with Babson Capital providing primary credit analytics and portfolio management services. The Company expects to account for its 50% interest in Jefferies Babson Finance LLC on the equity method of accounting.

Page 8 of 39

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

Principles of Consolidation

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

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

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

Recent Accounting Developments

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

A member of the Securities and Exchange Commission staff recently provided interpretative guidance on what may constitute an important right that affects a company’s consolidation policies with regard to its investment partnerships (American Institute of Certified Public Accountants (“AICPA”) Statement of Position No. 78-9 Accounting for Investments in Real Estate Ventures (“SOP 78-9”)). Among other factors to consider, SOP 78-9 indicates that in the event that limited partners have “kick-out” rights there is a presumption that the general partner or asset manager does not control the investment vehicle and such vehicle should not be consolidated. SOP 78-9 defines “kick-out” rights as the right to replace the general partner or manager. As a result of this change, the Company began to account for its interests in Jefferies RTS Fund (“RTS”) on the equity method of accounting beginning in the second quarter of 2004.

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.

Page 9 of 39

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

Principal Transactions

Securities and other inventory positions owned and securities and other inventory positions sold but not yet purchased (both of which are recorded on a trade-date basis) are valued at market or fair value, as appropriate, with unrealized gains and losses reflected in principal transactions in the Consolidated Statement of Earnings. The Company follows the AICPA Audit and Accounting Guide, “Brokers and Dealers in Securities,” (the “Guide”) when determining market or fair value for financial instruments. Market value generally is determined based on listed prices or broker quotes. In certain instances, such price quotations may be deemed unreliable when the instruments are thinly traded or when we hold a substantial block of a particular security and the listed price is not deemed to be readily realizable. In accordance with the Guide, in these instances the Company determines fair value based on management’s best estimate, giving appropriate consideration to reported prices and the extent of public trading in similar securities, the discount from the listed price associated with the cost at the date of acquisition, and the size of the position held in relation to the liquidity in the market, among other factors. When the size of our holding of a listed security is likely to impair our ability to realize the quoted market price, the Company records the position at a discount to the quoted price reflecting our best estimate of fair value. In such instances, the Company generally determines fair value with reference to the discount associated with the acquisition price of the security. When listed prices or broker quotes are not available, the Company determines fair value based on pricing models or other valuation techniques, including the use of implied pricing from similar instruments. The Company typically uses pricing models to derive fair value based on the net present value of estimated future cash flows including adjustments, when appropriate, for liquidity, credit and/or other factors.

Investment Banking

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

Asset Management Fees and Investment Income From Managed Funds

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

	Sept. 30,		Sept. 26,
	2004		2003
Fixed Income (1)	$	450	$	415
Equities (2)		435		21
International Funds (3)		1,843		801
Real Assets (4)		164		—
Total	$	2,892	$	1,237

(1) The Company’s managed or co-managed assets under management in two Jefferies Partners Opportunity funds, Jefferies Employees Opportunity Fund, LLC and the Jackson Creek CDO, but does not include third-party managed funds.

(2) The Jefferies RTS Fund and Jefferies Paragon Fund.

(3) Asymmetric Convertible Fund and other managed international convertible bond assets.

(4) The Jefferies Real Asset Fund.

Page 10 of 39

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

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

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

The following summarizes revenues from asset management fees and investment income in managed funds for the three-month and nine-month periods ended September 30, 2004 and September 26, 2003 (in thousands of dollars):

	Three Months Ended				Nine Months Ended
	Sept. 30,		Sept. 26,		Sept. 30,		Sept. 26,
	2004		2003		2004		2003
Asset management fees:
Fixed Income	$	3,162	$	2,182	$	8,497	$	5,978
International Funds		2,278		2,686		9,409		4,411
Equities		1,592		23		2,761		188
Real Assets		958		—		2,054		—
		7,990		4,891		22,721		10,577
Asset management fees – minority interest portion		—		—		3,015		—
		7,990		4,891		25,736		10,577
Investment income from managed funds		2,246		2,772		19,736		6,144
Investment income from managed funds – minority interest portion		1,394		2,041		8,786		3,570
		3,640		4,813		28,522		9,714
Total	$	11,630	$	9,704	$	54,258	$	20,291

Page 11 of 39

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

The following tables detail the Company’s average investment in managed funds, investment income from managed funds, investment income from managed funds – minority interest portion and net investment income from managed funds for the quarter and nine months ended September 30, 2004 (in millions of dollars):

Quarter Ended September 30, 2004

						Investment		Net
			Investment			Income from		Investment
			Income from			Managed Funds –		Income from
	Average		Managed			Minority Interest		Managed
	Investment		Funds			Portion		Funds
Fixed Income (1)	$	107.7	$	5.3		$	1.4	$	3.9
Equities (2)		52.9		(0.9	)		—		(0.9	)
International Funds (3)		11.8		(0.8	)		—		(0.8	)
Real Assets (4)		10.1		0.0			—		0.0
Total	$	182.5	$	3.6		$	1.4	$	2.2

Nine Months Ended September 30, 2004

						Investment		Net
			Investment			Income from		Investment
			Income from			Managed Funds -		Income from
	Average		Managed			Minority Interest		Managed
	Investment		Funds			Portion		Funds
Fixed Income (1)	$	102.6	$	18.9		$	4.2	$	14.7
Equities (2)		32.6		9.8			4.6		5.2
International Funds (3)		12.2		(0.5	)		—		(0.5	)
Real Assets (4)		9.0		0.3			—		0.3
Total	$	156.4	$	28.5		$	8.8	$	19.7

(1) The Company’s managed or co-managed assets under management in two Jefferies Partners Opportunity funds, Jefferies Employees Opportunity Fund, LLC, the Jackson Creek CDO and third-party managed funds.

(2) The Jefferies RTS Fund and Jefferies Paragon Fund.

(3) Asymmetric Convertible Fund and other managed international convertible bond assets.

(4) The Jefferies Real Asset Fund.

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 lending activity. Jefferies also earns interest on its securities portfolio, on its operating and segregated balances, on its margin lending activity and on certain of its investments, including its investment in short term bond funds. Interest expense also includes interest payable on the Company’s long-term debt obligations.

Page 12 of 39

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

Cash and Financial Instruments – Cash Management Activities

The following are financial instruments that are readily convertible into cash as of September 30, 2004 and December 31, 2003 (in thousands of dollars):

	September 30, 2004		December 31, 2003
Cash and cash equivalents:
Cash in banks	$	61,996	$	41,398
Money market investments		173,528		66,478
Total cash and cash equivalents		235,524		107,876
Auction rate preferreds (a)		50,365		—
Mortgage-backed securities (a)		29,690		—
Asset-backed securities (a)		14,264		—
Short-term bond funds		194,780		215,790
Cash and securities segregated		416,162		182,641
	$	940,785	$	506,307

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

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

The following is a summary of the market value of major categories of securities owned and securities sold, not yet purchased, as of September 30, 2004 and December 31, 2003 (in thousands of dollars):

	September 30, 2004				December 31, 2003
			Securities				Securities
			Sold,				Sold,
	Securities		Not Yet		Securities		Not Yet
	Owned		Purchased		Owned		Purchased
Corporate equity securities	$	138,349	$	337,621	$	115,597	$	167,950
High-yield securities		86,642		14,059		127,874		34,200
Corporate debt securities		80,035		515,330		81,231		351,888
U.S. Government and agency obligations		129,109		144,441		11,900		114,696
Auction rate preferreds		50,365		—		—		—
Mortgage-backed securities.		29,690		—		—		—
Asset-backed securities		14,264		—		—		—
Options		19,219		14,540		14,547		4,488
	$	547,673	$	1,025,991	$	351,149	$	673,222

The following is a summary of the market value of major categories of securities pledged to creditors as of September 30, 2004 and December 31, 2003 (in thousands of dollars):

	September 30, 2004		December 31, 2003
Corporate equity securities	$	69,574	$	37,776
High-yield securities		40,701		77,527
Corporate debt securities		455,424		353,100
U.S. Government and agency obligations		59,929		89,324
	$	625,628	$	557,727

Page 13 of 39

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

Receivable from, and Payable to, Customers

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

Investments in Managed Funds

Investments in managed funds includes the Company’s investments in funds managed by the Company and the Company’s investments in third-party managed funds in which the Company is entitled to a portion of the management and/or performance fees.

Goodwill

Goodwill represents the excess of cost over net assets acquired. Goodwill is no longer amortized, but is tested for impairment at least annually as of September 30 by comparing the fair value of a reporting unit with its carrying amount, including goodwill.

Income Taxes

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

Bank Loans

Bank loans represent short-term borrowings that are payable on demand and generally bear interest at the brokers’ call loan rate. At September 30, 2004, there were $176,000,000 in unsecured bank loans outstanding with an average interest rate of 2.5%.

Long-Term Debt

The following summarizes long-term convertible debt and long-term debt outstanding as of September 30, 2004 and December 31, 2003 (in thousands of dollars):

	September 30, 2004		December 31, 2003
7½% Senior Notes, due 2007, less unamortized discount of $81 (2004)	$	99,919	$	99,898
7¾% Senior Notes, due 2012, less unamortized discount of $6,187 (2004)		341,075		342,950
5½% Senior Notes, due 2016, less unamortized discount of $2,089 (2004)		347,911		—
10% Subordinated Loans, due 2004		—		300
	$	788,905	$	443,148

In March 2004, the Company issued $350 million aggregate principal amount of unsecured 51/2% senior notes due March 15, 2016, with a yield of 5.6%.

Page 14 of 39

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

The Company has entered into a fair value hedge with no ineffectiveness using interest rate swaps in order to convert $200 million aggregate principal amount of unsecured 7¾% senior notes due March 15, 2012 into floating rates based upon LIBOR. The effective interest rate on the $200 million aggregate principal amount of unsecured 7¾% senior notes, after giving effect to the swaps, is 4.0%. The fair value of the mark to market of the swaps was positive $22.3 million as of September 30, 2004, which was recorded as an increase in the book value of the debt and an increase in other assets.

Pension

The following summarizes the net periodic pension cost for the three-month and nine-month periods ended September 30, 2004 and September 26, 2003 (in thousands of dollars):

	Three Months Ended						Nine Months Ended
	Sept. 30,			Sept. 26,			Sept. 30,			Sept. 26,
	2004			2003			2004			2003
Net pension cost included the following components:
Service cost — benefits earned during the period	$	631		$	330		$	1,354		$	991
Interest cost on projected benefit obligation		677			508			1,780			1,524
Expected return on plan assets		(561	)		(423	)		(1,285	)		(1,270	)
Amortization of prior service cost		(3	)		(3	)		(9	)		(9	)
Amortization of net loss (gain)		365			113			827			338
Net periodic pension cost	$	1,109		$	525		$	2,667		$	1,574

The Company contributed $4 million to its pension plan during the first nine months of 2004 and does not anticipate contributing any more during the remainder of 2004.

Minority Interest

Minority interest represents the minority equity holders’ proportionate share of the equity of JEOF and Bonds Direct. At September 30, 2004, Jefferies Group, Inc. had effective control and owned approximately 29% and 55% of JEOF and Bonds Direct, respectively. As previously reported, both Jefferies RTS and ACM were de-consolidated in the second quarter and are now accounted for under the equity method of accounting.

On September 22, 2004, the Company announced that it had signed a definitive agreement to acquire the minority interest of Bonds Direct Securities LLC not already owned by the Company. The transaction was consummated in October 2004.

Page 15 of 39

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 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 are expensed by the Company over the option vesting period, based on the estimated fair value of the award on the date of grant. In the first nine months of 2004, the Company recorded a net compensation expense reversal of $58,000 because stock option amortization expense of $7,000 was exceeded by $65,000 in expense reversals related to stock option forfeitures. Additionally, the Company recorded compensation expense of $5.4 million related to the Company’s Employee Stock Ownership Plan and $1.4 million related to the Company’s Employee Stock Purchase Plan, the latter was based on a discount from market. There were stock option grants totaling 9,233 shares in the first nine months of 2004. These grants were made through the Company’s Deferred Compensation Plan. Also, there were grants, net of forfeitures, of restricted stock and restricted stock units, some of which relate to 2003 employee compensation, totaling 4,016,354 shares and $119.9 million in the first nine months of 2004.

In 2002 and prior years, the Company measured the cost of its stock-based compensation plans using the intrinsic value approach under Accounting Principles Board (“APB”) Opinion No. 25 rather than applying the fair value method provisions of FASB No. 123. Accordingly, the Company has not recognized compensation expense related to stock options granted prior to January 1, 2003 and shares issued to participants in the Company’s employee stock purchase plan prior to January 1, 2003. Therefore, the cost of $49.1 million related to stock-based compensation included in the determination of net income for 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of FASB No. 123.

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. 30,			Sept. 26,			Sept. 30,			Sept. 26,
	2004			2003			2004			2003
Net earnings, as reported	$	32,275		$	20,532		$	95,970		$	53,455
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects		8,842			7,648			28,589			21,112
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(9,440	)		(8,857	)		(30,527	)		(24,802	)
Pro forma net earnings	$	31,677		$	19,323		$	94,032		$	49,765
Earnings per share:
Basic — as reported	$	0.56		$	0.38		$	1.68		$	1.01
Basic — pro forma	$	0.55		$	0.36		$	1.64		$	0.94
Diluted — as reported	$	0.51		$	0.35		$	1.51		$	0.92
Diluted — pro forma	$	0.50		$	0.32		$	1.48		$	0.85

Page 16 of 39

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 nine-month periods ended September 30, 2004 and September 26, 2003 (in thousands, except per share amounts):

	Three Months Ended				Nine Months Ended
	Sept. 30,		Sept. 26,		Sept. 30,		Sept. 26,
	2004		2003		2004		2003
Earnings	$	32,275	$	20,532	$	95,970	$	53,455
Shares:
Average shares used in basic computation		57,833		53,534		57,233		52,738
Stock options		1,730		2,164		1,965		1,771
Unvested restricted stock and restricted stock units		4,304		3,804		4,418		3,760
Average shares used in diluted computation		63,867		59,502		63,616		58,269
Earnings per share:
Basic	$	0.56	$	0.38	$	1.68	$	1.01
Diluted	$	0.51	$	0.35	$	1.51	$	0.92

Other Comprehensive Gain (Loss)

The following summarizes other comprehensive loss and accumulated other comprehensive loss at September 30, 2004 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 25, 2004	$	5,987		$	(7,464	)	$	(1,477	)
Change in third quarter of 2004		(1,214	)		—			(1,214	)
Ending at September 30, 2004	$	4,773		$	(7,464	)	$	(2,691	)

The following summarizes other comprehensive loss and accumulated other comprehensive loss at September 30, 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	)

Page 17 of 39

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

Comprehensive income for the three months ended September 30, 2004 and September 26, 2003 was as follows (in thousands of dollars):

	September 30,			September 26,
	2004			2003
Net earnings	$	32,275		$	20,532
Other comprehensive loss		(1,214	)		(659	)
Comprehensive income	$	31,061		$	19,873

The following summarizes other comprehensive loss and accumulated other comprehensive loss at September 30, 2004 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, 2003	$	5,331		$	(7,464	)	$	(2,133	)
Change in first nine months of 2004		(558	)		—			(558	)
Ending at September 30, 2004	$	4,773		$	(7,464	)	$	(2,691	)

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 nine months of 2003		951		—			951
Ending at September 26, 2003	$	2,846	$	(5,769	)	$	(2,923	)

Comprehensive income for the nine months ended September 30, 2004 and September 26, 2003 was as follows (in thousands of dollars):

	September 30,			September 26,
	2004			2003
Net earnings	$	95,970		$	53,455
Other comprehensive gain (loss)		(558	)		951
Comprehensive income	$	95,412		$	54,406

Net Capital Requirements

As registered broker-dealers, Jefferies, Jefferies Execution, 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, Jefferies Execution, 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.

Page 18 of 39

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

As of September 30, 2004, Jefferies’, Jefferies Execution’s and Bonds Direct’s net capital and excess net capital were as follows (in thousands of dollars):

	Net Capital		Excess Net Capital
Jefferies	$	267,178	$	246,527
Jefferies Execution		10,232		9,982
Bonds Direct		4,143		3,893

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):

	1st Qtr.		2nd Qtr.		3rd Qtr.
2004	$	.080	$	.080	$	.100
2003	$	.025	$	.025	$	.080

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

Jefferies Financial Products LLC.

Jefferies Financial Products LLC (“JFP”), a wholly-owned subsidiary of the Company, was formed as a limited liability company in November 2003. JFP is a market maker and trader in commodities futures and options. In addition to its market making capacity, JFP offers customers exposure to over-the-counter commodity indices and other commodity baskets in the form of fixed-for-floating swaps (“swaps”), where the return is based on a specific commodity or basket of commodities (e.g., Jefferies Commodity Performance Index (“JCPI”)). The primary end users in this market are creditworthy institutional investors, such as pension funds, mutual funds, foundations, endowments, and insurance companies. These investors generally seek exposure to commodities in order to diversify their existing stock and bond portfolios. Generally, JFP will enter into swaps whereby JFP receives a stream of fixed cash flows against paying the return of a given commodity or index plus a spread or fee (“fee”). The fee is meant to compensate JFP for the costs of replicating the commodity or index exposure in the underlying exchange traded futures markets. The floating return can be either the total return on the index (inclusive of implied collateral yield), or the excess return. JFP also enters into swap, forward and option transactions on foreign exchange and individual commodities.

Generally, the swap contract tenors range from 1 month to 2 years and in some transactions, both parties may settle the changes in the mark-to-market value of the transaction on a monthly basis. Where appropriate, JFP utilizes various credit enhancements, including guarantees, collateral and margin agreements to mitigate the credit exposure relating to these swaps. JFP establishes credit limits based on, among other things, the creditworthiness of the counterparties, the transaction’s size and tenor, and estimated potential exposure. In addition, swap transactions are generally documented under ISDA Master Agreements. JFP believes that such agreements provide for legally enforceable set-off and close-out netting of exposures to specific counterparties. Under such agreements, in connection with an early termination of a transaction, JFP is permitted to set-off its receivables from a counterparty against its payables to the same counterparty arising out of all included transactions. As a result, the fair value represents the net sum of estimated positive fair values after the application of such netting, agreements and collateral held. After consideration of these credit enhancements, JFP has determined that the fair value of its obligations under swaps approximated $12.7 million at September 30, 2004 and $0 at December 31, 2003. The fair value represents the maximum potential

Page 19 of 39

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

loss to JFP. At September 30, 2004, all swaps and exchange-traded commodities and all foreign exchange futures and options are scheduled to mature within one year.

In July 2004, JFP entered into a credit intermediation facility with an AA-rated European bank (the “Bank”). This facility will allow JFP customers that require a counterparty with a high credit rating for commodity index transactions to transact with the Bank. The Bank will simultaneously enter into a back-to-back transaction with JFP and receive a fee from JFP for providing credit support. Subject to the terms of the agreement between JFP and the Bank, JFP is generally responsible to the Bank for the performance of JFP’s customers. The Company guarantees the performance of JFP to the Bank under the credit intermediation facility. JFP will also provide commodity index pricing to the Bank’s customers and JFP will earn revenue from the Bank’s hedging of its customer transactions with JFP.

JFP independently evaluates the creditworthiness of its counterparties, taking into account credit ratings assigned by recognized statistical rating organizations. The average credit rating of swap counterparties as a whole (as measured by the Company’s Credit Risk Committee) is equivalent to AA or higher. The maximum potential loss will increase or decrease during the life of the swap commitments as a function of maturity and changes in market prices.

JFP determines counterparty credit quality by reference to ratings from independent rating agencies or, where such ratings are not available, by internal analysis. At September 30, 2004 and December 31, 2003, the counterparty credit quality with respect to the fair value of commodities and foreign exchange futures, options and swap portfolios were as follows:

	Fair Value
(in millions)	September 30,		December 31,
	2004		2003
Counterparty credit quality:
AA or higher	$	12.7	$	—
Exchange-traded futures and options(a)		8.4		0.6
Total	$	21.1	$	0.6

(a) Exchange-traded commodities and foreign exchange futures and options are not deemed to have significant credit exposures as the exchanges guarantee that every contract will be properly settled on a daily basis.

At September 30, 2004 and December 31, 2003 the counterparty breakdown by industry with respect to the fair value of JFP’s commodities and foreign exchange futures, options and swap portfolio was as follows:

	Fair Value
(in millions)	September 30,		December 31,
	2004		2003
Special purpose	$	12.7	$	—
Exchanges*		8.4		0.6
Total	$	21.1	$	0.6

* Exchange-traded commodities and foreign exchange futures and options are not deemed to have significant credit exposures as the exchanges guarantee that every contract will be properly settled on a daily basis.

Financial Instruments

Off-Balance Sheet Risk

The Company has contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to sell, securities sold but not yet purchased, repurchase agreements, future purchases and

Page 20 of 39

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

sales of foreign currencies, securities transactions on a when-issued basis, options contracts, futures index contracts, commodities futures contracts and underwriting. Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the market values of the securities underlying the financial instruments may be in excess of, or less than, the contract amount. The settlement of these transactions is not expected to have a material effect upon the Company’s consolidated financial statements.

Derivative Financial Instruments

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

The Company has also entered into a fair value hedge with no ineffectiveness using interest rate swaps in order to convert $200.0 million aggregate principal amount of unsecured 7¾% senior notes due March 15, 2012 into floating rates based upon LIBOR. The effective interest rate on the $200.0 million aggregate principal amount of unsecured 7¾% senior notes, after giving effect to the swaps, is 4.0%. The fair value of the mark to market of the swaps was positive $22.3 million as of September 30, 2004, which was recorded as an increase in the book value of the debt and an increase in derivative assets classified as part of other assets.

The gross contracted or notional amount of index futures contracts, commodities futures contracts, commodities related swaps, options contracts, foreign exchange forward contracts and interest rate swaps, which are not reflected in the consolidated statement of financial condition, is set forth in the table below (in thousands of dollars) and provides only a measure of the Company’s involvement in these contracts at September 30, 2004 and December 31, 2003. They do not represent amounts subject to market risk and, in many cases, serve to reduce the Company’s overall exposure to market and other risks.

	Notional or contracted amount
	September 30, 2004				December 31, 2003
	Purchase		Sale		Purchase		Sale
Index futures contracts	$	17,548	$	279,554	$	—	$	214,981
Commodities futures contracts		394,382		14		212,520		—
Commodities related swaps		15,000		306,125		—		—
Option contracts		858,894		895,084		129,872		121,999
Foreign exchange forward contracts		19,515		28,263		12,588		13,900
Interest rate swaps		200,000		—		200,000		—

Fair Value of Derivative Financial Instruments

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

The following is an aggregate summary of the average first nine months of 2004 and full year 2003 and September 30, 2004 and December 31, 2003 fair values of derivative financial instruments (in thousands of dollars):

Page 21 of 39

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

	1st Nine Months 2004				Full Year 2003
	Average		End of period		Average		End of period
Index futures contracts:
In a favorable position	$	2,302	$	105	$	2,607	$	452
In an unfavorable position		7,866		33,053		42		49
Commodities futures contracts:
In a favorable position		8,750		38,187		118		118
In an unfavorable position		2,466		—		1,699		—
Commodities related swaps:
In a favorable position		2,598		12,713		—		—
In an unfavorable position		471		—		—		—
Option contracts:
Purchase		15,131		19,219		6,007		14,547
Sale		7,595		14,540		2,671		4,488
Foreign exchange forward contracts		16		315		20		(62	)
Interest rate swaps:
In a favorable position		22,622		22,261		27,919		24,567

Guarantees

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

In the normal course of business, the Company had letters of credit outstanding aggregating $20.0 million at September 30, 2004, mostly to satisfy various collateral requirements in lieu of depositing cash or securities. These letters of credit have a current carrying amount of aggregate liability of $0.

As of September 30, 2004, the Company had outstanding guarantees of $24.0 million relating to undrawn bank credit obligations of two associated investment funds in which the Company has an interest. Also, the Company has guaranteed obligations of Jefferies International Limited (“JIL”) to various banks which provide clearing and credit services to JIL and to counterparties of JIL. In addition, as of September 30, 2004, the Company had commitments to invest up to $12.5 million in various investments.

On October 7, 2004, the Company entered into an agreement with Babson Capital and MassMutual to form Jefferies Babson Finance LLC, a joint venture entity created for the purpose of offering senior loans to middle market and growth companies. Jefferies Babson Finance LLC will be capitalized over time with $250 million in equity commitments, provided equally by Jefferies Group, Inc. and Babson Capital’s parent, MassMutual, and will be leveraged. Loans are expected to be originated primarily through the investment banking efforts of Jefferies & Company, Inc. with Babson Capital providing primary credit analytics and portfolio management services.

In July 2004, JFP entered into a credit intermediation facility with an “AA”-rated European bank (the “Bank”). This facility will allow JFP customers that require a counterparty with a high credit rating for commodity index transactions to transact with the Bank. The Bank will simultaneously enter into a back-to-back transaction with JFP and receive a fee from JFP for providing credit support. Subject to the terms of the agreement between JFP and the Bank, JFP is generally responsible to the Bank for the performance of JFP’s customers. The Company guarantees the performance

Page 22 of 39

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

of JFP to the Bank under the credit intermediation facility. JFP will also provide commodity index pricing to the Bank’s customers and JFP will earn revenue from the Bank’s hedging of its customer transactions with JFP. The Company also guaranteed the performance of JFP to various banks and dealers, which provide futures clearing to JFP and act as trading counterparties to JFP.

Credit Risk

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

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

Concentration of Credit Risk

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

Segment Reporting

The Company’s operations have been classified into a single business segment, a securities broker-dealer, which includes several types of financial services. This segment includes the traditional securities brokerage and investment banking activities of the Company. Traditional securities brokerage and investment banking activities account for over 90% of total revenue for the nine months ended September 30, 2004.

Page 23 of 39

JEFFERIES GROUP, INC. AND SUBSIDIARIES

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

Special Note on Forward-Looking Statements

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

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

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

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

• our other SEC filings.

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

Overview

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

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

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Analysis of Financial Condition

Total assets increased $3,091.8 million, or 28%, from $10,992.3 million at December 31, 2003 to $14,084.1 million at September 30, 2004. Securities borrowed increased $2,049.1 million and securities owned and securities pledged increased $264.4 million. Total liabilities increased $2,962.0 million, or 29% from $10,153.9 million at December 31, 2003 to $13,115.9 million at September 30, 2004. Securities loaned increased $1,458.0 million, long-term debt increased $345.8 million, payable to brokers increased $432.0 million and securities sold, not yet purchased increased $352.8. The increases in securities borrowed and securities loaned are mostly related to our matched book business. Long-term debt increased due to our issuance of $350 million aggregate principal amount of unsecured 5½% senior notes due March 15, 2016. The increases in securities owned and securities pledged and securities sold, not yet purchased mostly relate to Bonds Direct.

A substantial portion of our total assets consists of highly liquid marketable securities and short-term receivables, arising principally from traditional securities brokerage and investment banking activity. The highly liquid nature of these assets provides us with flexibility in financing and managing our business.

The following table sets forth book value and tangible book value per share (dollars in thousands, except per share data):

	September 30, 2004			December 31, 2003
Stockholders’ equity	$	968,150			$	838,371
Less: Goodwill		(106,537	)			(100,596	)
Tangible stockholders’ equity	$	861,613			$	737,775
Book value per share (1)	$	17.02			$	14.79
Tangible book value per share (2)	$	15.15			$	13.01

(1) Book value per share equals stockholders’ equity divided by common shares outstanding of 56.9 million at September 30, 2004 and 56.7 million at December 31, 2003.

(2) Tangible book value per share equals tangible stockholders’ equity divided by common shares outstanding of 56.9 million at September 30, 2004 and 56.7 million at December 31, 2003.

Tangible stockholders’ equity and tangible book value per share are “non-GAAP financial measures”. A “non-GAAP financial measure” is a numerical measure of financial performance that includes adjustments to the most directly comparable measure calculated and presented in accordance with GAAP, or for which there is no specific GAAP guidance. We calculate tangible stockholders’ equity as stockholders’ equity less intangible assets. We calculate tangible book value per share by dividing tangible stockholders’ equity by common stock outstanding. We consider tangible book value per share a meaningful measurement of our financial condition and believe it provides investors with an additional metric to comparatively assess the fair market value of our stock.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Revenues by Source

The following provides a breakdown of total revenues by source for the three-month periods ended September 30, 2004 and September 26, 2003.

	Three Months Ended
	September 30, 2004					September 26, 2003
			% of					% of
			Total					Total
	Amount		Revenues			Amount		Revenues
			(Dollars in thousands)
Commissions and principal transactions:
Equities	$	112,192		38	%	$	85,142		38	%
International		19,027		6			21,951		10
High Yield		10,845		4			9,216		4
Convertibles		5,913		2			5,146		2
Execution		7,989		3			6,209		3
Bonds Direct		11,604		4			8,066		4
Other proprietary		3,450		1			5,585		3
Total		171,020		58			141,315		64
Investment banking		72,122		25			42,000		19
Asset management fees and investment income from managed funds:
Asset management fees		7,990		3			4,891		2
Investment income from managed funds		3,640		1			4,813		2
Total		11,630		4			9,704		4
Interest		35,948		12			23,582		11
Other		2,382		1			5,346		2
Total revenues	$	293,102		100	%	$	221,947		100	%

The following provides a breakdown of total revenues by source for the nine-month periods ended September 30, 2004 and September 26, 2003.

	Nine Months Ended
	September 30, 2004					September 26, 2003
			% of					% of
			Total					Total
	Amount		Revenues			Amount		Revenues
			(Dollars in thousands)
Commissions and principal transactions:
Equities	$	293,538		34	%	$	240,182		38	%
International		63,996		7			63,800		10
High Yield		35,055		4			26,425		4
Convertibles		18,940		2			21,900		3
Execution		25,196		3			17,244		3
Bonds Direct		33,551		4			18,642		3
Other proprietary		7,490		1			13,775		2
Total		477,766		55			401,968		63
Investment banking		247,066		28			130,919		20
Asset management fees and investment income from managed funds:
Asset management fees		25,736		3			10,578		2
Investment income from managed funds		28,522		3			9,713		2
Total		54,258		6			20,291		4
Interest		85,132		10			75,782		12
Other		9,144		1			8,495		1
Total revenues	$	873,366		100	%	$	637,455		100	%

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Third Quarter 2004 Versus Third Quarter 2003

Overview

Revenues, net of interest expense, increased $53.0 million, or 26%, to $253.8 million, compared to $200.8 million for the third quarter of 2003. The increase was primarily due to a $30.1 million, or 72%, increase in investment banking, a $29.7 million, or 21%, increase in trading revenues (commissions and principal transactions), and a $1.9 million, or 20%, increase in asset management fees and investment income from managed funds, partially offset by a $5.8 million decrease in net interest revenues (interest income less interest expense) and a $3.0 million, or 55%, decrease in other revenues over last year’s third quarter.

Equity Product Revenue

Equity product revenue is composed of commissions and principal transaction trading revenues, net of soft dollar expenses. Equity product revenue for the third quarter was $112.2 million, up 32% over last year’s third quarter. Equity product revenue increased this quarter for the following reasons: (i) the Company changed its quarter end to the last day of the calendar quarter, benefiting from four extra days of production versus last year’s third quarter, (ii) the Company engaged in several large block-trading opportunities, generated from investment banking relationships that are not necessarily repeatable and (iii) the Company experienced continued growth in newer strategic efforts including Bulletin Board, ADR and ETF trading.

International Product Revenue

International revenues of $19.0 million in the quarter were down 13% over last year’s third quarter. The decrease is a result of declines in secondary trading in Euro converts caused by a substantial reduction in trade volumes, the lack of new security issuance, and overall poor trading volatility.

High Yield Product Revenue

High yield product revenue for the quarter, not including origination revenues, was $10.8 million, up 18% over last year’s third quarter. The increase in high yield product revenue was due to increased trading activity despite the challenges posed by rising interest rates and tighter spreads.

Convertible Product Revenue

Convertible product revenue for the quarter was $5.9 million, up 15% over last year’s third quarter. The increase is attributed to improved secondary sales and trading activity due in part to the corporate finance activity in which the Company has been involved.

Execution Product Revenue

Execution product revenue was $8.0 million, up over 29% from last year’s third quarter. The increase in execution revenue was due to the expansion of direct access execution services to a limited number of institutional customers.

Bonds Direct Product Revenue

Bonds Direct product revenue was $11.6 million, up 44% over last year’s third quarter. The growth was driven by the fixed income business acquired from Mellon Securities LLC in December 2003 and the expansion of products offered, including the trading of agencies, treasuries and mortgage-backed securities on an agency basis.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Investment Banking Product Revenue

	Three Months Ended
	September 30,		September 26,		Percentage
	2004		2003		Change
	(Dollars in Thousands)
Financing	$	28,717	$	24,521		17	%
Advisory		43,405		17,479		148	%
Total	$	72,122	$	42,000		72	%

Financing revenues were $28.7 million, an increase of 17% from the comparable prior year period. The increase reflected higher industry-wide new issuance activity compared to the third quarter of 2003. The higher volume of equity offerings in the quarter ended September 30, 2004 was across several sectors, including education, consumer, gaming, media, energy and healthcare.

Revenues from advisory activities were $43.4 million, an increase of 148% from the comparable period of 2003. The increase reflected a higher level of merger, acquisition and restructuring transaction activity across several sectors, including technology (primarily as a result of the acquisition of Broadview), consumer, energy, and healthcare.

Asset Management Revenue

Asset management revenue includes revenues we receive from management and performance fees from funds managed by us, revenues from asset management and performance fees we receive from third-party managed funds, and investment revenue from our investments in these funds. Asset management revenues were $11.6 million for the quarter, up 20% over last year’s third quarter. The increase in asset management revenue this quarter over the prior year’s quarter was a result of management and performance fees on a higher base of assets under management (up 138% versus the prior year assets under management).

Net Interest Expense

Interest income and interest expense are a function of the level and mix of total assets and liabilities (principally securities borrowed and securities loaned financing activities), the prevailing level of interest rates, and the term structure of our financings. Interest income and interest expense are integral components of our overall customer flow activities. The net interest decrease of $5.8 million over last year’s third quarter primarily relates to the issuance of the $350 million in long-term debt in March of 2004.

Compensation and Benefits

Compensation and benefits increased $25.4 million, or 22%, versus the 26% increase in net revenues. The ratio of compensation to net revenues for the quarter was 56%, compared to 58% for the third quarter of 2003. The improved compensation ratio for the quarter is attributable primarily to two factors:

• Investment banking revenues increased approximately 72% for the quarter versus the third quarter of last year. As revenues have increased, we have been able to leverage the fixed costs associated with the support and management of the investment banking department. The improvement attributable to this may not be sustainable depending on the recurring level of investment banking revenues or the possible need for incremental infrastructure to support more activity.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

• Asset management revenues include investment income from our investment in various managed funds. Relatively, there is less compensation associated with these revenues. The compensation ratio improvement attributable to the asset management business may not be sustainable as it is highly dependent on performance that is likely to vary.

Non-Personnel Expenses

Technology and communications increased $2.0 million, or 15%, mostly due to increased headcount including the addition of Broadview. Floor brokerage and clearing fees increased $447,000, or 4%, primarily due to increased trade volumes. Other expenses increased $2.6 million, or 31%, mostly due to higher general consulting, business insurance and legal expenses. Occupancy and equipment rental expense increased $2.4 million, or 31%, mostly due to the addition of Broadview. Business development expenses increased $1.2 million, or 19%, due to increased headcount and related travel.

Earnings before Income Taxes and Minority Interest

Earnings before income taxes and minority interest were up $18.8 million, or 52%, to $55.0 million, compared to $36.1 million for the same prior year period. The effective tax rate was approximately 39% for the third quarter of 2004 compared to 36% for the third quarter of 2003. This increase in rates is due primarily to a reduction in the effect of minority interest holders in several LLCs, which we control but are not subject to tax, and an increase in effective state tax rates.

Minority Interest

Minority interest was down $1.5 million, or 57%, to $1.2 million, compared to $2.7 million for the third quarter of 2003. RTS and ACM were de-consolidated in the second quarter of 2004 due to changes in the capital structure of those two entities.

Earnings per Share

Basic net earnings per share were $0.56 for the third quarter of 2004 on 57,833,000 shares compared to $0.38 in the 2003 period on 53,534,000 shares. Diluted net earnings per share were $0.51 for the second quarter of 2004 on 63,867,000 shares compared to $0.35 in the comparable 2003 period on 59,502,000 shares.

First Nine Months of 2004 Versus First Nine Months of 2003

Overview

Revenues, net of interest expense, increased $216.3 million, or 38%, to $780.2 million, compared to $563.9 million for the first nine months of 2003. The increase was primarily due to an $116.1 million, or 89%, increase in investment banking, a $75.8 million, or 19%, increase in trading revenues (commissions and principal transactions), and a $34.0 million, or 167%, increase in asset management fees and investment income from managed funds partially offset by a $10.3 million decrease in net interest revenues (interest income less interest expense) over last year’s period.

Equity Product Revenue

Equity product revenue is composed of commissions and principal transaction trading revenues, net of soft dollar expenses. Equity product revenue for the first nine months was $293.5 million, up 22% over last year’s first nine months. Equity product revenue increased for the following reasons: (i) the Company engaged in several large block-trading opportunities, generated from investment banking relationships that are not necessarily repeatable and (ii) the Company experienced continued growth in newer strategic efforts, including Bulletin Board, ADR and ETF trading.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

International Product Revenue

International revenues of $64.0 million in the first nine months were up slightly over the first nine months of last year. International revenues increased due to a strong market conditions from the first quarter of 2003 through the first four months of 2004.

High Yield Product Revenue

High yield product revenue for the first nine months, not including origination revenues, were $35.1 million, up 33% over the first nine months of last year. The increase in high yield product revenue was due to increased trading activity despite the challenges posed by rising interest rates and tighter spreads.

Convertible Product Revenue

Convertible product revenue for the first nine months was $18.9 million, down 14% over the first nine months of last year. The decrease relates to a reduction in trading volume caused by lower interest rates and overall lower volatility in the convertible market.

Execution Product Revenue

Execution product revenue was nearly $25.2 million, up over 46% from the first nine months of last year. The increase in execution revenue was due to the expansion of direct access execution services to a limited number of institutional customers.

Bonds Direct Product Revenue

Bonds Direct product revenue was $33.6 million, up 80% over the first nine months of last year. The growth was driven by the fixed income business acquired from Mellon Securities LLC in 2003 and the expansion of products offered, including the trading of agencies, treasuries and mortgage-backed securities on an agency basis.

Investment Banking Product Revenue

	Nine Months Ended
	September 30,		September 26,		Percentage
	2004		2003		Change
	(Dollars in Thousands)
Financing	$	117,929	$	53,682		120	%
Advisory		129,137		77,238		67	%
Total	$	247,066	$	130,920		89	%

Financing revenues were $117.9 million, an increase of 120% from the comparable prior year period. The increase reflected higher industry-wide new issuance activity compared to the first nine months of 2003. The higher volume of equity offerings in the first nine months ended September 30, 2004 was across several sectors, including education, consumer, gaming, media, energy and healthcare.

Revenues from advisory activities were $129.1 million, an increase of 67% from the comparable period of 2003. The increase reflected a higher level of merger and acquisition activity in technology, generated primarily by Broadview.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Asset Management Revenue

Asset management revenue includes revenues we receive from management and performance fees from funds managed by us, revenues from asset management and performance fees we receive from third-party managed funds, and investment revenue from our investments in these funds. Asset management revenues were $54.3 million for the nine months ended September 30, 2004, up 167% up over last year’s comparable period. The increase in asset management revenue this period over the prior year’s period was a result of management and performance fees on a higher base of assets under management (up 109% versus the prior period assets under management) and performance on our investments in managed funds (our investments in managed funds were 141% higher than last year’s first nine months).

Net Interest Expense

Interest income and interest expense are a function of the level and mix of total assets and liabilities (principally securities borrowed and securities loaned financing activities), the prevailing level of interest rates, and the term structure of our financings. Interest income and interest expense are integral components of our overall customer flow activities. The net interest decrease of $10.3 million primarily relates to the issuance of the $350 million in long-term debt in March of 2004.

Compensation and Benefits

Compensation and benefits increased $110.7 million, or 34%, versus the 38% increase in net revenues. The ratio of compensation to net revenues for the period was 56%, compared to 58% for the first nine months of 2003. The improved compensation ratio for the period is attributable primarily to two factors:

• Investment banking revenues increased approximately 89% for the period versus the first nine months of 2003. As revenues have increased, we have been able to leverage the fixed costs associated with the support and management of the investment banking department. The improvement attributable to this may not be sustainable depending on the recurring level of investment banking revenues or the possible need for incremental infrastructure to support more activity.

• Asset management revenues include investment income from our investment in various managed funds. Relatively, there is less compensation associated with these revenues. The compensation ratio improvement attributable to the asset management business may not be sustainable as it is highly dependent on performance that is likely to vary.

Non-Personnel Expenses

Technology and communications increased $6.0 million, or 14%, mostly due to increased headcount and the addition of Broadview. Floor brokerage and clearing fees increased $4.1 million, or 12%, primarily due to increased trade volumes. Other expenses increased $4.7 million, or 18%, mostly due to higher business insurance and general consulting costs. Occupancy and equipment rental expense increased $4.7 million, or 19%, mostly due to the addition of Broadview. Although we had higher occupancy and equipment rental expenses this period resulting from increased headcount we incurred a one-time $1.9 million expense in the prior year period attributable to the write-down of our San Francisco lease. Business development expenses increased $6.9 million, or 39%, due to increased headcount and related travel.

Earnings before Income Taxes and Minority Interest

Earnings before income taxes and minority interest were up $79.1 million, or 86%, to $170.8 million, compared to $91.7 million for the same prior year period. The effective tax rate was approximately 37% for both the first nine months of 2004 and 2003.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Minority Interest

Minority interest was up $6.3 million, or 136%, to $10.9 million, compared to $4.6 million for the first nine months of 2003. The increase in minority interest largely relates to the minority interest in Bonds Direct, JEOF, RTS, and ACM recorded in the first quarter of 2004. RTS and ACM were de-consolidated in the second quarter of 2004 due to changes in the capital structure of those two entities.

	Nine Months Ended
	September 30,		September 26,
	2004		2003		Difference
	(Amounts in Thousands)
JEOF	$	3,267	$	1,091	$	2,176
RTS		4,503		1,576		2,927
Bonds Direct		1,285		1,771		(486	)
ACM		1,840		188		1,652
Total	$	10,895	$	4,626	$	6,269

Earnings per Share

Basic net earnings per share were $1.68 for the first nine months of 2004 on 57,233,000 shares compared to $1.01 in the 2003 period on 52,738,000 shares. Diluted net earnings per share were $1.51 for the first nine months of 2004 on 63,616,000 shares compared to $0.92 in the comparable 2003 period on 58,269,000 shares.

Liquidity and Capital Resources

Cash or assets readily convertible into cash are as follows (in thousands of dollars):

	September 30, 2004		December 31, 2003
Cash and cash equivalents:
Cash in banks	$	61,996	$	41,398
Money market investments		173,528		66,478
Total cash and cash equivalents		235,524		107,876
Auction rate preferreds (a)		50,365		—
Mortgage-backed securities (a)		29,690		—
Asset-backed securities (a)		14,264		—
Short-term bond funds		194,780		215,790
Cash and securities segregated		416,162		182,641
	$	940,785	$	506,307

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

A substantial portion of our assets is liquid, consisting of cash or assets readily convertible into cash. The majority of securities positions (both long and short) in our 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 our receivables are secured by marketable securities.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Our 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. We have arrangements with banks for unsecured financing of $255 million. Secured bank loans are collateralized by a combination of customer, non-customer and firm securities. We have always been able to obtain necessary short-term borrowings in the past and believe that we will continue to be able to do so in the future. Additionally, we have $20.0 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, Jefferies Execution, 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, Jefferies Execution, and Bonds Direct use the alternative method of calculation.

As of September 30, 2004, Jefferies’, Jefferies Execution’s and Bonds Direct’s net capital and excess net capital were as follows (in thousands of dollars):

	Net Capital		Excess Net Capital
Jefferies	$	267,178	$	246,527
Jefferies Execution		10,232		9,982
Bonds Direct		4,143		3,893

In March 2004, we issued $350 million aggregate principal amount of unsecured 5-1/2% senior notes due March 15, 2016, with a yield of 5.6%.

During the nine months ended September 30, 2004, we purchased 1,886,430 shares of our common stock for $59.4 million. We typically repurchase our common stock in open market transactions in accordance with Rule 10b-18 and on occasion, in transactions directly with stockholders. We believe that we have sufficient liquidity and capital resources to make these repurchases without any material adverse effect on us.

Other than the issuance of the unsecured 5-1/2% senior notes, our liquidity and capital resources are largely unchanged since December 31, 2003.

As of September 30, 2004, we had outstanding guarantees of $24.0 million relating to undrawn bank credit obligations of two associated investment funds in which we have an interest. Also, we have guaranteed the performance of JIL and JFP to various banks and dealers, which provide clearing and credit services to JIL, JFP and to counterparties of JIL and JFP. In addition, as of September 30, 2004, we had commitments to invest up to $12.5 million in various investments.

On October 7, 2004, the Company announced that it had formed a joint venture with Babson Capital to offer senior loans to middle market and growth companies. Jefferies Babson Finance LLC will be capitalized over time with $250 million in equity commitments, provided equally by the Company and Babson Capital’s parent, MassMutual, and will be leveraged. Loans are expected to be originated primarily through the investment banking efforts of Jefferies & Company, Inc., with Babson Capital providing primary credit analytics and portfolio management services.

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.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

We believe our 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, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

Our management believes our 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 our valuation methodologies applied to investments and our valuation methodologies applied to securities positions.

Investments are stated at estimated fair value as determined in good faith by management. 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. We believe that our 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 Our Business

The following factors describe some of the assumptions, risks, uncertainties and other factors that could adversely affect our business or that could otherwise result in changes that differ materially from our expectations. In addition to the factors mentioned in this report, we are 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 our business 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 we receive from commissions and spreads.

• Unfavorable financial or economic conditions could likely reduce the number and size of transactions in which we provide underwriting, financial advisory and other services. Our 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 we participate and could therefore be adversely affected by unfavorable financial or economic conditions.

• Adverse changes in the market could lead to a reduction in revenues from principal transactions and commissions.

• Adverse changes in the market could also lead to a reduction in revenues from asset management fees and investment income from managed funds and losses from managed funds. Continued increases in our asset management business, including increases in the amount of our investments in managed funds, would make us more susceptible to adverse changes in the market.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Our proprietary trading and investments expose us to risk of loss.

A significant portion of our revenues is derived from proprietary trading in which we act as principal. Although the majority of our trading is “riskless principal” in nature, we may incur trading losses relating to the purchase, sale or short sale of high yield, international, convertible, and equity securities and futures and commodities for our own account and from other program or proprietary trading. Additionally, we have made substantial investments of our capital in debt and equity securities, including investments managed by us and investments managed by third parties. In any period, we may experience losses as a result of price declines, lack of trading volume, and illiquidity. From time to time, we may engage in a large block trade in a single security or maintain large position concentrations in a single security, securities of a single issuer, or securities of issuers engaged in a specific industry. Any downward price movement in these securities could result in a reduction of our revenues and profits. In addition, we may engage in hedging transactions that if not successful, could result in losses.

Increased competition may adversely affect our revenues and profitability.

All aspects of our business are intensely competitive. We compete 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. We believe that the principal factors affecting competition involve market focus, reputation, the abilities of professional personnel, the ability to execute the transaction, relative price of the service and products being offered and the quality of service. Increased competition or an adverse change in our 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 our losing business formerly serviced by such employee or employees. Competition can also raise our costs of hiring and retaining the key employees we need to effectively execute our business plan.

Our business is substantially dependent on our Chief Executive Officer.

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

Our business depends on our ability to maintain adequate levels of personnel.

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

Page 35 of 39

JEFFERIES GROUP, INC. AND SUBSIDIARIES

Extensive regulation of our business limits our activities, and, if we violate these regulations, we may be subject 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, anti-money laundering, record-keeping and the conduct of directors, officers and employees. Broker-dealers that engage in commodities and futures transactions are also subject to regulation by the Commodity Futures Trading Commission (“CFTC”) and the National Futures Association (“NFA”). The Commission, self-regulatory organizations, state securities commissions, state attorneys general, the CFTC and the NFA may conduct administrative proceedings which can result in censure, fine, suspension, expulsion of a broker-dealer or its officers or employees, or revocation of broker-dealer licenses. Additional legislation, changes in rules promulgated by the Commission or self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect our mode of operation and our profitability.

Legal liability may harm our business.

Many aspects of our business involve substantial risks of liability, and in the normal course of business, we have been named as a defendant or co-defendant in lawsuits involving primarily claims for damages. 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. Our expansion into private client services involves an aspect of the business that has historically had more risk of litigation than our institutional business. Additionally, the expansion of our business, including increases in the number and size of investment banking transactions and our expansion into new areas, imposes greater risks of liability. Substantial legal liability could have a material adverse financial effect or cause us significant reputational harm, which in turn could seriously harm our business and our prospects.

Operational risks may disrupt our business, result in regulatory action against us or limit our growth.

We face operational risks arising from mistakes made in the confirmation or settlement of transactions or from transactions not being properly recorded, evaluated or accounted. Our business is highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous and diverse markets, and the transactions we process have become increasingly complex. Consequently, we rely heavily on our financial, accounting and other data processing systems as well as on processing systems controlled by third parties. If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our business, liability to clients, regulatory intervention or reputational damage. The inability of our systems or third-party systems to accommodate an increasing volume of transactions could also constrain our ability to expand our business.

Asset Management revenue is subject to variability.

Asset management revenue includes revenues we receive from management and performance fees from funds managed by us, revenues from asset management and performance fees we receive from third-party managed funds, and investment income from our investments in these funds. We experience significant fluctuations in our quarterly operating results due to the nature of our asset management business and therefore may fail to meet revenue expectations. Asset management revenue may not be sustainable as it is highly dependent on performance that is likely to vary.

Page 36 of 39

JEFFERIES GROUP, INC. AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risk is largely unchanged from December 31, 2003.

Item 4. Controls and Procedures

We conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our 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 period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. In addition, no change in our 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, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Many aspects of our business involve substantial risks of liability. In the normal course of business, we and our subsidiaries have been named as defendants or co-defendants in lawsuits involving primarily claims for damages. Our management believes that pending litigation will not have a material adverse effect on us.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

					(c) Total Number of
	(a) Total		(b)		Shares Purchased as		(d) Maximum Number of
	Number of		Average		Part of Publicly		Shares that May Yet Be
	Shares		Price Paid		Announced Plans or		Purchased Under the
Period	Purchased (1)		per Share		Programs (2)		Plans or Programs
January 1 - January 30, 2004		66,668		38.60		66,668		2,705,666
January 31 - February 27, 2004		103,584		37.17		60,000		2,645,666
February 28 - March 26, 2004		38,596		37.93		30,000		2,615,666
March 27 - April 30, 2004		102,428		35.82		55,200		2,560,466
May 1 - May 28, 2004		149,450		32.31		148,000		2,412,466
May 29 - June 25, 2004		127,900		32.00		127,900		2,284,566
June 26 - July 30, 2004		1,284,751		29.97		1,284,566		1,000,000
August 1 - August 27, 2004		12,100		30.89		12,100		987,900
August 28 - September 30, 2004		953		33.40		—		987,900
Total		1,886,430		31.48		1,784,434

(1) We repurchased an aggregate of 101,996 shares other than as part of a publicly announced plan or program. We repurchased these securities in connection with our stock compensation plans which allow participants to use shares to pay the exercise price of options exercised and to use shares to satisfy tax liabilities arising from the exercise of options or the vesting of restricted stock. The number above does not include unvested shares forfeited back to the Company pursuant to the terms of our stock compensation plans.

(2) On October 24, 2002, we issued a press release announcing the authorization by our Board of Directors to repurchase, from time to time, up to 1,500,000 shares of our stock. We may still repurchase, from time to time, up to 987,900 shares under our publicly announced program as of September 30, 2004, after adjusting for the 2-for-1 stock split effected as a stock dividend on August 15, 2003.

Page 37 of 39

JEFFERIES GROUP, INC. AND SUBSIDIARIES

Item 5. Other Information

On October 7, 2004, the Company issued 311,842 shares of restricted common stock as partial consideration for the purchase of securities of Bonds Direct not already owned by the Company. The shares of restricted common stock were issued in a transaction not involving a public offering and were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

Item 6. Exhibits

Exhibits

3.1	Amended and Restated Certificate of Incorporation of Jefferies Group, Inc. is incorporated herein by reference to Exhibit 3 of the Registrant’s Form 8-K filed on May 26, 2004.
3.2	By-Laws of Jefferies Group, Inc are incorporated herein by reference to Exhibit 3.2 of Registrant’s Form 10-K filed on March 28, 2003.
10.1*	Limited Liability Company Agreement, dated as of October 7, 2004, by and among Jefferies Group, Inc., Massachusetts Mutual Life Insurance Company, Babson Capital Management LLC, Class C Member LLC, and Jefferies Babson Finance LLC.
10.2*	Form of Restricted Stock Agreement pursuant to Jefferies Group, Inc. 2003 Incentive Compensation Plan.
10.3*	Form of Option Agreement pursuant to Jefferies Group, Inc. 2003 Incentive Compensation Plan and Jefferies Group, Inc. Deferred Compensation Plan.
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*	Rule 13a-14(b)/15d-14(b) and Section 1350 of Title 18 U.S.C. Certification by the Chief Executive Officer and Chief Financial Officer.

* Filed herewith.

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

Page 38 of 39

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 8, 2004	By:	/s/ Joseph A. Schenk
		Joseph A. Schenk
		Chief Financial Officer

Page 39 of 39

EX-10.1

                                                                    EXHIBIT 10.1

                          Jefferies Babson Finance LLC
                      A Delaware Limited Liability Company

                       LIMITED LIABILITY COMPANY AGREEMENT

                           Dated as of October 7, 2004



                                TABLE OF CONTENTS



                                                                                                 PAGE
                                                                                              
ARTICLE I      DEFINED TERMS...................................................................    1

     1.1     Certain Defined Terms.............................................................    1

     1.2     Other Defined Terms...............................................................   12

     1.3     Headings..........................................................................   14

ARTICLE II     ORGANIZATION....................................................................   14

     2.1     Formation.........................................................................   14

     2.2     Name..............................................................................   14

     2.3     Term..............................................................................   14

     2.4     Registered Agent and Office.......................................................   14

     2.5     Principal Place of Business.......................................................   15

     2.6     Qualification in Other Jurisdictions..............................................   15

     2.7     Purpose...........................................................................   15

     2.8     Powers of the Company.............................................................   15

     2.9     No State-Law Partnership..........................................................   15

ARTICLE III    MANAGEMENT AND OPERATIONS.......................................................   16

     3.1     Board of Directors................................................................   16

     3.2     Composition of the Board..........................................................   17

     3.3     Procedural Matters Regarding the Board............................................   18

     3.4     Officers..........................................................................   20

     3.5     Insurance.........................................................................   21

     3.6     Compliance with Authority.........................................................   21

     3.7     Approval of Certain Matters.......................................................   21

     3.8     Dispute Resolution................................................................   24

     3.9     Transaction Fees..................................................................   24

     3.10    Credit Committee..................................................................   24

     3.11    Valuation of Assets...............................................................   25

ARTICLE IV     MEMBERSHIP; CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS; AND ADDITIONAL INTERESTS...   26

     4.1     Members...........................................................................   26

     4.2     No Liability of Members...........................................................   27


                                       i


                                TABLE OF CONTENTS
                                   (continued)



                                                                                                 PAGE
                                                                                              
     4.3     Capital Contributions.............................................................   28

     4.4     Status of Capital Contributions...................................................   29

     4.5     Capital Accounts..................................................................   29

     4.6     Issuance of Additional Interests; Additional Members..............................   30

     4.7     Advances..........................................................................   31

     4.8     Member's Interest; Interest Equivalents...........................................   31

ARTICLE V      TRANSFERS AND OTHER EVENTS......................................................   31

     5.1     Restriction on Transfers..........................................................   31

     5.2     Invalid Transfers Void............................................................   32

     5.3     Effect of Transfer; Exclusions....................................................   32

ARTICLE VI     INVESTMENT RESTRICTIONS; CONFIDENTIALITY........................................   33

     6.1     Investment Opportunities..........................................................   33

     6.2     Confidentiality...................................................................   33

ARTICLE VII    ALLOCATIONS AND DISTRIBUTIONS...................................................   35

     7.1     Allocations.......................................................................   35

     7.2     Adjustments to Reflect Changes in Interests.......................................   37

     7.3     Allocation of Taxable Income and Loss.............................................   37

     7.4     Distributions.....................................................................   38

     7.5     Withholding.......................................................................   40

ARTICLE VIII   BOOKS AND RECORDS...............................................................   40

     8.1     Books, Records and Financial Statements...........................................   40

     8.2     Reports...........................................................................   41

     8.3     Accounting Method.................................................................   41

     8.4     Audit.............................................................................   41

ARTICLE IX     TAX MATTERS.....................................................................   42

     9.1     Tax Matters Member................................................................   42

     9.2     Right to Make Section 754 Election................................................   42

     9.3     Indemnity of Tax Matters Member...................................................   42

     9.4     Notices to Tax Matters Member.....................................................   42

ARTICLE X      LIABILITY AND INDEMNIFICATION...................................................   43


                                       ii


                                TABLE OF CONTENTS
                                   (continued)



                                                                                                 PAGE
                                                                                              
     10.1    Liability.........................................................................   43

     10.2    Indemnification...................................................................   43

     10.3    Expenses..........................................................................   43

ARTICLE XI     DISSOLUTION, LIQUIDATION AND TERMINATION........................................   44

     11.1    Dissolution; Buy-Sell; Agreements Regarding Employees.............................   44

     11.2    Events of Bankruptcy of Member....................................................   48

     11.3    Withdrawal of Members.............................................................   49

     11.4    Notice of Dissolution.............................................................   49

     11.5    Liquidation.......................................................................   49

     11.6    Termination.......................................................................   50

     11.7    Claims of the Members.............................................................   50

ARTICLE XII    MISCELLANEOUS...................................................................   51

     12.1    Notices...........................................................................   51

     12.2    Entire Agreement..................................................................   51

     12.3    Governing Law.....................................................................   51

     12.4    Member Defaults; Waiver of Certain Damages........................................   51

     12.5    Assigns...........................................................................   51

     12.6    No Implied Rights or Remedies.....................................................   51

     12.7    Counterparts......................................................................   52

     12.8    Construction......................................................................   52

     12.9    Severability......................................................................   52

     12.10   Consent to Jurisdiction...........................................................   52

     12.11   WAIVER OF RIGHT TO JURY TRIAL.....................................................   52

     12.12   Amendments........................................................................   52

     12.13   Trademark Licenses................................................................   53


                                       iii


                                TABLE OF CONTENTS
                                   (CONTINUED)



                                     PAGE
                                  
SCHEDULES

     Schedule A - MEMBERS

     Schedule B - INITIAL DIRECTORS

     Schedule C - TRANSACTION FEES

     Schedule D - LICENSED MARKS




                       LIMITED LIABILITY COMPANY AGREEMENT
                         OF JEFFERIES BABSON FINANCE LLC

      This Limited Liability Company Agreement of Jefferies Babson Finance LLC,
a Delaware limited liability company (the "Company"), is made as of October 7,
2004 (as amended and in effect from time to time, this "Agreement"), by and
among (a) JEFFERIES GROUP, INC., a Delaware corporation ("JGI"), (b)
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, a mutual life insurance company
organized under the laws of the Commonwealth of Massachusetts ("MassMutual"),
(c) BABSON CAPITAL MANAGEMENT LLC, a Delaware limited liability company and an
indirect wholly-owned subsidiary of MassMutual ("Babson"), and (d) CLASS C
MEMBER LLC, a Delaware limited liability company ("Class C Member Vehicle"), as
members of the Company, and (e) the Company. Any reference in this Agreement to
JGI, MassMutual, Babson or Class C Member Vehicle shall include such Member's
successors to the extent such successors have become New Members in accordance
with the provisions of this Agreement.

      WHEREAS, JGI, MassMutual, Babson and Class C Member Vehicle desire to form
a limited liability company pursuant to the Delaware Act for the purpose of
conducting the Business; and

      WHEREAS, it is the intent of the parties that the Company be treated as a
"finance company" in accordance with the guidelines set forth in the AICPA,
Audit Accounting Guide Depository and Lending Institutions, Banks and Savings
Institutions, Credit Unions, Finance Companies and Mortgage Companies.

      WHEREAS, each of JGI, MassMutual, Babson and Class C Member Vehicle is
executing and delivering concurrently herewith the Related Agreements (other
than the Employment Agreements) to which it is a party.

      NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound,
the Members and the Company hereby agree as follows:

                                    ARTICLE I

                                  DEFINED TERMS

      1.1 Certain Defined Terms. As used in this Agreement, the following terms
shall have the meanings specified below:

      "Accounting Period" means a three month period commencing on the first day
of each Fiscal Quarter, or any period of shorter duration commencing upon the
Closing Date or the day following the last day of the preceding Accounting
Period and terminating upon the earlier of (a) the last day of the current
Fiscal Quarter or (b) the day preceding the effective date of the admission of
any New Member, any other change in the relative Interests of the Members, a



Transfer by any Member, a Company Sale or any other similar transaction or
event, as determined by the Board acting pursuant to Section 3.7.

      "Adjusted Capital Account" means, with respect to the Capital Account of
any Member, the balance, if any, in such Member's Capital Account as of the end
of the relevant Accounting Period, after giving effect to all allocations made
with respect to such Accounting Period under Section 7.1 and to the following
adjustments:

            (a) credit to such Capital Account any amounts that the Member is
obligated to restore pursuant to Treasury Regulation Section
1.704-1(b)(2)(ii)(c) or is deemed to be obligated to restore pursuant to
Treasury Regulation Sections 1.704-2(g)(1) or 1.704-2(i)(5); and

            (b) debit to such Capital Account the items described in Treasury
Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and
1.704-1(b)(2)(ii)(d)(6) that are attributable to such Capital Account.

      The foregoing definition of Adjusted Capital Account is intended to comply
with the provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and
shall be interpreted consistently therewith.

      "Affiliate" means, with respect to any Person, any other Person
controlling, controlled by or under common control with, such Person. As used in
this definition, (a) "control" (including, with its correlative meanings,
"controlling," "controlled by" and "under common control with") means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of that Person, whether through the
ownership of voting securities, by Contract or otherwise, (b) with respect to
any Person other than a Subsidiary of the Company, the term "Affiliate" shall
not include the Company or any Subsidiary of the Company, (c) JGI (and its
Affiliates) and the MassMutual Members (and their Affiliates) shall not be
deemed to be Affiliates of each other and (d) Class C Member Vehicle shall not
be deemed to be an Affiliate of JGI (or its Affiliates) or the MassMutual
Members (or their Affiliates).

      "Aggregate Net Income" means, as calculated from time to time, the excess
of the aggregate Net Income for the then-current and all previous Accounting
Periods over the Aggregate Net Loss for the then-current and all previous
Accounting Periods, taking into account adjustments under Section 4.5(b).

      "Aggregate Net Loss" means, as calculated from time to time, the excess of
the aggregate Net Loss for the then current and all previous Accounting Periods
over the aggregate Net Income for the then current and all previous Accounting
Periods, taking into account adjustments under Section 4.5(b).

      "Assets" means any cash, Cash Equivalents, Investments or other property
or assets, including the Licensed Marks and other intangible assets, owned by
the Company.

      "Babson Services Agreement" means the Services Agreement, dated as of the
Closing Date, between the Company and Babson relating to the provision of
certain services to the Company by Babson, as such agreement is in effect from
time to time.

                                       2


      "Book Property" means property that is properly reflected on the books of
the Company at a book value that differs from the adjusted tax basis of such
property, within the meaning of Treasury Regulation Section
1.704-1(b)(2)(iv)(g)(1).

      "Business" means (a) the financing of investment opportunities through
Senior Loan Financings and Special Situation Financings with the equity capital
of the Company as well as with funds borrowed by the Company, (b) the purchase
and sale of Secondary Loan Investments and (c) any activity required thereby or
incidental thereto.

      "Business Day" means a day other than Saturday, Sunday or any day on which
banks located in the State of New York are authorized or obligated to close.

      "Business Plan" means the business plan for the Company adopted by the
Board no less frequently than twice each calendar year and setting forth (a) the
budget for the Company for the Fiscal Year covered by such plan and (b) the
capital requirements for the Business, and the means proposed for meeting such
capital requirements.

      "Buy-Sell Value" means the net asset value of the Company and/or any
Interest, as the case may be, determined by the Board or, if required, pursuant
to an Independent Appraisal, and calculated by subtracting (a) all liabilities
of the Company (including Indebtedness of the Company then outstanding, future
funding obligations of the Company and accrued expenses of the Company) from (b)
the value of the Assets; provided, that (i) each Asset that is an Investment
shall have been valued at its Market Value and (ii) any Asset that is not an
Investment shall be valued at the book value of such Asset as determined in
accordance with GAAP; and provided further, however, that no additional value
shall be ascribed the Company as a going concern. For this purpose, the value of
an Interest shall be determined by multiplying the net asset value of the
Company as so calculated by the Percentage Interest represented by such
Interest.

      "Capital Account" means, with respect to any Member, the account
maintained for such Member in accordance with the provisions of Section 4.5
hereof. A Transferee may acquire an interest in a Capital Account as provided in
Article V.

      "Capital Contribution" means, with respect to any Member, the amount of
money plus the fair market value of any other property (net of liabilities that
the Company is considered to assume pursuant to Code Section 752 and the
Treasury Regulations thereunder) contributed, or deemed to be contributed, to
the Company pursuant to Article IV.

      "Cash Equivalents" means investments available for sale or held to
maturity by the Company that are one or more of the following obligations or
securities:

            (a) U.S. Government Securities;

            (b) certificates of deposit of, banker's acceptances issued by or
money market accounts in, any depository institution or trust company
incorporated under the laws of the United States of America or any state thereof
and subject to supervision and examination by federal and/or state banking
authorities, so long as the deposits offered by such depository institution or
trust company are rated and have a rating of at least "F-1" if rated by Fitch,
"P-1" if rated by Moody's or "A-1" if rated by S&P or, if rated by two or more
of the foregoing, so rated

                                       3


by any two of the foregoing (or, in the case of the principal depository
institution in a holding company system whose deposits are not so rated, the
long-term debt obligations of such holding company are rated and such rating is
at least "A+" if rated by Fitch, "Al" if rated by Moody's or "A+" if rated by
S&P or any two of the foregoing);

            (c) commercial paper issued by any depository institution or trust
company incorporated under the laws of the United States of America or any state
thereof and subject to supervision and examination by federal and/or state
banking authorities, or any corporation incorporated under the laws of the
United States of America or any state thereof, so long as the commercial paper
of such issuer is rated and has at the time of such investment a short-term
rating of at least "F-1" if rated by Fitch, "P-l" if rated by Moody's or "A-1"
if rated by S&P or, if rated by two or more of the foregoing, so rated by any
two of the foregoing on its commercial paper;

            (d) securities bearing interest or sold at a discount issued by any
corporation incorporated under the laws of the United States of America or any
state thereof having a remaining term to maturity of one year or less, so long
as the obligations thereof are rated and have a credit rating of at least "F-1"
if rated by Fitch, "P-1" if rated by Moody's or "A-1" if rated by S&P or, if
rated by two or more of the foregoing, so rated by any two of the foregoing
either at the time of such investment or the making of a contractual commitment
providing for such investment;

            (e) interest-bearing deposits in United States dollars in United
States or Canadian banks with an unrestricted surplus of at least $250,000,000
maturing within one year; provided, that: (i) in no event shall Cash Equivalents
include any obligations that provide for the payment of interest alone or
principal alone; (ii) except in the case of U.S. Government Securities, Cash
Equivalents shall mature within one hundred eighty-three (183) days of
acquisition by the Company; (iii) if any of Fitch, S&P or Moody's changes its
rating system, then any ratings included in any subsection of this definition
shall be deemed to be an equivalent rating in a successor rating category of
Fitch, S&P or Moody's, as the case may be; and (iv) if any of Fitch, S&P or
Moody's is not in the business of rating securities, then any ratings included
in any sub-section of this definition shall be deemed to be an equivalent rating
from another rating agency of comparable standing; and

            (f) securities issued by money market funds substantially all the
assets of which are comprised of securities of the types described in clauses
(a) through (e) hereof.

      "Certificate" means the Certificate of Formation of the Company and any
and all amendments thereto and restatements thereof filed on behalf of the
Company with the office of the Secretary of State of the State of Delaware
pursuant to the Delaware Act.

      "Change in Ownership" means, with respect to JGI, Babson or MassMutual, as
the case may be, a change of control thereof (whether by merger, consolidation,
recapitalization, reorganization, sale of securities, sale of assets or
otherwise) in one transaction or a series of related transactions pursuant to
which one or more Persons acquire (i) securities representing at least a
majority of the voting power of all securities thereof (assuming the conversion,
exchange or exercise of all securities convertible, exchangeable or exercisable
for or into voting securities),

                                       4


or (ii) all or substantially all of the assets thereof on a consolidated basis,
unless in each case the equity owners of JGI, Babson or MassMutual, as the case
may be, immediately before such transaction(s) hold after the transaction(s) a
majority of the outstanding equity interests of the successor to the business
thereof; provided, however, that neither the election by MassMutual to convert,
nor such conversion, from a mutual life insurance company to a different entity
form, whether or not followed by a stock offering by MassMutual or an Affiliate
thereof to policy holders and/or the public, shall in itself be deemed to be a
"Change in Ownership" hereunder.

      "Class A Interest" means, with respect to any Member holding a Class A
Interest, the rights entitling such Member to the Preferred Return, to a share
of the Net Income and Net Loss, to Distributions and to a share of the Assets
upon liquidation, all in accordance with this Agreement.

      "Class A Members" means those Persons listed on Schedule A (as in effect
on the date hereof) as holders of a Class A Interest, and any New Member
admitted to the Company as a Class A Member after the date hereof in accordance
with this Agreement.

      "Class A Proportionate Ownership" means the proportion of the Class A
Interests owned by a Class A Member.

      "Class B Interest" means, with respect to any Member holding a Class B
Interest, the rights entitling such Member to appoint Directors pursuant to
Section 3.2, to appoint members of the Credit Committee pursuant to Section
3.10, to a share of Net Income and Net Loss, to Distributions and to a share of
the Assets upon liquidation, all in accordance with this Agreement.

      "Class B Members" means those Persons listed on Schedule A (as in effect
on the date hereof) as holders of a Class B Interest, and any New Member
admitted to the Company as a Class B Member after the date hereof in accordance
with this Agreement.

      "Class B Proportionate Ownership" means the proportion of the Class B
Interests owned by a Class B Member.

      "Class C Interest" means, with respect to any Member holding a Class C
Interest, the rights entitling such Member to a share of Net Income and Net
Loss, to Distributions and to a share of the Assets upon liquidation, all in
accordance with this Agreement.

      "Class C Members" means those Persons listed on Schedule A (as in effect
on the date hereof) as holders of a Class C Interest, and any New Member
admitted to the Company as a Class C Member after the date hereof in accordance
with this Agreement.

      "Closing Date" means October 7, 2004.

      "Code" means the Internal Revenue Code of 1986, as amended from time to
time.

      "Company Sale" means (a) the sale or issuance by the Company of Interests
after the date hereof that constitute, following consummation of such sale or
issuance, more than fifty percent (50%) of the outstanding Interests or (b) the
sale, in a single transaction or in a series of related

                                       5


transactions, to any Person or group (as defined for purposes of Section
13(d)(3) of the Exchange Act) of (i) all of the outstanding Interests or (ii)
all or substantially all of the Assets determined on a consolidated basis, in
each case whether accomplished directly or indirectly and whether accomplished
by purchase of Interests, stock or assets, merger, recapitalization,
reorganization or other transaction.

      "Company Seconded Employees" means each of the New Jefferies Employees, as
defined in the Jefferies Services Agreement, any other person whose Employee
Fees (as such term is defined in the Jefferies Services Agreement) are subject
to payment by the Company pursuant to Section 4(d) of the Jefferies Services
Agreement and any person employed by the Company, Babson, JGI or any of their
Affiliates primarily engaged in structuring and origination activities on behalf
of the Company.

      "Contract" means any agreement, lease, evidence of Indebtedness, mortgage,
indenture, security agreement or other contract or commitment (whether written
or oral).

      "Covered Person" means any Director, Officer, Member, holder of an
Economic Interest and Affiliate of a Member or holder of an Economic Interest,
and any officer, member, director, partner, shareholder, employee,
representative or agent of a Member and its Affiliates or holder of an Economic
Interest, and any employee of the Company and its Affiliates.

      "Default" with respect to any Member means (a) the failure of such Member
to contribute, within five (5) Business Days of the date required, all or any
portion of a Capital Contribution that such Member is required to make as
provided in this Agreement or (b) the failure of a Member to comply in any
material respect with any of its other agreements, covenants or obligations
under this Agreement or any Related Agreement to which it is a party if, in the
case of each such failure under this clause (b), such failure is not cured
(including via amendment, waiver or consent, if applicable) by the applicable
Member within sixty (60) days of its receiving notice thereof from another
Member or the Company.

      "Defaulting Member" means any Class A Member or Class B Member that is in
Default.

      "Delaware Act" means the Delaware Limited Liability Company Act, 6 Del. C.
Section 18-101, et seq., as amended and in effect from time to time, and any
successor statute thereto.

      "Director" means a member of the Board.

      "Distribution" shall mean cash or property (net of liabilities that the
Member is considered to assume pursuant to Code Section 752 and the Treasury
Regulations thereunder) distributed to a Member or an assignee or Transferee of
a Member in respect of such Member's Interest in the Company.

      "Economic Interest" means the portion of the Company's Net Income, Net
Losses and Distributions (including, without limitation, Distributions of
liquidation proceeds) attributable to any Interest held by a Member or any
Transferee thereof (whether or not admitted as a New Member) pursuant to this
Agreement and the Delaware Act.

                                       6


      "Employment Agreements" means the Employment Agreements entered into
between Jefco and each Company Seconded Employee, pursuant to the terms of the
Jefferies Services Agreement.

      "Encumbrances" means all liabilities, obligations, pledges, security
interests, security agreements, options, rights of first refusal, rights of
first offer, options to purchase, liens, mortgages, deeds of trust, leases,
subleases, easements, encroachments, claims, encumbrances or charges.

      "Exchange" means NASDAQ, any national securities exchange registered under
the Exchange Act or any other exchange or quotation system providing regularly
published securities prices.

      "Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.

      "Fiscal Quarter" means a fiscal quarter of a Fiscal Year.

      "Fiscal Year" for financial reporting and tax purposes means the calendar
year, except that the Company's first fiscal year shall commence on the Closing
Date and shall end on December 31, 2004 and, upon dissolution of the Company,
the Company's last fiscal year shall be from the end of the last fiscal year
next preceding the date of such dissolution to the date on which the winding up
of the Company is completed.

      "Fitch" means Fitch IBCA, Inc. and its successors.

      "GAAP" means United States generally accepted accounting principles,
consistently applied throughout the specified period and in the immediately
prior comparable period.

      "Indebtedness" means as to any Person: (a) all obligations, whether or not
contingent, of such Person for borrowed money (including, without limitation,
reimbursement and all other obligations with respect to surety bonds, letters of
credit and bankers' acceptances, whether or not matured), (b) all obligations of
such Person evidenced by notes, bonds, debentures or similar instruments, (c)
all obligations of such Person representing the balance of deferred purchase
price of property or services, except trade accounts payable and accrued
commercial or trade liabilities arising in the ordinary course of business, (d)
all interest rate and currency swaps, caps, collars and similar agreements or
hedging devices under which payments are obligated to be made by such Person,
whether periodically or upon the happening of a contingency, (e) all
indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), (f)
all obligations of such Person under leases which have been or should be, in
accordance with GAAP, recorded as capital leases, (g) all indebtedness secured
by any Encumbrance on any property or asset owned or held by that Person
regardless of whether the indebtedness secured thereby shall have been assumed
by that Person or is non-recourse to the credit of that Person, and (h) all
Indebtedness of any other Person referred to in clauses (a) through (g) above,
guaranteed, directly or indirectly, by that Person.

                                       7


      "Independent Appraisal" means a determination of the value of the Company,
its Assets or an Interest prepared by an Independent Appraiser as of the date of
determination. For such purpose, each Investment of the Company shall be valued
at its Market Value as of the date of determination.

      "Independent Appraiser" means any nationally recognized investment bank,
accounting firm or other professional valuation consultant with relevant
experience selected by the Board, acting pursuant to Section 3.11(b), that is
unaffiliated with any Class A Member or other Person having an Economic
Interest.

      "Interest" means a Member's membership interest in the Company, including
such Member's Economic Interest and the rights expressly provided in this
Agreement or required by the Delaware Act. The number and type of Interests
assigned to each Member shall be listed opposite such Member's name on Schedule
A. Any Interests issued after the date of this Agreement shall have such
designations, preferences or special rights as determined by the Board, acting
pursuant to Section 3.7, which may differ from those of the Interests issued as
of the date of this Agreement.

      "Interest Equivalent" means any right, warrant, option, convertible
security, exchangeable security, Indebtedness or other right, in each case
exercisable for or convertible or exchangeable into, directly or indirectly, an
Interest or security exercisable for or convertible or exchangeable into an
Interest, whether at the time of issuance or upon the passage of time or the
occurrence of some future event.

      "Investment" means any note, bond, loan or other evidence of Indebtedness,
security, capital stock, partnership or limited liability company interest,
warrant or other similar asset purchased, held to maturity or available for sale
by the Company, together with any ancillary rights and obligations, such as
security interests associated therewith.

      "Jefco" means Jefferies & Company, Inc., a Delaware Corporation.

      "Jefferies Services Agreement" means the Services Agreement, dated as of
the Closing Date, between the Company and Jefco relating to the provision of
certain services to the Company or its Subsidiaries by Jefco, as such agreement
is in effect from time to time.

      "Market Value" means as of the date of determination (a) with respect to
any Investment (other than cash, a Cash Equivalent or a Quoted Investment) at
any date, the value of such Investment as most recently determined by Babson,
another Person selected by the Board pursuant to Section 3.11(b) in the ordinary
course, or an Independent Appraiser (if required pursuant to the terms of this
Agreement), as applicable, or, if no such value has been so determined within
the past three (3) months, the value ascribed to such Investment by the Board
employing a methodology consistent with that employed by the Company for similar
Investments in the ordinary course; (b) with respect to any Quoted Investment
(i) the value attributed thereto by the applicable Pricing Service (or the
average value if priced by more than one Pricing Service) on the last Business
Day prior to the relevant date of determination, (ii) the average bid value
attributed thereto by the independent, third party dealers valuing such
Investment or (iii) the closing price of such Investment quoted on the principal
Exchange on

                                       8


which it trades on the last Business Day prior to the relevant date of
determination; (c) with respect to cash, the amount thereof; and (d) with
respect to any Cash Equivalent, (i) if interest-bearing, the face amount thereof
and (ii) if issued at a discount, the face amount thereof less any unamortized
discount. For purposes of this definition, (A) accrued interest on any
interest-bearing Investment (unless it is quoted "flat") will be included in the
determination of Market Value by the party making such determination and (B) the
value of all non-dollar-denominated Investments will be converted into dollars
(at the spot exchange rate at the close of business of the relevant calculation
date).

      "MassMutual Members" means, collectively, Babson and MassMutual.

      "Member" means any Person who becomes a party hereto as a Member in
accordance with the terms hereof, each in his or its capacity as a member of the
Company.

      "Moody's" means Moody's Investors Service, Inc., and its successors.

      "NASDAQ" means The Nasdaq Stock Market, Inc.

      "Net Income" or "Net Loss" means, except as specified below, the income or
loss of the Company for "book" or "capital account" purposes under Treasury
Regulation Section 1.704-1(b)(2) (iv). In particular, but without limitation,
for each Accounting Period, "Net Income" or "Net Loss" shall mean the Company's
taxable income or loss for such Accounting Period, determined in accordance with
Code Section 703(a) (it being understood that for this purpose, all items of
income, gain, loss or deduction required to be stated separately pursuant to
Code Section 703(a)(1) shall be included in such taxable income or loss), with
the following modifications:

            (a) income, gain or loss from, and cost recovery, amortization or
depreciation deductions with respect to, any Book Property shall be computed by
reference to the value of such Book Property as set forth in the books of the
Company, all in accordance with the principles of Treasury Regulation Section
1.704-1(b)(2)(iv)(g), notwithstanding that the adjusted tax basis of such Book
Property differs from such value;

            (b) any income of the Company that is exempt from federal income
tax, and that is not otherwise taken into account in computing Net Income or Net
Loss, shall be treated as an item of income in computing such Net Income or Net
Loss;

            (c) any expenditures of the Company that are described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and that are not
otherwise taken into account in computing Net Income or Net Loss, shall be
treated as items of expense in computing such Net Income or Net Loss;

            (d) in the event that the value of any Company property is adjusted
pursuant to Section 4.5(b) or Section 4.5(f) of this Agreement, the amount of
such adjustment shall be taken into account as gain or loss (as the case may be)
from the disposition of such property for purposes of computing Net Income and
Net Loss;

            (e) to the extent (and only to the extent) that an adjustment made
to the adjusted

                                       9


tax basis of any Asset pursuant to Code Section 732, Code Section 734 or Code
Section 743 is required to be taken into account in determining Capital Accounts
pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), the amount of such
adjustment shall be treated as an item of gain or loss (as the case may be) for
purposes of computing Net Income or Net Loss; and

            (f) all items of Company gross income, gain, loss, deduction or
expense for any Accounting Period that are specially allocated pursuant to
Section 7.1(b) shall be disregarded in computing Net Income or Net Loss for the
Accounting Period (but the amount of such items available for allocation under
Section 7.1(b) shall be determined by applying rules analogous to the
modifications set forth in clauses (a) through (e) above).

      "New Member" means any Member admitted to the Company pursuant to the
terms of this Agreement other than JGI, MassMutual, Babson or Class C Member
Vehicle.

      "Non-Defaulting Member" means, in the event of a Default by either
MassMutual Member, JGI; and in the event of a Default by JGI, either MassMutual
Member as they shall determine.

      "Percentage Interest" means the interest of each Member in the profits and
losses of the Company, expressed as a percentage, as set forth on Schedule A,
all of which taken together shall equal one hundred percent (100%). Changes in
the Percentage Interests of the Members by reason of the issuance of Additional
Interests pursuant to Section 4.6(a), by reason of the Board's allocation of Net
Income between the Class B Members and Class C Members pursuant to Section
3.7(c) or by reason of any Transfer shall be recorded on Schedule A hereto.

      "Person" means any individual, partnership, corporation, association,
trust, limited liability company, joint venture, unincorporated organization and
any government, governmental department or agency or political subdivision
thereof.

      "Preferred Return" means, with respect to each Class A Interest, as of any
determination date, an amount equal to the interest that would have been earned,
at an interest rate of eight percent (8%) per annum, on the Unreturned Capital
Contribution attributable to such Class A Interest from the date of each Capital
Contribution in respect of such Class A Interest to and including the date of
determination, compounded annually and appropriately adjusted to reflect any
change in the amount of Unreturned Capital Contributions during each such Fiscal
Year.

      "Presumed Tax Rate" means the greater of (i) the highest combined federal,
state and local effective tax rate applicable to a corporation doing business in
New York City with respect to income allocated to New York City, taking into
account the deductibility of state and local taxes and (ii) the highest combined
federal, state and local effective tax rate applicable to an individual who is
taxed as a resident of New York State and as a U.S. citizen, taking into account
the deductibility of state and local taxes.

      "Previously Undistributed Net Income" means, as calculated from time to
time, the excess, if any, of (i) Aggregate Net Income over (ii) the aggregate
amount of Distributions pursuant to Sections 7.4(b) and 7.4(c) for the then
current and all previous Accounting Periods.

                                       10


      "Pricing Service" means any of J.J. Kenny, Merrill Lynch, LockPoint Xtra,
LoanX or IDC, and their successors.

      "Quoted Investment" means any Investment (other than Cash or a Cash
Equivalent) which is (a) priced by a Pricing Service, (b) quoted by two
independent, third party dealers or (c) traded on an Exchange.

      "Regulated Member" means any Class A Member or Class B Member which, by
reason of a change in or promulgation of any law, regulation or governmental
order, occurring after its admission as a Member, to which such Member is
subject, would be (according to the written opinion of outside counsel) in
violation of any such law, regulation or order if such Member continued to be a
Member of the Company or if any Person affiliated with that Member were, or
continued to be, Officers or Directors of the Company.

      "Related Agreements" means, collectively, the Certificate, this Agreement,
the Services Agreements, and the Employment Agreements.

      "Revaluation Event" means (i) the last business day of each Accounting
Period; (ii) a contribution of more than a de minimis amount of money or
property to the Company by any new or existing Member; (iii) the distribution by
the Company of more than a de minimis amount of money or property to a retiring
or continuing Member; and (iv) the liquidation of the Company, within the
meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(g) or pursuant to
Article XI; provided, however, that in connection with an event described in
clause (ii) or (iii) above a "Revaluation Event" shall occur only if, as a
result of such event, there is a change in the proportionate interests of the
Members.

      "S&P" means Standard & Poor's Ratings Services, and its successors.

      "SEC" means the United States Securities and Exchange Commission.

      "Secondary Loan Investments" means investments available for sale or held
to maturity and constituting transferable assets through the secondary par and
distressed loan markets.

      "Securities Act" means the Securities Act of 1933, as amended.

      "Senior Loan Financing" means a financing provided on a senior basis that
involves either a revolving credit facility or term loan (including first and
second lien facilities and senior floating rate notes).

      "Services Agreements" means the Babson Services Agreement and the
Jefferies Services Agreement.

      "Special Situation Financings" means a financing, with or without an
equity co-invest opportunity, arising from a distressed restructuring,
bankruptcy or other investment opportunity that involves (a) a newly issued
senior debt facility (including a revolving credit facility, term loan,
debtor-in-possession facility, bridge facility or other senior floating rate
instrument); or (b) high yield or subordinated debt or other mezzanine
securities or private equity securities.

                                       11


      "Subsidiary" means any corporation, association, trust, or other business
entity, of which the designated parent shall at any time own or control directly
or indirectly through a Subsidiary or Subsidiaries at least a majority (by
number of votes) of the outstanding shares of capital stock (or other shares of
beneficial interest) entitled ordinarily to vote for the election of such
business entity's directors (or in the case of a business entity that is not a
corporation, for those Persons exercising functions similar to directors of a
corporation).

      "Tax" or "Taxes" means all federal, state, local or foreign net or gross
income, gross receipts, net proceeds, sales, use, ad valorem, value added,
franchise, bank shares, withholding, payroll, employment, excise, sales, use,
property, alternative or add-on minimum, environmental or other taxes,
assessments, duties, fees, levies or other governmental charges of any nature
whatsoever, whether disputed or not, together with any interest, penalties,
additions to tax or additional amounts with respect thereto.

      "Tax Matters Member" means Babson.

      "Transfer" or "Transferred" means, with respect to any Interest or
Interest Equivalent, a direct or indirect sale, transfer, exchange, assignment,
gift, pledge, hypothecation or other disposition or Encumbrance of any nature,
voluntarily or involuntarily or by operation of law of or on such Interest or
Interest Equivalent (including any Transfer as a result of a direct or indirect
Change in Ownership of such Member).

      "Transferee" means, with respect to any Interest or Interest Equivalent,
the Person to whom such Interest or Interest Equivalent has been Transferred or,
if the context so requires, to whom the Transferor of such Interest or Interest
Equivalent desires to Transfer such Interest or Interest Equivalent.

      "Transferor" means, with respect to any Interest or Interest Equivalent,
the Member or Person who has Transferred such Interest or Interest Equivalent
or, if the context so requires, who desires to Transfer such Interest or
Interest Equivalent.

      "Treasury Regulations" means the income tax regulations, including
temporary regulations, promulgated under the Code, as such regulations may be
amended from time to time (including corresponding provisions of succeeding
regulations).

      "Unaffected Member" means in the event of a Change in Ownership of either
MassMutual Member, JGI; and in the event of a Change in Ownership of JGI, either
MassMutual Member as they shall determine.

      "Unreturned Capital Contribution" shall mean, with respect to each Class A
Interest on any applicable date of determination, the amount contributed to the
capital of the Company pursuant to Section 4.3, plus the aggregate amount
allocated to such Class A Interest on or before that date pursuant to Section
7.1(a)(i)(B), less the aggregate amount of any Distributions made by the Company
with respect to such Class A Interest on or before that date (other than any Tax
Distribution made with respect to an allocation of income pursuant to Section
7.1(a)(ii)(C)).

      "U.S. Government Securities" means securities that are direct obligations
of, and obligations the timely payment of principal and interest on which is
fully guaranteed by, the

                                       12


United States of America or any agency or instrumentality of the United States
of America, the obligations of which are backed by the full faith and credit of
the United States of America.

      1.2 Other Defined Terms. The following terms have the meanings given such
terms in the Sections set forth below:



              Term                        Section
- ----------------------------------  -------------------
                                 
Additional Interests                Section 4.6(a)
Agreement                           Caption
Approving Member                    Section 3.10(b)
Alternate                           Section 3.2(a)
Babson                              Caption
Board                               Section 3.1(a)
Budget                              Section 3.3(f)
Capital Account                     Section 4.5(a)
Capital Call                        Section 4.3(b)(i)
Class C Member Vehicle              Caption
Chairman                            Section 3.2(b)(i)
Closing                             Section 11.1(c)(iv)
Company                             Caption
Credit Committee                    Section 3.10(a)
Credit Committee Dissolution Event  Section 3.10(b)
Date of Value                       Section 11.1(c)(ii)
Disapproving Member                 Section 3.10(b)
Disclosing Party                    Section 6.2(a)
Disputed Matter                     Section 3.8
Dispute Notice                      Section 3.8
Financing Opportunities             Section 3.10(b)
Head Loan Officer                   Section 3.4(b)
JGI                                 Caption
Licensed Marks                      Section 12.13
Management Event                    Section 4.1(c)(i)
MassMutual                          Caption
Material Decision                   Section 3.7
Non-Terminating Members             Section 11.1(b)
Non-Extension Date                  Section 11.1(b)
Offering Notice                     Section 11.1(c)(ii)
Officer                             Section 3.4(a)
Origination Fee                     Schedule C
Other Business                      Section 6.1(b)
Proprietary Information             Section 6.2(a)
Purchase Price                      Section 11.1(c)(ii)
Purchasing Member                   Section 11.1(c)
Related Party                       Section 6.2(a)
Repayment Rights                    Section 11.1(c)(iv)


                                       13


                                 
Residual Fee                        Schedule C
Selling Member                      Section 11.1(c)
Syndication Fee                     Schedule C
Tax Distribution                    Section 7.4(c)
Technical Withdrawal                Section 11.2(a)
Terminating Member                  Section 11.1(b)
Termination Notice                  Section 11.1(b)
Underwriting Fee                    Schedule C
Unlimited Parties                   Section 6.1(b)
Vice Chairman                       Section 3.2(b)(ii)



      1.3 Headings. The headings and subheadings in this Agreement are included
for convenience and identification only and are in no way intended to describe,
interpret, define or limit the scope, extent or intent of this Agreement or any
provision hereof.

                                   ARTICLE II

                                  ORGANIZATION

      2.1 Formation.

            (a) The Members hereby agree to form the Company as a limited
liability company under and pursuant to the provisions of the Delaware Act and
agree that the rights, duties and liabilities of the Members shall be as
provided in the Delaware Act, except as otherwise provided herein.

            (b) Upon the execution of this Agreement, each of Babson,
MassMutual, JGI and Class C Member Vehicle shall be Members of the Company.

            (c) The name and mailing address of each Member and each Member's
Percentage Interest shall be listed on Schedule A attached hereto. The Board
shall update Schedule A from time to time as necessary to accurately reflect the
information required to be stated therein. Any amendment or revision to Schedule
A made in accordance with this Agreement shall not be deemed an amendment to
this Agreement. Any reference in this Agreement to Schedule A shall be deemed to
be a reference to Schedule A as amended and in effect from time to time.

      2.2 Name. The name of the limited liability company formed hereby and by
the filing of the Certificate on July 26, 2004, is Jefferies Babson Finance LLC.
The business of the Company may be conducted under any other name approved by
the Board in accordance with Section 3.7 and in compliance with applicable law.

      2.3 Term. The term of the Company shall commence on the date on which the
Certificate was filed with the office of the Secretary of State of the State of
Delaware and shall continue in perpetuity, unless sooner dissolved as provided
in Article XI.

      2.4 Registered Agent and Office. The registered office of the Company
required by the Delaware Act to be maintained in the State of Delaware shall be
the office of the initial

                                       14


registered agent named in the Certificate or such other office (which need not
be a place of business of the Company) as the Board may designate from time to
time in the manner provided by applicable law. The registered agent of the
Company in the State of Delaware shall be the initial registered agent named in
the Certificate or such other Person as the Board may designate from time to
time in the manner provided by applicable law.

      2.5 Principal Place of Business. The principal places of business of the
Company initially shall be New York, New York and Charlotte, North Carolina. At
any time, the Board may change the location of the Company's principal place of
business. The Company may have offices at such other places within or without
the State of Delaware as the Board may from time to time determine or the
business of the Company may require.

      2.6 Qualification in Other Jurisdictions. The Board shall cause the
Company to be qualified in, or registered under the assumed or fictitious name
statutes or similar laws of, any jurisdiction in which the Company transacts
business in which such qualification or registration is required. Any Officer
duly authorized by the Board shall execute, deliver and file any certificates
(and any amendments and/or restatements thereof) necessary for the Company to
qualify to do business in a jurisdiction in which the Company may wish to
conduct business.

      2.7 Purpose. The Company is formed for the object and purpose of, and the
nature of the business to be conducted and promoted by the Company is, engaging
in the Business and any lawful act or activity reasonably related thereto for
which limited liability companies may be formed and in which they may engage
under the Delaware Act.

      2.8 Powers of the Company.

            (a) Subject to the provisions of this Agreement, including, without
limitation, as set forth in Section 3.7, the Company shall have the power and
authority to take any and all actions necessary, appropriate, proper, advisable,
convenient or incidental to or for the furtherance of the purposes of the
Company set forth herein.

            (b) The Board may authorize any Person (including, without
limitation, any Member) to enter into and perform any document, instrument or
agreement on behalf of, and in the name of, the Company.

            (c) The Company may merge with, or consolidate into, another limited
liability company (organized under the laws of Delaware or any other state), a
corporation (organized under the laws of Delaware or any other state) or other
business entity (as defined in Section 18-209(a) of the Delaware Act) upon
approval of such transaction in accordance with the provisions of this
Agreement.

      2.9 No State-Law Partnership. The Members intend that the Company shall
not be a partnership (including, without limitation, a limited partnership) or
joint venture, and that no Member, Director or Officer shall be a partner or
joint venturer of any other Member, Director or Officer, for any purposes other
than federal, and if applicable, state tax purposes, and this Agreement shall
not be construed to the contrary. The Members intend that the Company shall be
treated as a partnership for federal and, if applicable, state income tax
purposes, and each Member and the Company shall file all Tax returns and shall
otherwise take all Tax and financial

                                       15


reporting positions in a manner consistent with such treatment. The Members
shall not make any election under Treasury Regulation Section 301.7701-3, or any
comparable provisions of state or local law, to treat the Company as an entity
other than a partnership for federal, state or local income tax purposes.

                                   ARTICLE III

                            MANAGEMENT AND OPERATIONS

      3.1 Board of Directors.

            (a) Except to the extent such matters are delegated to the Credit
Committee pursuant to Section 3.10, the business and affairs of the Company
shall be managed by or under the direction of a four-member board (the "Board")
(which shall be composed of the Directors), except as may otherwise be provided
in this Agreement. Each of the Directors shall possess all rights, powers,
duties and obligations of a "manager" of a limited liability company as provided
under the Delaware Act or otherwise by applicable law; provided, that all of the
actions of the Directors, in their capacity as such, shall be taken as a Board
and no Director shall unilaterally take any action in the name of or on behalf
of the Company, including without limitation assuming any obligation or
responsibility on behalf of the Company, unless such action, and the taking
thereof by such Director in his capacity as a Director, shall have been
expressly authorized by the Board in accordance with Sections 3.3 or 3.7 hereof,
as applicable. The Board shall have the power on behalf and in the name of the
Company to (or to cause the appropriate Officers, employees or agents of the
Company, as appropriate, to) in each case subject to Section 3.7 hereof:

                  (i) establish policies and guidelines for the conduct of the
business and affairs of the Company;

                  (ii) make determinations with respect to those matters set
forth in Section 3.7 hereto;

                  (iii) take all such actions as are necessary or desirable to
cause the Company to acquire, hold and sell real estate necessary for the
operation of the Business, including, without limitation, executing any deed,
lease, easement, mortgage, deed of trust, mortgage note, promissory note, bill
of sale, Contract, certificate or other instrument in connection with the
acquisition, holding, financing, management, maintenance, operation, lease,
mortgage or other disposition of real property;

                  (iv) consummate financings for the Company;

                  (v) make capital expenditures for the Company;

                  (vi) protect and preserve the interests of the Company and the
Assets and comply with all applicable laws and regulations and all agreements of
the Company;

                  (vii) keep the books and records of the Company;

                                       16


                  (viii) maintain the funds of the Company in one or more
Company accounts in a bank or banks and make payments for expenses of the
Company out of such accounts;

                  (ix) make Distributions periodically to the Members in
accordance with the provisions of this Agreement;

                  (x) obtain and comply with all policies of insurance in place
with respect to the Company and the Assets;

                  (xi) institute, defend, prosecute, settle or otherwise take
any action on behalf of the Company with respect to any lawsuit or other legal
action;

                  (xii) prepare and file all necessary returns, reports and
statements and pay all Taxes, assessments and other impositions relating to the
operation of the Company and the Assets and make any elections or take any other
actions with respect to any material matter relating to such Taxes, assessments
and other impositions;

                  (xiii) perform the other normal business functions and
otherwise operate and manage the day-to-day business affairs of the Company in
accordance with this Agreement;

                  (xiv) determine the value of the Assets from time to time as
required hereunder and under any Contract, including any Employment Agreement or
credit agreement or other financing agreement to which the Company may be party,
and to appoint such investment banks, accountants, professional valuation
consultants or other professional advisers as it may determine to assist in the
performance of such function; and

                  (xv) carry out any and all objects and purposes of the Company
contemplated by this Agreement and perform all acts which they may deem
necessary, advisable or appropriate in connection therewith.

            (b) The Members agree that all determinations, decisions and actions
made or taken by the Board shall be conclusive and absolutely binding upon the
Company, the Members (but only in their capacity as such) and their respective
successors, assigns and personal representatives, and any Person dealing with
the Company shall be entitled to rely on such determinations, decisions and
actions, and any execution of any instrument in connection therewith, without
any further investigation, as to the authority of the Board to make or take any
such determination, decision for or action on behalf of the Company.

      3.2 Composition of the Board.

            (a) General. Each Class A Member shall designate two (2) of the
Board's four (4) Directors. In the event that a New Member is admitted to the
Company in accordance with the terms of this Agreement as a Transferee of all,
but not less than all, of the Class A Interest of a Class A Member that has the
right to appoint Directors as described in the preceding sentence, such new
Class A Member shall acquire the same right to appoint such Directors. Each
Class A Member shall have the right to designate an alternate (an "Alternate")
to serve in the official capacity of any such Director appointed by such Class A
Member at a meeting of the Board.

                                       17


Such Alternate shall be considered a Director under this Agreement at such
meeting.

            (b) Chairman and Vice Chairman of the Board.

                  (i) The Chairman of the Board (the "Chairman") shall serve a
one (1) year term and shall be a Director. The right to appoint the Chairman
shall alternate each term between each of the Class A Members. Babson shall have
the right to appoint the initial Chairman, and Roger W. Crandall shall be the
initial Chairman. Each Chairman shall serve until a successor has been appointed
and qualified by the Member that has the right to appoint the Chairman during
such term or until his or her earlier death, resignation or removal.

                  (ii) The Vice Chairman of the Board (the "Vice Chairman")
shall serve a one (1) year term and shall be a Director. Each term, the Class A
Member that does not have the right to appoint the Chairman pursuant to Section
3.2(b)(i) shall have the right to appoint the Vice Chairman. The initial Vice
Chairman shall be Brian Friedman. Each Vice Chairman shall serve until a
successor has been appointed and qualified by the Member that has the right to
appoint the Vice Chairman during such term or until his or her earlier death,
resignation or removal.

            (c) Initial Directors. The initial Directors shall be as set forth
on Schedule B.

            (d) Removal; Resignation; Vacancies. Except as otherwise provided in
this Agreement, each Director on the Board shall serve at the pleasure of the
Member which designated such Director. Each such Member shall have the right at
any time, in its sole and absolute discretion, to designate, remove (with or
without cause) and replace any of its Directors by written notice to the
Company, the Board and each other Member. No Director may be removed except by
the Member designating such Director. Any Director may resign at any time by
giving written notice to the Chairman, who shall provide notice thereof to the
other Directors and the Members. Such resignation shall take effect on the date
shown on or specified in such notice or, if such notice is not dated and the
date of resignation is not specified in such notice, on the date of the receipt
of such notice by the Chairman. No acceptance of such resignation shall be
necessary to make it effective. Any vacancy on the Board shall be filled only by
the Member the resignation, removal or death of whose Director has caused the
vacancy.

            (e) Compensation. No Person shall be entitled to any fee,
remuneration or compensation from or on behalf of the Company in connection with
service as a Director. Any reasonable direct costs and expenses incurred by a
Director on behalf of the Company shall be reimbursed by the Company.

            (f) Duties and Liabilities. Each Director's sole duty (including
fiduciary duty) to the Company shall be to act in the best interest of the
Member which appointed such Director.

      3.3 Procedural Matters Regarding the Board.

            (a) Meeting Agendas. The Chairman shall prepare or direct the
preparation of the agenda for, and preside over, meetings of the Board. The
Chairman shall deliver such agenda to each Director at least two (2) Business
Days prior to the giving of notice of a regular or special meeting, and any
Director may add items to such agenda.

                                       18


            (b) Timing; Notice. The Board shall meet at least once every three
(3) months at the Company's New York, New York offices or as otherwise agreed by
the Board. Special meetings of the Board may be called by the Chairman or the
Vice Chairman and shall be held at the Company's New York, New York offices or
as otherwise agreed by the Board. Written notice (including a proposed agenda)
of the time and place of each regular and special meeting of the Board shall be
given by or at the direction of the person calling such meeting to each
Director, in the case of a regular or a special meeting, at least two (2)
Business Days before such meeting by electronic transmission, mail or facsimile
transmission. The written notice shall include the place, day and hour of the
meeting of the Board, the purpose of such meeting and any information necessary
to arrange attendance through telecommunications equipment, if applicable. The
required notice of any meeting to any Director may be waived by such Director in
writing either before or after such meeting. Attendance by a Director at a
meeting shall constitute a waiver of any required notice of such meeting by such
Director, except when such Director attends such meeting for the express purpose
of objecting to the transaction of any business on the grounds that the meeting
is not properly called or convened.

            (c) Quorum and Approval. Whenever any Company action is to be taken
by a vote of the Board, it shall be authorized upon receiving the unanimous
affirmative vote of the Directors then entitled to vote present at a duly
constituted meeting of the Board at which a quorum is present. The presence of
at least one (1) Director designated by each of the Class A Members (other than
any such Class A Member whose management participation rights have been
suspended in accordance with Section 4.1(c)) in accordance with this Agreement
shall constitute a quorum for the transaction of any business by the Board which
is not a Material Decision, and the presence of each Director designated by each
of the Class A Members (other than any such Class A Member whose management
participation rights have been suspended in accordance with Section 4.1(c)) then
entitled to vote in accordance with this Agreement shall constitute a quorum for
the transaction of any business by the Board which is a Material Decision;
provided, however, that the Member which appointed any absent Director may waive
compliance with the quorum requirements set forth in this Section 3.3(c); and
provided, further, that if notice of a meeting is provided to the Directors, and
such notice describes the business to be considered, the actions to be taken and
the matters to be voted on at the meeting in reasonable detail, and insufficient
Directors attend the meeting to constitute a quorum, the meeting may be
adjourned by those Directors attending such meeting for a period not to exceed
twenty (20) days. Such meeting may be reconvened by providing notice of the
reconvened meeting to the Directors no less than ten (10) days prior to the date
of the meeting specifying that the business to be considered, the actions to be
taken and the matters to be voted upon are those set forth in the notice of the
original adjourned meeting; provided that a quorum shall still be required for
any action to be taken at such reconvened meeting.

            (d) Attendance by Telephone, Etc. Directors may, unless prohibited
by applicable law, rule or regulation, participate in a meeting of the Board by
means of conference telephone or similar communications equipment by means of
which all Persons participating in the meeting can speak to and hear each other,
and such participation shall constitute presence in person at such meeting,
except where a Director participates in the meeting for the express purpose of
objecting to the transaction of any business on the ground that the meeting is
not properly called or convened.

                                       19


            (e) Action by Written Consent in Lieu of Meeting. Unless prohibited
by applicable law, rule or regulation, any action required or permitted to be
taken at a meeting of the Board may be taken without a meeting if a written
consent (including a consent executed and delivered in counterpart by means of
electronic transmission), setting forth the action so taken, is signed by all of
the Directors and is filed with the minutes of the proceedings of the Board.
Each request for written consent of the Directors shall be given to each of the
Directors as far in advance as is reasonably practicable under the
circumstances. Any consent shall have the same force and effect as a vote of the
Directors at a meeting of the Board duly called and held at which a quorum was
present.

            (f) Budgetary Meetings. The Board shall meet prior to the end of the
second Fiscal Quarter and the fourth Fiscal Quarter of each Fiscal Year to
develop the Business Plan and budgets (each a "Budget") for revenues, operating
expenses, capital improvements and reserves for the succeeding two Fiscal
Quarters. A Budget shall be adopted when approved by the Board, acting pursuant
to Section 3.7, and may be modified or amended only by written amendment
approved by the Board, acting pursuant to Section 3.7. The Board shall agree
upon the initial Budget for the first two Fiscal Quarters of the 2005 Fiscal
Year no later than December 31, 2004. In the event that the Board has not
developed and approved a Budget prior to the beginning of the next six-month
fiscal period, the Budget in effect in the preceding six (6) month fiscal period
shall be the Budget for such next six (6) month fiscal period until a succeeding
Budget is developed and approved.

      3.4 Officers.

            (a) There shall be such number of officers of the Company (each an
"Officer") as may be determined from time to time by the Board so long as there
is at least one (1) Officer, who is designated the Head Loan Officer. Each
Officer of the Company shall be a natural person of full age who need not be a
resident of the State of Delaware. The Board shall have the right to confer upon
any Officer such titles as the Board deems appropriate, including, without
limitation, President, Executive Vice President, Treasurer, Assistant Treasurer,
Secretary, Assistant Secretary or Managing Director, and, subject to the
limitations set forth in Section 3.7 of this Agreement, delegate specifically
defined duties to the Officers. Notwithstanding the foregoing or any other
provision of this Agreement or of the Delaware Act to the contrary, no Officer
of the Company shall have the power or authority to do or perform any act with
respect to any of the matters set forth in Section 3.7 unless such matter has
been approved in accordance with the provisions of Section 3.7.

            (b) The Board, acting pursuant to Section 3.7, shall agree upon a
senior Officer for the Company who will be engaged by Jefco as a Company
Seconded Employee to act as the head of structuring and origination activities
of the Business (the "Head Loan Officer"). The Head Loan Officer shall serve
until a successor is appointed by the Board acting pursuant to Section 3.7.
Other key personnel with regard to the structuring and origination activities of
the Business will be recruited by the Head Loan Officer or the Members and
engaged by Jefco as Company Seconded Employees subject to the approval of the
Board acting pursuant to Section 3.3.

            (c) Except as otherwise set forth herein, the Board shall have the
right, in its sole

                                       20


and absolute discretion, to appoint, remove (with or without cause) and replace
the Officers and to define their respective duties and responsibilities. Except
as provided in Section 3.4(d), each Officer shall hold office until a successor
has been designated by the Board and qualified or until his or her earlier
death, resignation or removal.

            (d) An Officer may resign at any time by giving written notice to
the Board. The resignation of an Officer shall be effective upon receipt of such
notice or at such later time as shall be specified in the notice. Unless
otherwise specified in the notice, the acceptance of the resignation shall not
be necessary to make such resignation effective.

            (e) The salaries, if any, of the Officers shall be fixed from time
to time by the Board; provided, that any Officer who may be entitled to vote on
(by reason of his or her membership on the Board) or fix salaries shall not vote
on or otherwise participate in the fixing of his or her own salary. The salaries
or other compensation of any other employees and other agents shall be fixed
from time to time by the Board.

      3.5 Insurance. The Company shall purchase and maintain insurance,
including without limitation directors' and officers' liability insurance
covering the Directors and Officers, to the extent and in such amounts as the
Board shall deem reasonable, on behalf of Covered Persons and such other Persons
as the Board, acting pursuant to Section 3.3, shall determine, against any
liability that may be asserted against or expenses that may be incurred by any
such Person in connection with the activities of the Company. The Company may
enter into indemnity contracts with Covered Persons, or agreements (including
the Related Agreements) containing indemnity provisions and may adopt written
procedures pursuant to which arrangements are made for the advancement of
expenses and the funding of obligations under Section 10.3 hereof and containing
such other procedures regarding indemnification as may be deemed appropriate by
the Board.

      3.6 Compliance with Authority.

            (a) General Rules. The Company shall, and the Board shall cause the
Company to, comply in all material respects with all applicable laws, rules,
regulations, orders, decrees, rulings, certificates, licenses, demands,
judgments, writs, injunctions, and awards applicable to the Company.

            (b) Taxes and Charges. Each Member shall promptly pay all applicable
Taxes and other governmental charges attributable to it in its individual
capacity, shall satisfy all Encumbrances attributable to it in its individual
capacity and shall comply with all applicable governmental rules attributable to
it in its individual capacity to the extent, and only to the extent, that a
failure to do so would create an Encumbrance or claim on the Company or the
Assets or would impose additional, or alter any existing, governmental approvals
applicable to the Company or the Business.

      3.7 Approval of Certain Matters. The following matters shall each be a
"Material Decision" (it being agreed that the matters delegated to the Credit
Committee pursuant to Section 3.10 shall not be considered "Material
Decisions"), and the Company shall have no power or

                                       21


authority to do or perform any act with respect to any of the following matters
without approval or consent of the Board given in accordance with the provisions
of this Agreement:

            (a) Additional Capital Contributions; Adjustments to Interests.
Except as otherwise provided herein, including with respect to any Capital Call,
the making of any call for additional Capital Contributions or any modification
or adjustment of Interests.

            (b) Distributions. Except as provided in Section 11.5, the making of
any declaration or payment of Distributions to the Members.

            (c) Allocation of Class B Members' and Class C Members' Net Income.
Prior to the end of each Fiscal Year, the adjustment of the Percentage Interests
of the Class B Members and the Class C Members for such Fiscal Year and revision
of Schedule A to reflect the resulting changes in Percentage Interests; provided
that (i) each Class B Member's Percentage Interest shall be adjusted
proportionately to that of each other Class B Member, (ii) the aggregate of the
Percentage Interests of the Class B Members and the Class C Members shall total
twenty percent (20%) and (iii) the Percentage Interest of the Class C Members
shall be at least ten percent (10%), unless the Board, acting in its sole
discretion pursuant to this Section 3.7, elects to make a different allocation.

            (d) Company Seconded Employees. Termination, engagement, renewal or
extension of the employment of, any Company Seconded Employees.

            (e) Litigation. Commencement or settlement of any material
litigation involving the Company.

            (f) Indebtedness. Incurrence or assumption of any material
Indebtedness by the Company.

            (g) EITF 96-16/FIN 46R. Take, or refrain from taking, any action
which would cause the financial position, results of operations and cash flows
of the Company to be consolidated with those of any Member.

            (h) Interested Transactions. Entrance into or modification of any
employment, independent contractor or any other transaction by the Company with
a Member or an Affiliate of a Member or with any Person which is not at arm's
length; provided, that the Members hereby acknowledge that concurrently with the
execution of this Agreement the Company is entering into the Related Agreements
(other than the Employment Agreements) and the transactions contemplated thereby
are approved and that no vote or approval of the Members or the Board shall be
required in connection with the performance of such agreements; but provided,
further, that any assignment, amendment or modification (including the payment
of any Additional Fees (as defined under the Services Agreements)) of such
agreements, or request for services not explicitly contemplated by such
agreements, shall be a Material Decision.

            (i) New Members. Admission of any New Member.

            (j) Assets. Sale, lease, disposition or Encumbrance of any material
Asset, other than as determined by the Credit Committee acting pursuant to
Section 3.10.

                                       22


            (k) Real Property. Purchase, disposition, mortgage, Encumbrance or
lease of any real property by the Company.

            (l) Amendments. Amendment of or modification to the Certificate or
recommendation of any amendment or modification to this Agreement.

            (m) Other Business or Name. Engagement by the Company in any
business other than the Business, change of the name of the Company or conduct
of business under any name other than the name of the Company.

            (n) Company Sale. Entering into discussions or any Contract
regarding any Company Sale.

            (o) Insolvency. Any declaration or admission of insolvency or
bankruptcy by the Company.

            (p) Tax Matters. Any tax returns, material tax election or action,
including without limitation any election pursuant to Treasury Regulation
Section 301.7701-3 to classify the Company for federal income tax purposes as
anything other than a partnership and any decision regarding the management,
control or settlement of any administrative proceeding at the Company level with
the Internal Revenue Service relating to the determination of any item of
Company income, gain, loss, deduction or credit for federal income tax purposes.

            (q) Accounting Changes. Change in any accounting method adopted by
the Company, unless required by GAAP, or appointment or discharge of the
Company's auditors.

            (r) Confess Judgments. Settlement or compromise of any material
claim against the Company that would result in a judgment against the Company.

            (s) Subsidiaries. Creation of any Subsidiaries.

            (t) Management Compensation. Appointment, termination and
determination of the compensation of management personnel responsible for
implementing the Company's policies and procedures, including, without
limitation, any increase in the compensation provided to any Company Seconded
Employee (whether pursuant to the terms of the Jefferies Services Agreement or
otherwise).

            (u) Financial Statements; Budgets. Finalization of financial
statements and establishment of the operating and capital budgets of the
Company, whether or not in the ordinary course of business.

            (v) License Agreements. The negotiation of, or entry by the Company
into, license agreements of any type or nature, other than with regard to
generic license agreements entered into in the ordinary course of business (i.e.
license agreements for business computer software, etc.)

            (w) Investments. Allocation of greater than (i) ten percent (10%) of
Capital Contributions to Secondary Loan Investments outstanding at any given
time or (ii) twenty

                                       23


percent (20%) of the fair market value of the Company's Assets to any Investment
or any group or series of Investments issued by any Person or group of
affiliated Persons.

            (x) Legal Counsel. Determination of an "approved list" of legal
counsel to the Company in connection with its operations and the addition of
counsel to such "approved list".

            (y) Restructuring Agreements. Entry into any agreement that would
impose any non-competition or similar restriction on the Company.

            (z) Licensed Marks. Use of or other actions regarding the Licensed
Marks.

      3.8 Dispute Resolution. In the event that the Board is unable to agree
with regard to a Material Decision (a "Disputed Matter"), then either the
Chairman or the Vice Chairman, by written notice to the other (a "Dispute
Notice") may invoke the procedures set forth in the following sentence. In the
event a Dispute Notice is delivered, each Class B Member shall cause one of its
top three (3) most senior officers to meet periodically over the thirty (30) day
period following receipt of the Dispute Notice to negotiate in good faith in an
attempt to resolve the Disputed Matter. If the Disputed Matter remains
unresolved after such thirty (30) day period, then any Class A Member or Class B
Member shall, for twenty (20) Business Days following the end of such period,
have the buy-sell rights provided under Section 11.1(c)(i)(E).

      3.9 Transaction Fees. Fees paid or payable in connection with the
origination of any Senior Loan Financing or Special Situation Financings shall
be allocated among the participants in such financing in accordance with the
principles set forth on Schedule C, subject to exceptions approved on a
case-by-case basis by the Credit Committee.

      3.10 Credit Committee.

            (a) Each Class A Member shall designate two (2) persons to serve on
a five (5) person Credit Committee (the "Credit Committee"). The fifth member of
the Credit Committee shall be the Head Loan Officer, who shall serve as a
non-voting member thereof and shall, as a result, not be entitled vote upon any
matter to be approved or determined, or any action to be taken, by the Credit
Committee hereunder. In the event that a New Member is admitted to the Company
in accordance with the terms of this Agreement as a Transferee of all, but not
less than all, of the Class A Interest of a Class A Member that has the right to
appoint one or more representatives to the Credit Committee as described in the
proceeding sentence, such new Class A Member shall acquire the same right to
appoint such representatives. The Credit Committee is hereby designated to
review and approve all new Investments and material amendments to existing
Investments. Except as set forth in Section 6.1(a), any action of the Credit
Committee shall be authorized by the unanimous vote of the members of the Credit
Committee present and voting at a duly constituted meeting thereof at which a
quorum is present. The presence of at least one (1) person designated by each of
the Class A Members (other than any such Class A Member whose management
participation rights have been suspended in accordance with Section 4.1(c))
shall constitute a quorum of the Credit Committee for the transaction of any
business. The Credit Committee shall meet weekly, but may meet more frequently,
to the extent determined by the Credit Committee in its reasonable discretion.

            (b) All proposals for Senior Loan Financings and Special Situation
Financings,

                                       24


and all material modifications or amendments of any existing Investments
(collectively "Financing Opportunities") shall be presented to the Credit
Committee by the Head Loan Officer or another senior Officer of the Company to
whom such function shall have been delegated by the Head Loan Officer. Each such
proposal shall be subject to approval or disapproval by vote of the
representatives then sitting on the Credit Committee. If in any three (3) month
period after the Closing Date, the votes cast by the representative(s) of one
Class A Member (the "Disapproving Member") to disapprove Financing Opportunities
in circumstances when the representative(s) of the other Class A Member (the
"Approving Member") shall have voted to approve such Financing Opportunities
shall have resulted in the disapproval of seventy-five percent (75%) or more of
all such Financing Opportunities presented to the Credit Committee and approved
by the Approving Member in accordance with this Agreement in such three (3)
month period (a "Credit Committee Dissolution Event"), then the Approving Member
shall for twenty (20) Business Days following the end of such period have the
rights provided under Section 11.1(a)(iv) to require dissolution of the Company.

            (c) The Credit Committee shall keep regular and accurate records of
its meetings, valuations and determinations, including the vote of each member
thereof in respect of all such determinations, which records shall be maintained
by the Secretary of the Company. Upon reasonable request, such records shall be
available to Class A Members and Class B Members for inspection during normal
business hours.

            (d) For the avoidance of doubt, upon the dissolution of the Company
pursuant to Article XI, the Company's affairs shall be put in "run-off mode",
and the Credit Committee shall not act on any new Financing Opportunities except
as necessary to wind up the affairs of the Company as set forth in Article XI.

      3.11 Valuation of Assets. (a) The Board will arrange for Babson, acting
pursuant to the terms of the Babson Services Agreement, to calculate the Market
Value of the Investments of the Company to be determined no less frequently than
monthly, and shall provide the results of each such determination to the Class A
Members and Class B Members; provided, that the Board, acting pursuant to
Section 3.3, may designate another Person to make such calculations. Absent
manifest error, such determinations when made in accordance with the terms of
this Agreement shall be binding and conclusive upon the Members and all those
Persons who hold a beneficial interest in a Member for all purposes of this
Agreement, except to the extent set forth in subsections (b) and (c) of this
Section 3.11.

            (b) In the event of any adjustment of book values pursuant to
Section 4.5(b), distribution in kind pursuant to Section 4.5(f), Transfer
pursuant to the provisions of Section 11.1(c) or liquidation pursuant to Section
11.5, any Class A Member or Class B Member shall have the right to require the
Company to appoint an Independent Appraiser for purposes of performing an
Independent Appraisal. The Board, acting pursuant to Section 3.7, shall then
engage an Independent Appraiser within ten (10) days of such request. If the
Board fails to agree on the selection of an Independent Appraiser, each Class A
Member shall select one Independent Appraiser within ten (10) days of such
failure, and such two Independent Appraisers shall, within ten (10) days of
their selection, select a third Independent Appraiser, in which event
"Independent Appraiser" shall mean such third Independent Appraiser.

                                       25


            (c) The Board shall, acting pursuant to Section 3.3, make such
arrangements as may be required by any lender to the Company to prepare such
valuations of the Investments of the Company (and any other Assets of the
Company) as may be required by such lender.

            (d) The Board may at any time, and shall no less frequently than
annually, value the Assets for the purpose of calculating any value appreciation
interest pursuant to the terms of any applicable Employment Agreement or for any
other reasonable purpose.

                                   ARTICLE IV

                       MEMBERSHIP; CAPITAL CONTRIBUTIONS;
                   CAPITAL ACCOUNTS; AND ADDITIONAL INTERESTS

      4.1 Members.

            (a) Representations and Warranties of Members. Each Member and each
other Person who acquires an Interest or Interest Equivalent in the Company
hereby represents and warrants to the Company that: (i) it is an "accredited
investor" (as defined in Rule 501 under the Securities Act) and has such
knowledge and experience in financial and business matters and is capable of
evaluating the merits and risks of an investment in the Company and making an
informed investment decision with respect thereto; (ii) it is able to bear the
economic and financial risk of an investment in the Company for an indefinite
period of time; (iii) it is acquiring an Interest or Interest Equivalent for
investment only and not with a view to, or for resale in connection with, any
distribution to the public or public offering thereof; (iv) it understands and
acknowledges that the Interests and Interest Equivalents have not been
registered under the securities laws of any jurisdiction and cannot be disposed
of unless they are subsequently registered and/or qualified under applicable
securities laws and the provisions of this Agreement have been complied with;
(v) the execution, delivery and performance of this Agreement have been duly
authorized by such Person and do not require such Person to obtain any consent
or approval that has not been obtained and do not contravene or result in a
default under any provision of any decree, order, law or regulation applicable
to such Person or other governing documents or any agreement or instrument to
which such Person is a party or by which such Person is bound; and (vi) this
Agreement is valid, binding and enforceable against such Person in accordance
with its terms, except as the enforceability thereof may be limited by general
principles of equity whether applied in a court of law or a court of equity and
by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditor's rights and remedies generally.

            (b) Powers. (i) The Members shall have the power to exercise any and
all rights or powers granted to the Members pursuant to the express terms of
this Agreement or as otherwise required by the Delaware Act. Members holding
Class A Interests shall be entitled to cast that amount of all votes to be cast
by such Members as is represented by the Class A Proportionate Ownership held by
such Member; Members holding Class B Interests shall be entitled to cast that
amount of all votes to be cast by such Members as is represented by the Class B
Proportionate Ownership held by such Member. Except as otherwise specifically
provided by this Agreement or required by the Delaware Act, (A) Interest holders
shall not be entitled to vote on any matter with respect to the Company in their
capacity as such; provided, that Members

                                       26


holding Class A Interests shall be entitled to vote with regard to the election
of Directors and the selection of Credit Committee representatives; and (B) no
Member acting as such shall have the power to act for or on behalf of, or to
bind, the Company.

                  (ii) The Class A Members shall meet for the election of
Directors, and to determine such matters as may be presented to the Class A
Members for action by the Board. The presence of the Members holding a majority
of the Class A Proportionate Ownership shall constitute a quorum at any meeting
of the Class A Members. Actions and decisions of the Class A Members, other than
votes with regard to the election of Directors and the selection of Credit
Committee representatives as set forth in this Agreement, shall be determined at
meetings at which a quorum is present by the affirmative vote of the Members
holding a majority of the Class A Proportionate Ownership. The presence of the
Members holding a majority of the Class B Proportionate Ownership shall
constitute a quorum at any meeting of the Class B Members. Actions and decisions
of the Class B Members shall be determined at meetings at which a quorum is
present by the affirmative vote of the Members holding a majority of the Class B
Proportionate Ownership.

            (c) Suspension of Management Participation.

                  (i) Upon the occurrence and for the duration of any of the
following events in respect of a Member (each a "Management Event"), such Member
shall not be entitled to exercise any rights hereunder, the Interests held by
such Member shall be deemed to be non-voting for all purposes and such Member in
its capacity as Member, and the Directors and Credit Committee representatives
appointed by such Member, shall not be entitled (A) to exercise any rights to
vote on matters required to be voted on by Members, Directors or committee
members under either the Delaware Act or this Agreement, (B) to appoint
Directors pursuant to Section 3.2, (C) to have any Directors appointed by such
Member serve as Directors, attend meetings of the Board or any committee thereof
or vote on matters required to be voted on by Directors under either the
Delaware Act or this Agreement, or (D) to act as an Officer or member of any
committee of the Company:

                  (1) a Technical Withdrawal shall have occurred with respect to
      such Member or any Affiliate of such Member that is also a Member;

                  (2) such Member or any Affiliate of such Member that is also a
      Member shall be in Default; or

                  (3) there shall have been a Change in Ownership with respect
      to such Member or any Affiliate of such Member that is also a Member.

                  (ii) Except as provided in Section 4.1(c)(i) above, during the
continuance of a Management Event with respect to a Member, all the other terms
and provisions of this Agreement and the Delaware Act shall be applicable to
such Member and its Interests.

      4.2 No Liability of Members.

            (a) No Liability. Except as otherwise required by applicable law and
as expressly set forth in this Agreement, the Related Agreements and any other
Contract to which any of them

                                       27


and the Company or any Subsidiary thereof is a party, no Member shall have any
personal liability whatsoever in such Member's capacity as a Member, whether to
the Company, to any of the other Members, to the creditors of the Company or to
any other third party, for the debts, liabilities, commitments or any other
obligations of the Company or for any losses of the Company. Each Member shall
be liable only to make the contributions and payments expressly provided for
herein and in the Related Agreements to which it is a party, subject in each
case to the terms and conditions hereof and thereof.

            (b) Distribution. In accordance with the Delaware Act and the laws
of the State of Delaware, a member of a limited liability company may, under
certain circumstances, be required to return amounts previously distributed to
such member. It is the intent of the Members that no Distribution to any Member
pursuant to Article VII hereof shall be deemed a return of money or other
property paid or distributed in violation of the Delaware Act. Except as
otherwise expressly set forth in this Agreement, the payment of any such money
or Distribution of any such property to a Member shall be deemed to be a
compromise within the meaning of the Delaware Act, and the Member receiving any
such money or property shall not be required to return to any Person any such
money or property. However, if any court of competent jurisdiction holds that,
notwithstanding the provisions of this Agreement, any Member is obligated to
make any such payment, such obligation shall be the obligation of such Member
and not of any Director appointed by such Member or of any other Member.

      4.3 Capital Contributions.

            (a) On or prior to the date hereof each of the Class A Members has
contributed, or will contribute, to the Company twenty-five million dollars
($25,000,000) by wire transfer of immediately available funds. Members shall be
required or permitted to make additional Capital Contributions only as provided
in this Section 4.3 or Section 4.6. Any other Person hereafter admitted as a
Member shall make such Capital Contributions, and shall be issued such
Interests, as shall be determined by the Board, acting pursuant to Section 3.7,
in accordance with Section 4.6.

            (b) Hereafter, each Class A Member will make additional Capital
Contributions, in increments of one million dollars ($1,000,000), or any greater
amount, as follows:

                  (i) the Head Loan Officer shall, from time to time, determine
when additional Capital Contributions are necessary to satisfy the requirements
of the Business and the financing of Investments as approved by the Credit
Committee and shall instruct the appropriate Officers to issue to each Class A
Member and Class B Member a notice in writing (a "Capital Call") of such
determination, setting forth the amount and purpose in reasonable detail of the
Capital Contribution to be made by each Class A Member (it being understood that
all Capital Contributions shall be made pro rata by the Class A Members); and

                  (ii) unless the Board, acting pursuant to Section 3.7 within
five (5) Business Days of the delivery of such Capital Call, determines that
additional capital is not reasonably required in order to operate the Business
or effect the Business Plan, each Class A Member shall make the additional
Capital Contribution specified in the Capital Call promptly, and in any event
within seven (7) Business Days of delivery of the Capital Call.

                                       28


            (c) Notwithstanding anything to the contrary set forth herein, the
amount of Capital Contributions to be made by each Class A Member shall not
exceed one hundred and twenty-five million dollars ($125,000,000) in the
aggregate without the approval of each Class A Member and the Board acting
pursuant to Section 3.7. Any Capital Contribution made pursuant to the terms of
this Section 4.3 shall be made by wire transfer of immediately available funds.

      4.4 Status of Capital Contributions.

            (a) Except as otherwise set forth in Article XI, no Member shall
have the right to withdraw any part of its Capital Contribution or otherwise to
voluntarily or involuntarily withdraw from the Company. Each of the Members
waives any and all rights that it may have to maintain an action for partition
of the Company's property or to otherwise be paid any amount in respect of a
withdrawal from the Company.

            (b) No Member shall receive any interest, salary or drawing with
respect to its Capital Contributions or its Capital Account or for services
rendered on behalf of the Company or otherwise in its capacity as a Member,
except as otherwise specifically provided in this Agreement or any Related
Agreement to which such Member is a party.

            (c) After a Member has made all Capital Contributions required
pursuant to Section 4.3 or 4.6 hereof, such Member shall not be required to make
any additional Capital Contributions to the Company other than as specifically
provided herein. No Member shall have any personal liability for the repayment
of any Capital Contributions of any other Member. Anything herein to the
contrary notwithstanding, the Board shall have no power or authority to recall
or otherwise require Members to repay any distributions made in accordance with
the provisions of this Agreement, other than any such distribution made in
violation of applicable law.

      4.5 Capital Accounts.

            (a) The Company shall establish and maintain a separate capital
account for each Member in accordance with Code Section 704 and the Treasury
Regulations promulgated thereunder, including Treasury Regulation Section
1.704-1(b) (each such capital account, a "Capital Account"). Without limiting
the generality of the foregoing and subject to paragraphs (b), (c), (d), (e) and
(f) below, the Capital Account maintained for each Member shall be equal to:

            (i) the Capital Contributions made by such Member to the Company;
      increased by

            (ii) the aggregate amount of Net Income and other items of income
      and gain allocated to such Member pursuant to Section 7.1; decreased by

            (iii) the aggregate amount of Distributions made by the Company to
      such Member; decreased by

            (iv) the aggregate amount of Net Loss and other items of deduction,
      expenditure and loss allocated to such Member pursuant to Section 7.1.

                                       29


            (b) The Board may adjust the book values of all Assets to equal
their respective fair market values as determined by the Board, acting pursuant
to Section 3.7, upon the occurrence of any Revaluation Event; provided that the
value of any Investment shall be determined according to its Market Value. The
Capital Accounts shall be increased or decreased (as appropriate) to reflect the
revaluation of Assets, in accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f).

            (c) Except as may be required by the Delaware Act or any other
applicable law, no Member with a negative balance in its Capital Account shall
have any obligation, in connection with the liquidation of the Company or
otherwise, to restore such negative balance.

            (d) Upon any Transfer (other than a pledge or hypothecation) of an
Interest, a proportionate share of the Capital Account of the Transferor shall
be transferred to the Transferee, and the Transferee shall be deemed to have
made the Capital Contributions that were made by the Transferor and to have
received the Distributions and allocations that were received by the Transferor
from the Company, in each case to the extent of the Interest Transferred.

            (e) The maintenance of Capital Accounts pursuant to this Section 4.5
is intended to comply with the requirements of Code Section 704 and the Treasury
Regulations promulgated thereunder, and the provisions of this Agreement
regarding the maintenance of Capital Accounts shall be interpreted and applied
consistently therewith. If, in the opinion of the Board, the manner in which the
Capital Accounts are to be maintained pursuant to this Section 4.5 should be
modified in order to comply with the requirements of Code Section 704 and the
Treasury Regulations promulgated thereunder, then, notwithstanding anything to
the contrary contained in this Section 4.5, the Board may, acting pursuant to
Section 3.7, change the manner in which the Capital Accounts are maintained, and
the Board shall have the right, upon delivery of written notice to each Member
and without obtaining the consent of any Member, to amend this Agreement to
reflect any such change in the manner in which the Capital Accounts are
maintained; provided, however, that any such change in the manner of maintaining
the Capital Accounts shall not alter materially the economic arrangement among
the Members.

            (f) Accounting for Distributions in Kind. For purposes of
maintaining Capital Accounts when Company property is distributed in kind: (i)
the Company shall treat such property as if it had been sold for its fair market
value on the date of Distribution, with such fair market value to be determined
in accordance with Market Value, if applicable; (b) any difference between such
fair market value and the Company's prior book value in such property for
Capital Account purposes shall constitute Net Income or Net Loss, as the case
may be, for the Accounting Period ending on and including the date of such
Distribution and shall be allocated to the Capital Accounts of the Members
pursuant to Section 7.1; and (c) each Member's Capital Account shall be reduced
by the fair market value on the date of Distribution, as determined in
accordance with the definition of Market Value, if applicable, of the property
distributed to such Member (net of any liabilities secured by such distributed
property that such Member is considered to assume or take subject to Code
Section 752).

      4.6 Issuance of Additional Interests; Additional Members.

            (a) Additional Interests. The Board, acting pursuant to Section 3.7,
shall have the

                                       30


right to cause the Company to issue or sell to any Person (including Members and
Affiliates of Members) any of the following: (i) additional Interests in the
Company (which for purposes of this Agreement shall be "Additional Interests"),
including new classes or series thereof having different rights; and (ii)
Interest Equivalents. The Board, acting pursuant to Section 3.7, shall determine
the terms and conditions governing the issuance of such Additional Interests,
including the number and designation of such Additional Interests, the
preference (with respect to Distributions, in liquidation or otherwise) over any
other membership interests and any required contributions in connection
therewith. If an Additional Interest is issued in accordance herewith, the
Board, acting pursuant to Section 3.7, shall redetermine the Percentage
Interests, and the Secretary of the Company shall amend Schedule A without the
further vote, act or consent of any other Person to reflect the issuance of such
Additional Interest. Upon such amendment of Schedule A, such Member shall be
issued his or its Additional Interest.

            (b) New Members. In order for a Person to be admitted as a New
Member, such Person shall have delivered to the Company a written undertaking to
be bound by the terms and conditions of this Agreement and shall have delivered
such other documents and instruments as the Board determines to be necessary or
appropriate in connection with the issuance of such Additional Interest to such
Person or to effect such Person's admission as a Member. Upon the amendment of
Schedule A, such Person shall be admitted as a Member and deemed listed as such
on the books and records of the Company and thereupon shall be issued his or its
Additional Interest.

      4.7 Advances. If any Member shall advance any funds to the Company in
excess of its Capital Contribution, the amount of such advance shall neither
increase its Capital Account nor in any way affect such Member's share of the
profits, losses, credits and Distributions of the Company. Subject to Section
3.7, any Member may, with the approval of the Board, make loans or otherwise
advance funds to the Company, and the amount of any such advance shall be a debt
obligation of the Company to such Member and shall be repaid to it by the
Company upon such terms and conditions as shall be determined by the Board.

      4.8 Member's Interest; Interest Equivalents.

            (a) A Member's Interest shall for all purposes be personal property.
No Member has any interest in specific Company property.

            (b) Interest Equivalents are not "Interests" for purposes of this
Agreement, and holders thereof (i) shall have no right, title or interest in the
Company and (ii) shall have no right, as holders of an Interest Equivalent, to
vote in the affairs of the Company or to participate as Members in any dividend
or other Distribution or otherwise, except to the extent expressly set forth in
the agreement evidencing such Interest Equivalent.

                                    ARTICLE V

                           TRANSFERS AND OTHER EVENTS

      5.1 Restriction on Transfers. No Member shall have the right, directly or
indirectly, to Transfer all or any portion of the Interest (including, without
limitation any of the Economic

                                       31


Interest associated therewith) held by such Member, except (a) in accordance
with the provisions of Sections 11.1 or 11.3, (b) upon the written consent of
all of the Class A Members and Class B Members, which consent shall not be
unreasonably withheld or delayed; provided, that in the event any Member seeks
to Transfer, directly or indirectly all or any portion of the Interest held by
such Member to any Person who is then, or within the prior three (3) years was,
engaged primarily in the business of making Senior Loan Financings or Special
Situation Financings, the other Class A Members or Class B Members may withhold
their consent to such Transfer in their sole discretion or (c) to an Affiliate
of such Member; provided, that such Affiliate is neither then, nor within the
prior three (3) years was, nor proposes to be, engaged primarily in the Business
as determined reasonably and in good faith by each other Class A Member and
Class B Member.

      5.2 Invalid Transfers Void. Notwithstanding anything contained herein to
the contrary, no Transfer of an Interest may be made if such Transfer (a) would
violate the then-applicable federal or state securities laws or rules and
regulations of the SEC, state securities commissions or rules and regulations of
any other government agencies with jurisdiction over such Transfer or (b) would
affect the Company's existence or qualification under the Delaware Act. In the
event a Transfer of an Interest is otherwise permitted hereunder,
notwithstanding any provision hereof, no Member shall Transfer all or any
portion of such Member's Interest unless and until such Member, upon the request
of the Company, delivers to the Company an opinion of counsel, addressed to the
Company, reasonably satisfactory to the Company, to the effect that (i) such
Interest has been registered under the Securities Act and any applicable state
securities laws, or that the proposed Transfer of such Interest is exempt from
any registration requirements imposed by such laws and that the proposed
Transfer does not violate any other applicable requirements of federal or state
securities laws and (ii) that such Transfer will not result in the Company being
taxed as a corporation or as an association taxable as a corporation. Such
opinion shall not be deemed delivered until the Company confirms to such Member
that such opinion is acceptable, which confirmation will not be unreasonably
withheld or delayed. Any purported Transfer of any Interest or any part thereof
not in compliance with this Article V shall be void and of no force or effect
and neither the Company, as issuer, nor any transfer agent shall give effect to
such attempted Transfer; which shall confer no rights on any purported
Transferee. In such event, the transferring Member shall be liable to the other
Members and the Company for all liabilities, obligations, damages, losses, costs
and expenses (including reasonable attorneys' fees and court costs) arising as a
result of such noncomplying Transfer.

      5.3 Effect of Transfer; Exclusions.

            (a) In addition to satisfaction of Section 3.7 and the other
provisions of this Article V, no Transferee of all or part of an Interest shall
have the right to be admitted as a Member or entitled to exercise the rights
thereof, unless and until:

                  (i) the Transferee has executed an instrument reasonably
satisfactory to the Board accepting and adopting the provisions of this
Agreement; and

                  (ii) the Transferee has paid all reasonable expenses of the
Company in connection with the admission of such Transferee as a Member.

            (b) A Person who is a Transferee of an Interest Transferred in
compliance with

                                       32


the provisions of this Article V shall be admitted to the Company as a Member
and shall receive an Interest without making a Capital Contribution or being
obligated to make a Capital Contribution to the Company and shall thereupon be
bound by the provisions of this Agreement. Such Transfer shall be reflected in a
revised Schedule A to this Agreement.

                                   ARTICLE VI

                    INVESTMENT RESTRICTIONS; CONFIDENTIALITY

      6.1 Investment Opportunities.

            (a) Each of JGI and Babson agrees, in good faith, and subject to
contractual obligations and regulatory constraints, to use their commercially
reasonable best efforts to bring business opportunities to the Company in
respect of the Business of the Company and its Business Plan.

            (b) Each Class A Member and Class B Member and each of their
Affiliates (collectively, the "Unlimited Parties") shall not be prohibited in
any way from engaging in, acquiring or possessing an interest in any businesses
of any nature or description whatsoever, independently or with others, or from
using the services of any business, whether or not similar to the activities of
the Company, and the other Members shall not have any rights by virtue of this
Agreement in respect of such other businesses or the income or profits derived
therefrom. Without limiting the foregoing, to the fullest extent permitted by
applicable law, the doctrine of corporate opportunity, or any other analogous
doctrine, shall not apply with respect to the Company, and the Unlimited Parties
shall have no obligation, other than as set forth in Section 6.1(c) or Section
6.2, to refrain from (the following, collectively, "Other Business"): (i)
engaging in the same or similar activities or lines of business as the Company
or developing or marketing any products or services that compete, directly or
indirectly, with those of the Company; or (ii) engaging in any and all
activities associated with their businesses. In furtherance of and without
limiting the foregoing, to the fullest extent permitted by law, the Company and
each Member waives any right to assert that the involvement of any Unlimited
Party in any Other Business breaches any duty owed to the Company or to any
Member with respect to the Company, the Business or the affairs of the Company.

            (c) Anything herein to the contrary notwithstanding, nothing
contained in this Section 6.1 shall in any way supersede, limit or restrict, or
be deemed or construed to supersede, limit or restrict, any of the provisions of
Section 11.1(d) and thus the exercise by any Person of its rights under this
Section 6.1 shall be subject in all respects to the provisions of Section
11.1(d), including all non-solicitation obligations thereunder, which shall
remain applicable to each Unlimited Party notwithstanding any provision to the
contrary set forth in Section 6.1(b) or Section 6.2.

      6.2 Confidentiality.

            (a) Each Member shall maintain, and shall cause each of its
Affiliates and their respective directors, officers, employees, agents,
consultants and advisors including each Unlimited Party (each a "Related Party")
to maintain, the confidentiality of Proprietary

                                       33


Information and shall not use or disclose, or permit any Related Party to use or
disclose, any Proprietary Information other than to the extent necessary to
further the business objectives of the Company or with the written approval of
the Company; provided, that the foregoing obligation of confidentiality shall
not apply to (i) any disclosure to any regulatory authority which is necessary
in connection with any necessary regulatory approval or filing, including in
connection with the preparation of required financial reports, (ii) any
disclosure required by judicial, administrative or legislative process or, in
the written opinion of its counsel, by any other requirement of law or the
applicable requirements of any regulatory agency or self-regulatory body having
jurisdiction over the Company, (iii) information for which disclosure is
necessary in connection with enforcing this Agreement or any Related Agreement
or (iv) information that becomes generally known to the public or within the
relevant trade or industry other than as a result of the Member's or its Related
Party's violation of this Section 6.2. "Proprietary Information" means (w) all
client information of Jefferies or its Affiliates (including, without
limitation, all information relating to customers, customer lists, contacts and
contact lists) provided for use, used or useful in the origination activities of
the Company, (x) all pre-existing credit analysis systems, of the MassMutual
Members including, without limitation, Babson's "Credit Grading" process,
Babson's "Loss Given Default" analysis and Babson's "Radar Loan Information
System", (y) all other information designated in writing as confidential by the
party disclosing such information (the "DISCLOSING PARTY") at the time of
disclosure thereof and (z) all information which the Company is obligated to
keep confidential pursuant to any agreement with a third party. No party shall
release or disclose Proprietary Information to any other Person, except its
auditors, attorneys, financial advisors, bankers, other consultants and advisors
who have a need to know in order to act on a matter not adverse to the interests
of the Company and are advised of the confidentiality of such Proprietary
Information and, to the extent permitted above, regulatory authorities. In the
event that a Member or a Related Party receives notice that it will be compelled
to disclose any Proprietary Information in connection with (i) or (ii) above,
such Member shall provide the Disclosing Party, if known to such Member, with
prompt prior written notice of such requirement so that the Disclosing Party may
seek a protective order or other appropriate remedy. In the event that such
protective order or remedy is not obtained, only that portion of the Proprietary
Information which is legally required to be disclosed shall be so disclosed.
This Section 6.2(a) shall survive any termination or expiration of this
agreement and any dissolution of the Company.

            (b) Notwithstanding anything to the contrary set forth in Section
6.2 (a), the Board will, acting pursuant to Section 3.3, from time to time make
available to the Class A Members and Class B Members and their Affiliates
information which is designated as being with regard to the Company and its
financial position and results of operations that each of them may use in their
general marketing efforts without violation of this Section 6.2.

            (c) Each Member hereby acknowledges and agrees that (i) such
Member's officers, directors and employees (collectively, "Designated Persons")
may receive material nonpublic information concerning other Members and the
Company, its Affiliates and Investments pursuant to this Agreement or the
documents referred to herein, (ii) such Member will take reasonable steps to
inform relevant Designated Persons that United States securities laws may
prohibit certain persons in possession of material nonpublic information
concerning a company from purchasing or selling securities of such company, or
from communicating such confidential information to any other person under
circumstances in which it is reasonably

                                       34


foreseeable that such person is likely to purchase or sell securities and (iii)
such Member shall not use, and shall take reasonable steps to prevent relevant
Designated Persons from using, any such information in contravention of the
United States Securities Exchange Act of 1934, as amended, including, without
limitation, Rule 10b-5 thereunder.

                                   ARTICLE VII

                          ALLOCATIONS AND DISTRIBUTIONS

      7.1 Allocations.

            (a) Net Income and Net Loss. The Board shall use its best efforts to
determine and allocate all items of income, gain, loss and deductions, as
described below, with respect to each Accounting Period of the Company within
forty-five (45) days after the end of each Accounting Period other than any
Accounting Period ending on the last day of the Fiscal Year and within ninety
(90) days after the end of each Fiscal Year.

                  (i) Except as otherwise provided in this Agreement, the Net
      Income of the Company (and items thereof) for each Accounting Period shall
      be allocated:

                  (A) first, to the extent that an amount of Net Loss previously
      allocated pursuant to Section 7.1(a)(ii) exceeds aggregate Net Income
      allocated pursuant to Section 7.1(a)(i), to the Members in proportion to,
      and in an amount equal to, the unrecovered amount of such Net Loss (and,
      if there is an unrecovered Net Loss for more than one Accounting Period or
      that has been allocated pursuant to Section 7.1(a)(ii)(C) or Section
      7.1(a)(ii)(B), then this Section 7.1(a)(i)(A) shall be applied first to
      the Net Loss arising in the most recent Accounting Period until that Net
      Loss is recovered fully, and thereafter successively to each preceding
      Accounting Period for which there is an unrecovered Net Loss, ending with
      the first such Fiscal Quarter, in each case offsetting Net Losses
      allocated pursuant to Section 7.1(a)(ii)(C) before those allocated
      pursuant to Section 7.1(a)(ii)(B) and pursuant to Section 7.1(a)(ii)(B)
      before those allocated pursuant to Section 7.1(a)(ii)(A));

                  (B) second, to the Members holding Class A Interests on a pro
      rata basis, to the extent of the Preferred Return that has not been
      previously reflected by an allocation of Net Income pursuant to this
      Section 7.1(a)(i)(B), until the amount so allocated equals the amount of
      such previously unallocated Preferred Return; and

                  (C) third, to all of the Members on a pro rata basis in
      proportion to their respective Percentage Interests at the beginning of
      such Accounting Period.

                  (ii) Except as otherwise provided in this Agreement, Net Loss
      of the Company (and items thereof) for each Accounting Period shall be
      allocated:

                  (A) first, to the Members in proportion to the amounts equal
      to the aggregate Net Income, if any, previously allocated pursuant to
      Section 7.1(a)(i)(C) for all prior Accounting Periods that exceed the
      aggregate Net Loss previously allocated pursuant to this Section
      7.1(a)(ii)(A) for all prior Accounting Periods;

                                       35


                  (B) second, to the Members holding Class A Interests on a pro
      rata basis in proportion to the amounts equal to the aggregate Net Income,
      if any, previously allocated pursuant to Section 7.1(a)(i)(B) for all
      prior Accounting Periods that exceed the aggregate Net Loss previously
      allocated pursuant to this Section 7.1(a)(ii)(B) for all prior Accounting
      Periods; and

                  (C) third, to all of the Members on a pro rata basis in
      proportion to their respective Percentage Interests at the beginning of
      the Accounting Period.

            (b) Special Allocations. Prior to making any allocations under
Section 7.1(a), the following special allocations shall be made in the following
order:

                  (i) Limitation on Net Losses. If any allocation of Net Loss or
an item of deduction, expenditure or loss to be made pursuant to Section 7.1(a)
or this Section 7.1(b) for any Accounting Period would cause a deficit in any
Member's Adjusted Capital Account (or would increase the amount of any such
deficit), then the amount that would cause such deficit shall be allocated to
such Members that have positive Adjusted Capital Account balances in proportion
to the respective amounts of such positive balances until all such positive
balances have been reduced to zero. To the extent such allocation would result
in all Members having Adjusted Capital Account deficits, such Net Loss (or item
thereof) shall be allocated to the Members in accordance with Section
7.1(a)(ii)(C).

                  (ii) Qualified Income Offset. If any Member unexpectedly
receives any adjustment, allocation or distribution described in Treasury
Regulation Section 1.704-1(b)(2)(ii)(d)(4), Section 1.704-1(b)(2)(ii)(d)(5) or
Section 1.704-1(b)(2)(ii)(d)(6) that creates or increases a deficit in the
Adjusted Capital Account of such Member, then items of income and gain
(consisting of a pro rata portion of each item of Company income, including
gross income, and gain for the relevant Fiscal Year and, if necessary, for
subsequent Fiscal Years) shall be allocated to such Member in an amount and
manner sufficient to eliminate such deficit as quickly as possible. This Section
7.1(b)(ii) is intended to constitute a "qualified income offset" within the
meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(d), and shall be
interpreted and applied consistently therewith.

                  (iii) Substantial Economic Effect. Notwithstanding anything in
this Agreement to the contrary, if the allocation of any item of income, gain,
loss or expense pursuant to this Section 7.1 does not have substantial economic
effect under Treasury Regulation Section 1.704-1(b)(2) and is not in accordance
with the Members' Interests in the Company within the meaning of Treasury
Regulation Section 1.704-1(b)(3), then such item shall be reallocated in such
manner as to (i) have substantial economic effect or be in accordance with the
Members' Interests and (ii) result as nearly as possible in the respective
balances of the Capital Accounts that would have been obtained if such item had
instead been allocated under the provisions of this Section 7.1 without giving
effect to this Section 7.1(b)(iii).

                  (iv) Corrective Allocations. If any amount is allocated
pursuant to paragraph (i), (ii) or (iii) of this Section 7.1(b), then,
notwithstanding anything in Section 7.1(a) to the contrary (but subject to the
provisions of paragraphs (i), (ii) and (iii) of this Section 7.1(b)), income,
gain, loss and expense, or items thereof, shall thereafter be allocated in such

                                       36


manner and to such extent as may be necessary so that, after such allocation,
the respective balances of the Capital Accounts will equal as nearly as possible
the balances that would have been obtained if the amount allocated pursuant to
paragraph (i), (ii) or (iii) of this Section 7.1(b) instead had been allocated
under the provisions of this Section 7.1 without giving effect to the provisions
of such paragraph.

            (c) Amendments to Allocations. The provisions hereof governing
Company allocations and Distributions, including the distribution of Assets upon
liquidation of the Company, are intended to comply with the requirements of Code
Sections 704(b) and 704(c) and the Treasury Regulations that have been or may be
promulgated thereunder, and shall be interpreted and applied in a manner
consistent therewith. If, in the opinion of the Board, the allocations of
income, gain, loss and expense provided for herein do not comply with (i) such
Code provisions or Treasury Regulations or (ii) any other applicable provisions
of the Code or Treasury Regulations (including the provisions relating to
nonrecourse deductions and Member nonrecourse deductions), then, notwithstanding
anything in this Agreement to the contrary, such allocations shall, upon notice
in writing to each Member, be modified in such manner as the Board, acting
pursuant to Section 3.7, determines is necessary to satisfy the relevant
provisions of the Code or Treasury Regulations, and the Board shall have the
right to amend this Agreement (without the consent of any other Member being
required for such amendment) to reflect any such modification; provided,
however, that no such modification shall alter materially the economic
arrangement among the Members.

      7.2 Adjustments to Reflect Changes in Interests. With respect to any
Accounting Period during which any Member's Interest changes, whether by reason
of the admission of a New Member, the withdrawal of a Member, or otherwise as
described in Code Section 706(d)(1) and Treasury Regulations issued thereunder,
allocations of Net Income, Net Loss and other items of Company income, gain,
loss and expense shall be adjusted appropriately to take into account the
varying interests of the Members during such Accounting Period. The Board,
acting pursuant to Section 3.7, shall select the method of making such
adjustments.

      7.3 Allocation of Taxable Income and Loss.

            (a) Except as otherwise provided in this Section 7.3, the taxable
income or loss of the Company for any Accounting Period shall be allocated among
the Members in proportion to and in the same manner as Net Income, Net Loss and
separate items of income, gain, loss and expense (excluding items for which
there are no related tax items) are allocated among the Members for Capital
Account purposes pursuant to the provisions of Sections 7.1(a) and (b). Except
as otherwise provided in this Section 7.3, the allocable share of a Member for
tax purposes in each specified item of income, gain, loss or expense of the
Company comprising Net Income, Net Loss or any item allocated pursuant to
Section 7.1(a) and (b), as the case may be, shall be the same as such Member's
allocable share of Net Income, Net Loss or the corresponding item for such
Accounting Period.

            (b) In accordance with Sections 704(b) and 704(c) of the Code and
applicable Treasury Regulations, including Treasury Regulation Section
1.704-1(b)(4)(i), items of income, gain, loss and expense with respect to any
Book Property of the Company (and, if necessary, any other property of the
Company) shall, solely for tax purposes, be allocated among the Members so as

                                       37


to take account of any variation between the adjusted basis of the Book Property
to the Company for federal income tax purposes and its book value. In making
allocations pursuant to this Section 7.3(b), the Board shall apply the
"traditional method" set forth in Treasury Regulation Section 1.704-3(b).

            (c) The items of income, gain, loss and expense allocated to the
Members for tax purposes pursuant to this Section 7.3 shall not be reflected in
the Members' Capital Accounts. Any elections or other decisions relating to such
allocations shall be made by the Board, acting pursuant to Section 3.7, in any
manner that reasonably reflects the purpose and intent of this Agreement and is
consistent with the economic arrangement among the Members.

      7.4 Distributions.

            (a) From time to time, the Board, acting pursuant to Section 3.7,
will determine the amount of Distributions to be made, pursuant to Sections
7.4(b) and 7.4(c), of all or any portion of the Company's Aggregate Net Income,
in each case to the extent permitted by the applicable rules and regulations of
any regulatory authority having jurisdiction over the Company and provided that
no such Distribution shall be made if any amount due and owing from the Company
under any Services Agreement is past due and remains unpaid.

            (b) Distributions of amounts reflecting Previously Undistributed Net
Income shall be made at such times as the Board in its sole discretion may
determine (after taking into account any Distributions made pursuant to Section
7.4(c)). In addition to the Tax Distributions to be made pursuant to Section
7.4(c), the Company may make Distributions to the Members, including
distributions in kind pursuant to Section 7.4(f), at such times and in such
amounts as the Board, acting pursuant to Section 3.7, may determine. Any such
Distribution shall be made to the Members as follows: (i) first, to the holders
of Class A Interests on a pro rata basis in proportion to their relative amount
of Unreturned Capital Contribution, an amount equal to the Unreturned Capital
Contribution applicable to such Class A Interests; (ii) second, to the holders
of Class A Interests on a pro rata basis until they have received the Preferred
Return and (iii) third, to all of the Members on a pro rata basis in accordance
with their respective Percentage Interests at the time of the Distribution;
provided, however, that (A) no Member shall be entitled to receive any
Distribution in an amount that exceeds the positive Adjusted Capital Account
balance of that Member immediately preceding the Distribution (taking into
account the effect of any revaluation of the assets of the Company pursuant to
Section 4.5(b)) and (B) any amount not distributed to a Member pursuant to
clause (A) shall be distributed to the other Members that have positive Adjusted
Capital Account balances, after taking into account their share of the
Distribution, in accordance with their respective positive Adjusted Capital
Account balances.

            (c) If the Company has net taxable income for federal income tax
purposes for any Fiscal Year, then the Company shall distribute, within ninety
(90) days after the end of such Fiscal Year, cash (a "Tax Distribution") to each
Member in the amount, if any, that is required, when the Tax Distribution is
combined with all other Distributions theretofore made to the Member with
respect to such Fiscal Year, to cause the aggregate amount distributed to the
Member to be at least equal to the product of (i) the Presumed Tax Rate for such
Fiscal Year and (ii) the aggregate net taxable income allocated to such Member
for such Fiscal Year. Distributions pursuant to this Section 7.4(c) shall be
offset against Distributions that would

                                       38


otherwise be made to the Members pursuant to Section 7.4(b). Any Tax
Distributions made pursuant to this Section 7.4(c) shall be made to those
Members that held Interests in the Company as of the close of such Fiscal Year.
However, for purposes of this Section 7.4(c), Distributions and allocations made
to a predecessor-in-interest of a Member with respect to such Fiscal Year shall
be treated as having been made to such Member. Notwithstanding the foregoing
provisions of this Section 7.4(c), the Board may make appropriate adjustments to
Tax Distributions in accordance with the intent of Sections 4.5(f) and
7.1(b)(iv).

            (d) Notwithstanding any provision to the contrary contained in this
Agreement, the Company, and the Board on behalf of the Company, shall not make a
Distribution to any Member on account of its Interest if such Distribution would
violate Section 18-607 of the Delaware Act or other applicable law.

            (e) Notwithstanding the foregoing (other than Section 7.4(c) above),
the Board may set aside reasonable reserves for anticipated liabilities,
obligations or commitments of the Company.

            (f) Although the Board shall use its best efforts to cause all
Distributions to be made in cash, at any time and from time to time prior to the
dissolution of the Company, when the Board determines, acting pursuant to
Section 3.7, that it is in the interests of the Company to do so, the Company
may distribute property in kind to the Members. The Company shall provide at
least ten (10) Business Days' prior notice of any such Distribution in kind,
which notice shall describe the property to be distributed and shall state that,
upon the request of any Member, the Company shall provide such Member with such
information regarding the property to be distributed, including information
regarding the issuer of any securities instruments evidencing indebtedness or
other property to be distributed in kind, as may be available and as may be
deemed appropriate for such provision by the Company. Any securities instruments
evidencing indebtedness or other property to be distributed in kind to the
Members shall be valued in accordance with their Market Value and upon such
Distribution in kind, such securities instruments or other property, as
applicable, shall be deemed to have been sold at such value on the date of
Distribution and the proceeds of such sale shall be deemed to have been
distributed to the Members for all purposes of this Agreement.

            (g) With respect to any Distribution, a portion of which is to be
made in kind and a portion of which is to be made in cash, such in-kind and
in-cash portions shall be distributed to all Members on a pro rata basis to the
extent reasonably practicable; provided, that the Board shall endeavor to
accommodate the wishes, to the extent practicable, of those Members desiring to
receive all (or a disproportionate amount) of such Distribution in kind or in
cash, as the case may be, to the extent possible, with a priority as to cash for
any Member which, upon the advice of counsel, determines that any Distribution
would more likely than not cause such Member to be in violation of a law, rule
or regulation, as contemplated by the immediately following paragraph.

            (h) Notwithstanding anything to the contrary contained elsewhere in
this Agreement, the Company shall not distribute any securities instruments
evidencing indebtedness or other property in kind to any Member if such
Distribution would cause such Member or its Affiliates to be in violation of any
law, rule or regulation applicable to such Member. In the

                                       39


event a Member shall, upon the advice of counsel, determine that any
Distribution would more likely than not cause such Member to be in violation of
any law, rule or regulation, such Member shall deliver to the Company a notice
to such effect within ten (10) Business Days from the date of the notice to the
Member of the proposed Distribution of securities in kind. In any such case, the
Company shall use reasonable efforts to cause such securities, instruments or
other property (and only such allocable portion of such securities instruments
or other property) to be sold to a third party, who may be another Member, for
the best consideration available under the circumstances and to distribute the
cash proceeds thereof to such affected Member. No such sale to a third party
shall relieve any Member of its obligations hereunder. In the event such a sale
cannot be achieved on commercially reasonable terms and within a commercially
reasonable time period following the proposed Distribution, the obligation of
the Company shall be extinguished by establishing an escrow account for the
benefit of any affected Members into which shall be deposited such securities,
instruments or other property, which account shall be liquidated at such time as
a sale can be accomplished; provided, that if any Member is not reasonably
satisfied with the establishment of such escrow account and does not elect to
participate in such escrow arrangements, the Company shall, at the direction of
such objecting Member, transfer such Member's pro rata share of the securities
in accordance with instructions given by such objecting Member. Investments held
in any escrow account shall continue to earn dividends or interest, as the case
may be, and to carry all rights attributable to such securities, instruments or
other property, and shall be deemed for all purposes of this Agreement to have
been distributed to the Members to whom, and at such time as, such securities
instruments or other property would have been distributed but for this Section
7.4(h).

            (i) For the avoidance of doubt, amounts paid by or on behalf of the
Company pursuant to any Services Agreement shall not be deemed to be
Distributions for the purposes of this Agreement.

      7.5 Withholding. All amounts withheld pursuant to the Code or any
provision of any state, local or foreign tax law with respect to any payment,
Distribution or allocation by the Company shall be treated as amounts paid by
the Company. Such amounts shall in turn be allocated to and treated as
distributed to the Members for all purposes under this Agreement. The Board is
authorized to withhold from payments, Distributions or allocations to the
Members and to pay over to the appropriate federal, state, local or foreign
government any amounts required to be so withheld. The Board shall allocate any
such amounts to the Members in respect of whose Distribution or allocation the
tax was withheld and shall treat such amounts as actually distributed to such
Members.

                                  ARTICLE VIII

                                BOOKS AND RECORDS

      8.1 Books, Records and Financial Statements.

      At all times during the existence and continuance of the Company, the
Company shall maintain, at its principal place of business, separate books of
account for the Company that shall show a true and accurate record of all costs
and expenses incurred, all charges made, all credits made and received and all
income derived in connection with the operation of the Company and

                                       40


the Business in accordance with GAAP consistently applied, and, to the extent
inconsistent therewith, in accordance with this Agreement. Such books of
account, together with a copy of this Agreement and of the Certificate, shall at
all times be maintained at the principal place of business of the Company and
shall be open to inspection and examination at reasonable times by each Member
and its duly authorized representative for any purpose reasonably related to
such Member's interest as a member of the Company. Upon the request of a Member,
the Company shall promptly deliver to the requesting Member, at the expense of
the Company, a copy of any information which the Company is required by law to
so provide.

      8.2 Reports.

            (a) The Board shall receive management accounts and forecasts
prepared by Babson, or such other Person designated by the Board pursuant to
Section 3.11, no less frequently than monthly.

            (b) The Company shall cause to be prepared and distributed to each
Member:

                  (i) Within one hundred twenty (120) days after the end of each
Fiscal Year, such information as is necessary to complete the Member's United
States federal and state income tax or information returns, including a copy of
the Company's United States federal, state and local income tax or information
returns for the year;

                  (ii) Within ninety (90) days after the end of each Fiscal
Year, annual audited financial statements prepared in accordance with GAAP and
meeting all applicable requirements of Regulation S-X as then promulgated under
the Securities Act;

                  (iii) Within forty-five (45) Business Days after the end of
each of the first three full Fiscal Quarters and the end of each Fiscal Year, a
financial report containing statements of operations and cash flows, changes in
Members' Capital Accounts and changes in the Company's Net Assets for the period
then ended; and

                  (iv) Any additional information that may reasonably be
required by any Member to enable it to comply with the disclosure requirements
of the SEC as in effect from time to time, which information shall be provided
to such Member promptly upon request.

      8.3 Accounting Method. For both financial and tax reporting purposes and
for purposes of determining profits and losses, the books and records of the
Company shall be kept on the accrual method of accounting applied in a
consistent manner and shall reflect all Company transactions and be appropriate
for the Company's business.

      8.4 Audit. The annual financial statements of the Company shall be audited
by a firm of independent certified public accountants with relevant experience,
selected by the Board acting pursuant to Section 3.7, with such audit to be
accompanied by a report of such accounting firm containing its opinion. The cost
of such audits will be an expense of the Company.

                                       41


                                   ARTICLE IX

                                   TAX MATTERS

      9.1 Tax Matters Member.

            (a) Babson is hereby designated as the "Tax Matters Member" of the
Company for purposes of Code Section 6231(a)(7) and shall have the powers
appurtenant thereto, subject in each case to the prior approval of the Board
pursuant to Section 3.7.

            (b) The Tax Matters Member shall, within ten (10) days of the
receipt of any notice from the Internal Revenue Service in any administrative
proceeding at the Company level relating to the determination of any Company
item of income, gain, loss, deduction or credit, mail a copy of such notice to
each Member.

      9.2 Right to Make Section 754 Election. Except as provided herein, the
Board, acting pursuant to Section 3.7, may make or revoke, on behalf of the
Company, an election in accordance with Code Section 754, so as to adjust the
basis of Company property in the case of a Distribution of property within the
meaning of Code Section 734, and in the case of a transfer of a Company interest
within the meaning of Code Section 743. Each Member shall, upon request of the
Tax Matters Member, supply the information necessary to give effect to such an
election. Upon Transfer of an Interest, the Transferee may request that an
election in accordance with Code Section 754 be made, in which event the
Company, upon approval by the Board thereof pursuant to Section 3.7, shall make
the election for the Fiscal Year in which such Transfer occurs.

      9.3 Indemnity of Tax Matters Member. The Company shall indemnify and
reimburse the Tax Matters Member for all reasonable expenses (including
reasonable legal and accounting fees) incurred as Tax Matters Member pursuant to
this Article IX in connection with any administrative or judicial proceeding
with respect to the Tax liability of the Members as long as the Tax Matters
Member has determined in good faith that its course of conduct was in, or not
opposed to, the best interest of the Company. The payment of all such expenses
shall be made before any Distributions are made to the Members. Subject to the
requirement of approval by the Board pursuant to Section 3.7, the taking of any
action and the incurring of any expense by the Tax Matters Member in connection
with any such proceeding except to the extent provided herein or required by
law, is a matter in the sole discretion of the Tax Matters Member and the
provisions on limitations of liability of the Tax Matters Member and
indemnification set forth in Article X shall be fully applicable to the Tax
Matters Member in its capacity as such.

      9.4 Notices to Tax Matters Member. Any Member that receives a notice of an
administrative proceeding under Code Section 6223 relating to the Company shall
promptly notify the Company and the Tax Matters Member of the treatment of any
Company item on such Member's federal income tax return that is or may be
inconsistent with the treatment of that item on the Company's return. Any Member
that enters into a settlement agreement with the Internal Revenue Service with
respect to any Company item shall notify the Tax Matters Member of such
agreement and its terms within sixty (60) days after its date.

                                       42


                                    ARTICLE X

                          LIABILITY AND INDEMNIFICATION

      10.1 Liability. Except as otherwise provided by the Delaware Act, the
debts, obligations and liabilities of the Company, whether arising in Contract,
tort or otherwise, shall be solely the debts, obligations and liabilities of the
Company, and no Covered Person shall be obligated personally for any such debt,
obligation or liability of the Company solely by reason of being a Covered
Person. Each Covered Person shall be entitled to rely in good faith on the
advice of counsel, public accountants and other independent advisors experienced
in the matter at issue, and any act or omission of any Covered Person in
reliance on such advice shall in no event subject any Covered Person to
liability to the Company or any Member.

      10.2 Indemnification. Except with regard to claims by one Member against
another Member or Members, as otherwise required by law or as provided in this
Agreement, the Company shall indemnify and hold harmless each Covered Person
from and against all liabilities, losses (including amounts paid in settlement),
costs, damages and expenses (including all reasonable legal or other expenses
incurred in investigating or defending against any such liability, loss, cost,
damage or expense) actually incurred by such Covered Person by reason of any act
or omission or any act alleged to have been performed or omitted by such Covered
Person (including those in connection with serving as officers or on boards of
directors for companies the securities or Indebtedness of which the Company
holds as an Investment) so long as such Covered Person shall have acted in good
faith, in accordance with such Covered Person's obligations under this Agreement
and in a manner reasonably believed to be within the scope of authority
conferred on such Covered Person by or pursuant to this Agreement or a Related
Agreement, except that no Covered Person shall be entitled to be indemnified in
respect of any liability, loss, cost, damage or expense by reason of fraud,
gross negligence or willful misconduct of such Covered Person. The Company may,
from time to time, enter into separate agreements including the Related
Agreements with any Covered Person or other party providing for the indemnity by
the Company of such Covered Person or other party. The rights granted pursuant
to this Section 10.2 shall be deemed contract rights, and no amendment,
modification or repeal of this Section 10.2 shall have the effect of limiting or
denying any such rights with respect to actions taken or proceedings, appeals,
inquiries or investigations arising prior to any such amendment, modification or
repeal.

      10.3 Expenses. To the fullest extent permitted by applicable law, expenses
(including reasonable legal fees) incurred by a Covered Person in defending any
claim, demand, action, suit or proceeding shall, from time to time, be advanced
by the Company until such time as any determination by a court or regulatory
body of competent jurisdiction that such Covered Person was grossly negligent,
committed willful misconduct or fraudulent with regard to any action or omission
that resulted in liability to the Company or such Covered Person in respect of
such claim or was otherwise guilty or in material violation of applicable law or
regulation. The Company shall advance expenses in respect of such claim, demand,
action, suit or proceeding upon receipt by the Company of an undertaking (the
terms of which may include provision for such security as the Board, acting
pursuant to Section 3.7, may determine) by or on behalf of the Covered Person to
repay such amount if it shall be determined that the Covered Person is not
entitled to be indemnified as authorized in Section 10.2 hereof.

                                       43


                                   ARTICLE XI

                    DISSOLUTION, LIQUIDATION AND TERMINATION

      11.1 Dissolution; Buy-Sell; Agreements Regarding Employees.

            (a) Dissolution Events. The Company may be dissolved only upon the
occurrence of one or more of the following events:

                  (i) by written consent of all of the Class A Members and Class
B Members;

                  (ii) by a decree of judicial dissolution under Section 18-802
of the Delaware Act;

                  (iii) upon the occurrence of a Default, by the written notice
of any Non-Defaulting Member that is not an Affiliate of the Defaulting Member;

                  (iv) by written notice of the Approving Member sent within
twenty (20) Business Days of the occurrence of a Credit Committee Dissolution
Event as set forth in Section 3.10(b);

                  (v) within ten (10) Business Days of any Non-Extension Date
following the delivery of a Termination Notice (unless otherwise extended
pursuant to the penultimate sentence of Section 11.1(b));

                  (vi) upon a Change in Ownership of any Member other than a
Class C Member, by written notice of such Member or any other Member other than
a Class C Member which notice must be sent (i) if by the Member undergoing a
Change in Ownership within ten (10) Business Days of the occurrence of such
Change in Ownership or (ii) if by any other Member, within ten (10) Business
Days of such Member becoming aware of the occurrence of any such Change in
Ownership; and

                  (vii) upon the occurrence of the Technical Withdrawal of a
Member other than a Class C Member, by any Member other than a Class C Member
not in Technical Withdrawal that is not an Affiliate of the Member in Technical
Withdrawal; provided, that the non-withdrawing Member shall not have elected to
exercise its purchase right pursuant to Section 11.3;

provided, that no such dissolution shall take effect to the extent that any
Member exercises its buy-sell rights under Section 11.1(c):

            (b) Non-Extension and Regulatory Events. At any time (i) during the
period commencing on the one hundred eightieth (180th) and ending on the
ninetieth (90th) calendar day prior to the third anniversary of the Closing
Date, (ii) during each period commencing on the one hundred eightieth (180th)
and ending on the ninetieth (90th) calendar day prior to each subsequent
anniversary of the Closing Date or (iii) within ninety (90) calendar days after
the date on which any Class A Member or Class B Member delivers notice to the
Company that it has

                                       44


determined that it is a Regulated Member (each such anniversary of the Closing
Date or date of such notice, a "Non-Extension Date"), any Class A Member, Class
B Member or Regulated Member (the "Terminating Member") may deliver a written
notice (a "Termination Notice") to the other Members (the "Non-Terminating
Members") electing to cause the dissolution of the Company. Any Regulated Member
seeking to cause the dissolution of the Company pursuant to this Section 11.1(b)
shall (x) supply such opinions of outside counsel and other information as the
Non-Terminating Members may reasonably request to verify such Regulated Member's
status as a Regulated Member and/or its rights to deliver a Termination Notice
and (y) utilize commercially reasonable efforts to take such actions as would
cause it to lose its status as a Regulated Member. Any such Termination Notice
shall not be or become effective until such actions have been taken. Each of the
Members hereby represents and warrants that on the date hereof there exists no
circumstance or state of facts which would cause such Member to be or become a
Regulated Member. Once delivered, a Termination Notice may not be withdrawn. In
the event each Non-Terminating Member declines to exercise its buy-sell right
pursuant to Section 11.1(c)(i)(C), the Members agree that for the six (6) month
period following the Non-Extension Date they will cooperate in good faith to
effect a written agreement to engage in a Company Sale or effect an initial
public offering with regard to the Interests or the securities of any successor
Company formed for the purpose of effecting such an offering. If such effort
fails, the Company shall be dissolved pursuant to Section 11.1(a)(v).

            (c) Buy-Sell Right.

                  (i) Upon the occurrence of any of the following events, the
Member identified as the "Purchasing Member" shall have the right by delivery of
written notice to the Member(s) identified as the "Selling Member" within thirty
(30) days of the date such Purchasing Member becomes aware of any such
occurrence to purchase all, but not less than all, of the Interest(s) of the
Selling Member(s) and each Selling Member shall have the corresponding
obligation to sell all, but not less than all, of such Selling Members'
Interest(s) to the Purchasing Member as set forth in this Section 11.1(c):

                  (A) upon the occurrence of a Default, the Non-Defaulting
      Member and its Affiliates shall be the Purchasing Member and the
      Defaulting Member and any Member that is an Affiliate thereof shall be the
      Selling Member(s);

                  (B) upon the occurrence of a Credit Committee Dissolution
      Event, the Approving Member and its Affiliates shall be the Purchasing
      Member and the Disapproving Member and any Member that is an Affiliate
      thereof shall be the Selling Member(s);

                  (C) upon the delivery of a Termination Notice, the
      Non-Terminating Member(s) (other than Class C Members) and its Affiliates
      shall be the Purchasing Member and the Terminating Member and any Member
      that is an Affiliate thereof shall be the Selling Member(s);

                  (D) upon the occurrence of a Change in Ownership, any Class A
      Member or Class B Member which is not the subject of such Change of
      Ownership may elect (as such, the Purchasing Member), to purchase the
      Interests of the other Member(s)

                                       45


      which is the subject of such Change in Ownership, (as such, the Selling
      Member(s)); provided, that if more than one Member shall elect to exercise
      its buy-sell right pursuant to this Section 11.1(c)(i)(D), then no Member
      shall be afforded any such right and the Company shall be dissolved as set
      forth in Section 11.5; and

                  (E) upon the failure to resolve a Disputed Matter after the
      procedures set forth in Section 3.8 shall have been exhausted, any Class A
      Member may elect (as such, the Purchasing Member), to purchase the
      Interests of the other Member(s), (as such, the Selling Member(s));
      provided, that no Member shall have such right until such time as such
      Member has made Capital Contributions totaling at least one hundred and
      twenty-five million dollars ($125,000,000) and; provided further, that if
      more than one Member shall elect to exercise its buy-sell right pursuant
      to this Section 11.1(c)(i)(E), then no Member shall be afforded any such
      right and the Company shall be dissolved as set forth in Section 11.5.

                  (ii) In any circumstances described in Section 11.1(c)(i), the
Purchasing Member may, in its sole discretion, give written notice (the
"Offering Notice") to the Selling Member(s) of its intent to purchase all, but
not less than all, of such Selling Members' Interests for cash at the Buy-Sell
Value (the "Purchase Price") as of the date the Offering Notice is delivered
(the "Date of Value"). In any such event, the provisions set forth in this
Section 11.1(c) shall apply.

                  (iii) Each Selling Member shall then be obligated to sell to
the Purchasing Member its Interest for the Purchase Price. The Purchasing Member
shall have the right to restructure any such purchase and sale as a merger,
consolidation, purchase of all or substantially all assets or other form of
transaction and the Selling Member(s) hereby agree to cooperate with the
Purchasing Member to the extent reasonably required to effect any such
transaction, including, without limitation, by surrendering and/or transferring
its management or other rights with regard to the Class C Member Vehicle;
provided, that the Purchasing Member shall bear any additional expense to the
Selling Member(s) incurred as a result of any such change in form of
transaction.

                  (iv) The Members shall meet and exchange documents and pay any
amounts due, and otherwise do all things necessary to conclude the transaction
set forth herein at the closing of such purchase of such Selling Members'
Interest (the "Closing"). The Closing shall occur at the office of the
Purchasing Member's legal counsel at 9:00 a.m., on the first Wednesday after the
thirtieth (30th) day after the Date of Value, or at such later date as all
necessary regulatory approvals, if any, are received, unless that day is a not a
Business Day and, in that event, on the immediately preceding Business Day. At
the Closing, the Selling Member(s) shall deliver to the Purchasing Member a duly
executed assignment of its Interest and all Repayment Rights (as defined below),
if any, and shall also, upon the request of the Purchasing Member, concurrently
therewith (or at any time and from time to time thereafter) execute and deliver
such other documents and records as are reasonably necessary to effect the
Transfer. The Purchasing Member shall deliver to the Selling Member(s) cash by
wire transfer of immediately available funds for the full amount of the Purchase
Price, and shall also, upon the request of the Selling Member(s), concurrently
therewith (or at any time and from time to time thereafter) execute and deliver
such other documents and records as are reasonably necessary to

                                       46


effect the Transfer. Further, on the Closing, the Selling Member(s) shall be
released from its liability under any third party loans to the Company and any
guarantees made in connection therewith. If a Company creditor refuses to so
release the Selling Member(s), the Purchasing Member shall indemnify the Selling
Member(s) from liability under such loans and guarantees. In addition, any and
all outstanding loans, fees and reimbursements owed by the Company or the
Purchasing Member to the Selling Member(s) ("Repayment Rights") shall be
satisfied in full by the Company and/or by such Purchasing Member, as
applicable, out of its own funds at Closing (provided that no such amount paid
by the Company shall reduce the Purchase Price), and the satisfaction of all
Repayment Rights, if any, shall be a condition precedent to the Selling Members'
obligation to close hereunder. If the Selling Members' Interest is subject to
any Encumbrance, the same shall constitute a default and the Purchasing Member
may elect (a) to cause the Purchase Price (or a portion thereof) to be applied
to discharge such Encumbrance, (b) to take the Interest subject to such
Encumbrance and to reduce the Purchase Price otherwise payable to the Purchasing
Member to the Selling Member(s) by the amount of such Encumbrance, or (c) to
terminate the buy-sell proceedings under this Section 11.1(c) because of the
existence of such Encumbrance and in such event pursue any and all remedies
available at law and equity. Notwithstanding anything in this Agreement to the
contrary, (x) the Purchasing Member shall be entitled to designate any Affiliate
or third party to be the transferee of such Interest or obtain financing from
any third party with respect to such purchase; provided, that the foregoing
shall not delay the closing of any such transaction and (y) the Selling Members'
appointments to the Board, the Credit Committee and of any Officers shall be
automatically terminated effective as of the Closing. The reasonable costs of
the Closing shall be divided equally between the Selling Member(s) and the
Purchasing Member; provided, that each such Member shall bear its own attorneys'
fees and costs.

            (d) Agreements Regarding Employees.

                  (i) Upon the occurrence of any dissolution event set forth in
Sections 11.1(a)(i) - (vii) (other than a dissolution event resulting from JGI's
Default or JGI's Technical Withdrawal) JGI shall have the sole right among the
Members and their Affiliates to solicit for employment or employ each Company
Seconded Employee. Upon the occurrence of any dissolution event set forth in
Sections 11.1(a)(i) - (vii) resulting from JGI's Default or JGI's Technical
Withdrawal, the MassMutual Members shall have the sole right among the Members
and their Affiliates to solicit for employment or employ each Company Seconded
Employee and immediately upon the occurrence of any such dissolution event, and
in furtherance of the foregoing, JGI and/or each applicable Affiliate thereof
shall irrevocably assign to Babson (or its designee) the Employment Agreement
(to the extent permitted by the terms of each such Employment Agreement) of each
Company Seconded Employee selected by Babson in its sole discretion to be so
assigned and otherwise take all actions and execute all documents and
instruments necessary to transfer each such Company Seconded Employee to the
employ of Babson (or its designee). It is agreed, however, that any Member
afforded the foregoing rights shall, within 45 days of receiving notice of the
applicable dissolution event, inform the other Members in writing which Company
Seconded Employees it has determined (in its sole discretion) that the other
Members and their Affiliates should not solicit for employment or employ. Any
New Company Employees not included in any such notice shall not be the subject
of this Section 11.1(d).

                                       47


                  (ii) Except as otherwise set forth in this Section 11.1(d),
each Member hereby agrees that, without the prior written consent of each of the
Class A and Class B Members, neither such Member nor any of its Affiliates
(including any Unlimited Party) shall solicit for employment or employ any
Company Seconded Employee for a period of two (2) years following the later of
the occurrence of any dissolution event referenced in Section 11.1(d)(i), or
such Member's (or any of its Affiliates') ceasing to be a Member, as applicable.

                  (iii) Each party hereto hereby acknowledges and agrees that
any breach or threatened or attempted breach by any party hereto of this Section
11.1 would irreparably injure the other parties hereto, that such breach or
threatened or attempted breach would not be susceptible to monetary damages and
that there would be no adequate remedy at law therefor. Accordingly, each party
hereto hereby agrees that the other parties shall be entitled to one or more
injunctions enjoining any such breach or threatened or attempted breach or
requiring specific performance of this Section 11.1 and hereby expressly
consents to the entry thereof without the necessity of showing any actual damage
or irreparable harm or the posting of any bond or the furnishing of any other
security, in addition to any other remedies that may be available to the
non-breaching party at law or in equity.

      11.2 Events of Bankruptcy of Member.

            (a) Without limiting the generality of Section 11.1, the occurrence
of any of the events set forth in this Section 11.2 with respect to any Member
shall not result in the dissolution of the Company. If and when any of the
following events occurs with respect to a Member (a "Technical Withdrawal"),
such Member shall cease to be a Member of the Company, but shall, however,
retain its interest in allocations and Distributions:

                  (i) such Member makes an assignment for the benefit of
creditors;

                  (ii) such Member files a voluntary petition in bankruptcy;

                  (iii) such Member is adjudged bankrupt or insolvent, or there
has been entered against such Member an order for relief, in any bankruptcy or
insolvency proceeding;

                  (iv) such Member files a petition or answer seeking for such
Member any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or regulation;

                  (v) such Member files an answer or other pleading admitting or
failing to contest the material allegations of a petition filed against such
Member in any proceeding of the type described in this Section 11.2;

                  (vi) such Member seeks, consents to or acquiesces in the
appointment of a trustee, receiver or liquidator of such Member or of all or any
substantial part of the properties of such Member; or

                                       48


                  (vii) if within one hundred twenty (120) days after the
commencement of any proceeding against such Member seeking reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation, the proceeding has not been
dismissed, or if within ninety (90) days after the appointment without the
consent or acquiescence of such Member, of a trustee, receiver or liquidator of
such Member or of all or any substantial part of the properties of such Member,
the appointment is not vacated or stayed, or within ninety (90) days after the
expiration of any such stay, the appointment is not vacated.

      11.3 Withdrawal of Members.

            No Member shall have the right to withdraw from the Company except
in accordance with this Section 11.3. A Member shall be deemed to have withdrawn
from the Company upon such Member's Technical Withdrawal. Notwithstanding
anything to the contrary in this Agreement or the Delaware Act, the
non-withdrawing Member(s) (other than the Class C Members) shall have the right,
but not the obligation, to purchase the Interest of a Member and any Member that
is an Affiliate of such Member with respect to which a Technical Withdrawal from
the Company shall have occurred within ninety (90) days of notice or obtaining
knowledge of such Technical Withdrawal. Unless otherwise set forth herein,
including in Section 4.3, the purchase of any such Interests shall be effected
pursuant to the terms set forth in Section 11.1(c)(ii) - (iv), the necessary
changes having been made to effect the purposes of this Section 11.3.

      11.4 Notice of Dissolution. Upon the dissolution of the Company, the Board
shall promptly notify the Members of such dissolution.

      11.5 Liquidation.

            (a) Upon dissolution of the Company, the Board shall designate a
liquidating trustee to immediately commence to wind up the Company's affairs;
provided, however, that a reasonable time shall be allowed for the orderly
liquidation of the Assets, during which time Babson and JGI shall continue to
provide services pursuant to the terms of the Services Agreements, and the
satisfaction of liabilities to creditors so as to enable the Members to minimize
the normal losses attendant upon a liquidation, it being understood that the
Company shall be in a "run-off mode" with respect to its operations and
Investments.

            (b) The liquidating trustee shall distribute the proceeds of such
liquidation and any other Assets (subject to the requirements of the Delaware
Act and other applicable law or regulation) in the following order of priority:

                  (i) first, to payment of all of the debts, liabilities and
      obligations of the Company (including amounts then due and payable under
      the Services Agreements and all expenses incurred in liquidation);

                  (ii) second, to the establishment of adequate reserves for the
      payment and discharge of all debts, liabilities and obligations of the
      Company, including

                                       49


      contingent, conditional or unmatured liabilities, in such amount and for
      such term as the liquidating trustee may reasonably determine; and

                  (iii) third, any remaining proceeds of liquidation, and any
      Assets that are to be distributed in kind, shall be distributed to (a) the
      Class A Members on a pro rata basis in proportion to their relative
      amounts of Unreturned Capital Contribution, an amount equal to the
      Unreturned Capital Contribution applicable to such Class A Interests and
      then (b) the Members to the extent of their remaining respective positive
      Capital Account balances, as promptly as practicable, but in any event
      within the time required by Treasury Regulations Section
      1.704-1(b)(2)(ii)(b)(2).

            (c) The liquidating trustee shall use all reasonable efforts to
reduce the Assets to cash and to distribute cash upon liquidation to the
Members. Subject to the foregoing, if any Assets are not reduced to cash, then
the liquidating trustee (i) shall value such Assets according to the Market
Value thereof, (ii) shall allocate, in accordance with Section 4.5(f) and
Article VII, any unrealized gain or loss determined by such valuation to the
Members' Capital Accounts as though the non-cash Assets had been sold on the
date of distribution and (iii) shall, after giving effect to any such
adjustment, treat the distribution of such non-cash Assets as equivalent to a
distribution of cash in the amount determined by the appraisal of such Assets.
No Member shall have any right to any specific Assets except as otherwise herein
specifically provided. In making distributions of non-cash Assets under this
Section 11.5(c), the liquidating trustee may distribute such Assets unequally
among the Members to the extent necessary to avoid a Member receiving an Asset
that it is prohibited from holding or that could result in adverse tax
consequences to a Member; provided, that such unequal distribution shall not
affect the aggregate amount of Distributions to any Member.

            (d) Each of the Members shall be furnished with a statement prepared
by, or under the supervision of, the liquidating trustee, which shall set forth
the Assets and liabilities of the Company as of the date of complete
liquidation.

            (e) As soon as possible following application of the proceeds of
liquidation and any Assets that are to be distributed in kind, any Member (or
any other appropriate representative of the Company) shall execute a certificate
of dissolution in the form prescribed by the Act and shall file the same with
the Secretary of State of the State of Delaware.

      11.6 Termination. The Company shall terminate when all of the Assets have
been distributed in the manner provided for in this Article XI, and the
Certificate shall have been canceled in the manner required by the Delaware Act.

      11.7 Claims of the Members. Members and former Members shall look solely
to the Assets for the return of their Capital Contributions, and if the Assets
remaining after payment of or due provision for all debts, liabilities and
obligations of the Company are insufficient to return such Capital
Contributions, the Members and former Members shall have no recourse against the
Company or any other Member.

                                       50


                                   ARTICLE XII

                                  MISCELLANEOUS

      12.1 Notices. All notices, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered
personally or if mailed by certified mail, return receipt requested, postage
prepaid or if sent by overnight courier or sent by facsimile, to the address set
forth on Schedule A, or such other address or to the attention of such other
Person as the recipient party shall have specified by prior written notice to
the sending party. Any such communication shall be deemed to have been received
(i) when delivered, if personally delivered, sent by nationally-recognized
overnight courier or sent via facsimile (answerback confirmed) or (ii) on the
fifth (5th) Business Day following the date of mailing, if sent by certified
mail.

      12.2 Entire Agreement. This Agreement (including the Exhibits and
Schedules hereto) together with the Related Agreements (including the Exhibits
and Schedules thereto) contains the entire understanding of the parties hereto
with respect to the subject matter hereof and thereof and supersedes all prior
agreements and understandings relating to the subject matter hereof and thereof.
Each of the parties hereto further acknowledges and agrees that, in entering
into this Agreement and entering into the Related Agreements, it has not in any
way relied upon any oral or written agreements, statements, promises,
information, arrangements, understandings, representations or warranties,
express or implied, not specifically set forth in this Agreement or the Related
Agreements.

      12.3 Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of Delaware without regard to
its conflict of laws rules.

      12.4 Member Defaults; Waiver of Certain Damages. In addition to any
specific remedies set forth herein, if any Member is in Default, the Company or
any Non-Defaulting Member shall have the right to pursue such remedies as are
available to the Company or such Member at law and in equity in connection with
such Default; provided, that notwithstanding the foregoing or any other term or
provision of this Agreement: EACH OF THE PARTIES HERETO TO THE FULLEST EXTENT
PERMITTED BY LAW IRREVOCABLY WAIVES ANY RIGHTS THAT THEY MAY HAVE TO PUNITIVE,
SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES IN RESPECT OF ANY LITIGATION BASED
UPON, OR ARISING OUT OF, THIS AGREEMENT OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS OR ACTIONS OF ANY OF THEM RELATING THERETO.

      12.5 Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, successors and
permitted assigns. Except as otherwise expressly set forth herein, neither this
Agreement nor the rights and obligations of any party hereunder shall be
assignable or transferable by such party without the prior written consent of
the other parties hereto.

      12.6 No Implied Rights or Remedies. Except as otherwise expressly provided
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or to give

                                       51


any Person, except the parties hereto, any rights or remedies under or by reason
of this Agreement.

      12.7 Counterparts. This Agreement may be executed by facsimile and in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

      12.8 Construction. The language used in this Agreement will be deemed to
be the language chosen by the parties to express their mutual intent, and no
rule of strict construction will be applied against any party.

      12.9 Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law, (i) such
provision will be fully severable, (ii) this Agreement will be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof, (iii) the remaining provisions of this Agreement will
remain in full force and effect and will not be affected by the illegal, invalid
or unenforceable provision or by its severance herefrom and (iv) in lieu of such
illegal, invalid or unenforceable provision, there will be added automatically
as a part of this Agreement a legal, valid and enforceable provision as similar
in terms to such illegal, invalid or unenforceable provision as may be possible.

      12.10 Consent to Jurisdiction. Each Member hereby submits to the exclusive
jurisdiction of the courts of general jurisdiction of the State of New York and
the federal courts of the United States of America located in the City of New
York solely in respect of the interpretation and enforcement of the provisions
of this Agreement, any Related Agreement and any other agreement, instrument and
other document entered into in connection herewith and hereby waives, and agrees
not to assert, as a defense in any action, suit or proceeding for the
interpretation or enforcement of this Agreement or any such other agreement,
instrument or other document, that is not subject thereto or that such action,
suit or proceeding may not be brought or is not maintainable in such courts or
that this Agreement or any such other agreement, instrument or other document
may not be enforced in or by such courts or that its property is exempt or
immune from execution, that the suit, action or proceeding is brought in an
inconvenient forum, or that the venue of the suit, action or proceeding is
improper. Service of process with respect thereto may be made upon any Member by
mailing a copy thereof by registered or certified mail, postage prepaid, to such
party at its address as provided in Schedule A, provided that service of process
may be accomplished in any other manner permitted by applicable law.

      12.11 WAIVER OF RIGHT TO JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
WAIVES ITS RIGHTS TO A TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT
TO, IN CONNECTION WITH, OR ARISING OUT OF, THIS AGREEMENT OR THE VALIDITY,
INTERPRETATION OR ENFORCEMENT HEREOF OR THEREOF OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREBY.

      12.12 Amendments. This Agreement may only be amended with the unanimous
written consent of Members holding all of the Class A Interests and Class B
Interests.

      12.13 Trademark Licenses

                                       52


            (a) Each of JGI and Babson hereby grants to the Company a
non-exclusive, non-transferable, royalty-free, worldwide license to use the
trademarks, trade names and trade dress set forth on Schedule D hereto (the
"Licensed Marks") solely in connection with the operation of the Business in
video, print and electronic media. The Company has no right to grant sublicenses
without the prior written consent of JGI or Babson, as applicable.

            (b) Nothing in this Agreement shall grant the Company the right to
use any of the Licensed Marks, or any variations thereof, except as expressly
provided by this Agreement, nor shall anything in this Agreement limit in any
way the rights of JGI and Babson, or their other licensees, to use the Licensed
Marks.

            (c) These trademark licenses are granted only with respect to the
Licensed Marks in the exact forms as they are shown in Schedule D and in no
other forms whatsoever. The Company agrees that it will not alter or amend in
any way the exact forms of the Licensed Marks during the term of this Agreement
or thereafter adopt or use any term that is confusingly similar thereto.

            (d) Any requests for any expansion of the express trademark licenses
granted under this Agreement shall be made by the Company in writing to JGI or
Babson, as applicable. JGI or Babson may grant or deny such requests in their
sole discretion.

            (e) Other than as specifically set forth in this Agreement, JGI and
Babson make no representations or warranties with respect to the validity,
enforceability or coverage of the Licensed Marks.

            (f) Should JGI or Babson have reason to believe based on information
available to it that the Company is using its respective Licensed Marks in a
manner not authorized by JGI or Babson, as applicable, or likely to damage the
commercial image or goodwill of such Licensed Marks, the Company shall permit
JGI or Babson, as applicable to have reasonable access to its premises and
personnel during normal working hours and shall further permit inspection of, at
JGI's or Babson's request and without charge to JGI or Babson, samples of any
materials or information bearing such Licensed Marks for the purpose of ensuring
that the Company is complying with the terms of this Agreement and JGI's and
Babson's, as applicable, own quality control and marketing standards. If at any
time, including after having given approval of a usage of the Licensed Marks,
JGI or Babson, as applicable determines that any use of its respective Licensed
Marks fails to conform to JGI's or Babson's quality control or marketing
standards, the Company shall as promptly as reasonably practicable, but in no
event later than twenty (20) Business Days from receipt of notification from JGI
or Babson of such non-conformance, modify the item in question to conform to
JGI's or Babson's, as applicable, standards.

            (g) JGI or Babson may demand that any materials to be distributed by
the Company that bear its Licensed Marks shall be subject to the prior review
and approval of JGI or Babson, as applicable, provided that such approval shall
be deemed to have been given if JGI or Babson, as applicable, does not inform
the Company that such proposed use has been disapproved within thirty (30) days
after its receipt by JGI or Babson from the Company.

                                       53


            (h) The parties agree that nothing herein shall give the Company any
right, title or interest in the Licensed Marks apart from the rights to use
hereunder, all such right, title and interest, including but not limited to
respective owners of the marks. All goodwill and improved reputation generated
by the Company's use of the Licensed Marks shall inure to the benefit of Babson
or JGI, as applicable. In no event shall such use be deemed or construed to have
created or vested any right, title or interest whatever in and to the Company .
To the extent that any jurisdiction shall find for any reason as a matter of law
or otherwise that such use has vested in the Company any right, title or
interest in or to the Licensed Marks, the Company, upon the request of JGI or
Babson, as applicable, shall execute and deliver to JGI or Babson, as
applicable, without charge, appropriate assignments to vest such rights, title
and interest in the applicable owner.

            (i) The Company agrees not to raise or cause to be raised any
questions concerning or objections to the validity of the Licensed Marks in any
jurisdiction, or to any registrations thereof or applications therefor, or to
the sole proprietary rights of JGI or Babson thereto, as applicable, on any
grounds whatsoever.

            (j) The Company shall not file, apply to register or register the
Licensed Marks or any other name, mark, term, symbol, script or device colorably
similar thereto, except if, as, when, and to the extent as may be expressly
consented to in writing in advance by JGI and Babson, as applicable, in specific
instances.

            (k) Notwithstanding anything else to the contrary herein, the
trademark licenses granted by JGI or Babson, as the case may be, pursuant to
this Section shall expire ten (10) days after JGI or Babson, as applicable,
ceases to be a Member.

                             Signature Page Follows

                                       54


      IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above stated.

                    THE COMPANY:

                    JEFFERIES BABSON FINANCE LLC

                    By: /s/ Roger W. Crandall
                       -----------------------------------------
                        Name:  Roger W. Crandall
                        Title: Chairman

                    MEMBERS:

                    MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
                    By: Babson Capital Management LLC, as its investment advisor

                    By: /s/ Roger W. Crandall
                       -----------------------------------------
                        Name:  Roger W. Crandall
                        Title: Managing Director, Babson

                    BABSON CAPITAL MANAGEMENT LLC

                    By: /s/ Thomas M. Finke
                       -----------------------------------------
                        Name:  Thomas M. Finke
                        Title: Managing Director

                    JEFFERIES GROUP, INC.

                    By: /s/ Joseph A. Schenk
                       -----------------------------------------
                        Name:  Joseph A. Schenk
                        Title: Chief Financial Officer

                    CLASS C MEMBER LLC

                    By: /s/ Joseph A. Schenk
                       -----------------------------------------
                        Name:  Joseph A. Schenk
                        Title:

              SIGNATURE PAGE TO LIMITED LIABLITY COMPANY AGREEMENT



                                                                      Schedule A

                                     MEMBERS



                                                             Percentage
   Members                      Notice Address                Interest
- --------------  -------------------------------------------  ----------
                                                       
Class A:

JGI             520 Madison Avenue                               40%
                New York, NY  10022
                Attention: Joseph A. Schenk
                Facsimile: 212-284-2233

MassMutual      Massachusetts Mutual Life Insurance Company      40%
                c/o Babson Capital Management LLC
                1500 Main Street, Suite 2800
                Springfield, MA 01115
                Attention: Jack Anderson, Counsel
                Telephone: 413-226-1054
                Facsimile: 413-226-2054

                With copies to:

                Babson Capital Management LLC
                230 South Tryon Street, 10th Floor
                Charlotte, NC 28202
                Attention: Thomas Finke, Managing Director,
                Head of Bank Loan Team
                Telephone: 704-805-7201
                Facsimile: 413-226-2977

                and

                Babson Capital Management LLC
                360 Madison Avenue, 10th Floor
                New York, NY 10017
                Attention: David Wells, Managing Director
                Telephone: 917-542-8370
                Facsimile: 413-226-2958

Class B:

Babson          Babson Capital Management LLC                     5%
                230 South Tryon Street, 10th Floor
                Charlotte, NC 28202
                Attention: Thomas Finke, Managing Director,
                Head of Bank Loan Team




                                                       
                Telephone: 704-805-7201
                Facsimile: 413-226-2977

                and

                Babson Capital Management LLC
                360 Madison Avenue, 10th Floor
                New York, NY 10017
                Attention: David Wells, Managing Director
                Telephone: 917-542-8370
                Facsimile: 413-226-2958

                With a copy to:

                Babson Capital Management LLC
                1500 Main Street, Suite 2800
                Springfield, MA 01115
                Attention: Jack Anderson, Counsel
                Telephone: 413-226-1054
                Facsimile: 413-226-2054

JGI             520 Madison Avenue                            5%
                New York, NY  10022
                Attention:  Joseph A. Schenk
                Facsimile:  212-284-2233

Class C:

Class C Member  To each of the Members as specified above.   10%
Vehicle





                                                                      Schedule B

                                INITIAL DIRECTORS

Roger Crandall
Thomas Finke
Brian Friedman
Andrew Whittaker

                        INITIAL CREDIT COMMITTEE MEMBERS

Thomas Finke
David Wells
Andrew Booth
Jim Luikart
Head Loan Officer



                                                                      Schedule C

                                TRANSACTION FEES

The Company will allocate any fee received in connection with the origination of
a Senior Loan Financing or a Special Situation Financing (an "Underwriting Fee")
to (i) other lenders, as a "Syndication Fee" (described below), (ii) to Jefco or
Babson, as applicable, as an "Origination Fee" (described below) and (iii) to
itself (the portion of any Underwriting Fee reserved to the Company is referred
to as the "Residual Fee").

A "Syndication Fee" is the fee that is paid to third-party investors to fully
syndicate the proposed transaction. The Company will retain a portion of the
Syndication Fee based on its final hold level for a specific transaction,
subject to Schedule I of the Jefferies Services Agreement.

An "Origination Fee" is the fee paid to Jefco or Babson for sourcing the
Financing Opportunity. The Origination Fee will equal twenty-five percent (25%)
of the Underwriting Fee remaining after subtracting any Syndication Fee.

The Residual Fee will represent the premium to the Company for assuming the
underwriting risk of the transaction. The Residual Fee will be calculated by
netting the Syndication Fee and the Origination Fee from the Underwriting Fee.

Except for fees which shall be payable to Babson pursuant to the Babson Services
Agreement, additional fees, such as commitment fees, ticking fees and fees in
connection with amendments, if earned, will be payable to the Company.

The fee arrangement described above will be applied to all Senior Loan
Financings and Special Situation Financings of the Company, subject in all cases
to exceptions on a case-by-case basis as approved by the Credit Committee.



                                                                      Schedule D

                                 LICENSED MARKS

Babson

The word "Babson" used solely in the combination "Jefferies Babson Finance LLC"
as set forth in Section 12.13 of this Agreement.

JGI

The word "Jefferies" used solely in the combination "Jefferies Babson Finance
LLC" as set forth in Section 12.13 of this Agreement.

EX-10.2

                                                                    EXHIBIT 10.2

                              JEFFERIES GROUP, INC.
                        2003 INCENTIVE COMPENSATION PLAN

                           RESTRICTED STOCK AGREEMENT

      AGREEMENT dated as of [Date] (the "Grant Date"), between JEFFERIES GROUP,
INC., a Delaware corporation (the "Company"), and [Name] ("Employee").

      WHEREAS, the Compensation Committee of the Board of Directors (the
"Committee") has determined that the Company shall make a grant of Restricted
Stock to Employee under the Company's 2003 Incentive Compensation Plan (the
"2003 Plan"), in furtherance of the purposes of the 2003 Plan and in recognition
of Employee's service as an employee of the Company and/or its subsidiaries; and

      WHEREAS, the Company desires to confirm the grant of Restricted Stock, and
to set forth the terms and conditions of such grant, and Employee desires to
accept such grant and agree to the terms and conditions thereof, as set forth in
this Restricted Stock Agreement (the "Agreement").

      NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:

      1. GRANT OF RESTRICTED STOCK. The Company hereby confirms the grant, under
the 2003 Plan, to Employee on the Grant Date set forth above of [# of shares]
shares of Restricted Stock (the "Restricted Stock"). The Restricted Stock is
subject to all of the terms and conditions set forth in this Agreement,
including the restrictions set forth in Section 3. The Company shall issue in
the name of Employee, as promptly as practicable, one or more certificates
representing the shares of Common Stock, $.0001 par value ("Common Stock"),
granted as Restricted Stock or shall instruct its transfer agent to issue
Restricted Stock which shall be maintained in "book entry" form on the books of
the transfer agent. The Restricted Stock shall bear the restrictive legend and
be subject to the other terms set forth in Section 3. For purposes of this
Agreement, [[the] / [each tranche of shares of]] Common Stock will remain
Restricted Stock until the expiration of the Restrictions (as defined in Section
3) [[or] / [on such tranche or the]] forfeiture of the Restricted Stock, without
regard to extraordinary transactions which may affect the Common Stock except as
may be otherwise provided under the 2003 Plan and determinations of the
Committee thereunder.

      2. INCORPORATION OF 2003 PLAN BY REFERENCE. The Restricted Stock has been
granted to Employee under the 2003 Plan. The 2003 Plan and information regarding
the 2003 Plan, including documents that constitute the "Prospectus" for the 2003
Plan under the Securities Act of 1933, can be viewed and printed out from the
Company's secure Intranet website, www.corp.jefco.com (go to PeopleNet, then to
Plan Documents). All of the terms, conditions, and other provisions of the 2003
Plan are hereby incorporated by reference into this Agreement. Capitalized terms
used in this Agreement but not defined herein shall have the same meanings as in
the 2003 Plan. If there is any conflict between the provisions of this Agreement
and the provisions of the 2003 Plan, the provisions of the 2003 Plan shall
govern. Employee hereby



acknowledges that the 2003 Plan and information regarding the 2003 Plan has been
made readily available to him and agrees to be bound by all the terms and
provisions thereof (as presently in effect or hereafter amended), rules and
regulations adopted from time to time thereunder, and by all decisions and
determinations of the Committee made from time to time thereunder.

      3. RESTRICTIONS ON RESTRICTED STOCK AND RELATED TERMS.

            (a) Restrictions Generally. Until they expire in accordance with
Section 3(b), the following restrictions (the "Restrictions") shall apply to the
Restricted Stock: (1) the Restricted Stock shall be subject to a risk of
forfeiture as set forth in Section 3(b) (the "Risk of Forfeiture"), and (2)
Employee shall not sell, transfer, assign, pledge, margin, or otherwise encumber
or dispose of the Restricted Stock (except for transfers and forfeitures to the
Company). Upon issuance of certificates or the transfer agent making the
appropriate entry on its books representing the Restricted Stock in the name of
Employee, which shall occur as promptly as practicable after the Grant Date,
Employee shall be entitled to receive dividends on the Restricted Stock as
provided in Section 3(e), shall be entitled to vote Restricted Stock on any
matter submitted to a vote of holders of Common Stock, and shall have all other
rights in connection with such Restricted Stock as would a holder of Common
Stock except as otherwise expressly provided under this Section 3, and subject
to the Committee's authority (including authority to make adjustments to Awards)
under the 2003 Plan.

            (b) Risk of Forfeiture and Expiration Thereof. Unless otherwise
determined by the Committee, if for any reason Employee's employment by the
Company or a subsidiary terminates prior to the expiration of the Restrictions,
and immediately thereafter Employee is not employed by the Company or any direct
or indirect subsidiary of Company ("Termination"), except as set forth below,
[[any] / [all]] Restricted Stock as to which the Restrictions have not expired
at or before the time of such Termination (and any related property resulting
from Section 3(e)(iii)) shall be forfeited at the time of such Termination and
automatically repurchased by the Company upon the payment by the Company of
$1.00 in the aggregate for the repurchase of all such Restricted Stock (and
related property). Except as otherwise specifically set forth herein, the
Restrictions shall expire as to [[all]] / [vesting schedule]] of the shares of
Restricted Stock (and any related property) on [vesting schedule] ("Vesting
Date").

      (i)   Death or Disability. If such Termination is by reason of Employee's
            death or Disability (as defined below), then such forfeiture and
            automatic repurchase shall not occur, and the Restrictions as to all
            of the shares of Restricted Stock shall immediately expire upon such
            Termination.

      (ii)  Retirement. If such Termination is by reason of Employee's
            Retirement, and provided that (x) the Employee has provided a
            minimum of five years of service to the Company or any of its
            affiliates and reached Retirement Age and (y) the Employee executes
            a settlement agreement and release in such form as may be requested
            by the Company, Restricted Stock not presently vested shall not then
            be forfeited, but thereafter shall be forfeited if there occurs a
            Forfeiture Event prior to any Vesting Date for such Restricted
            Stock.



      (iii) Involuntary Termination by the Company not for Cause. In the event
            of an involuntary Termination of Employment by the Company not for
            Cause, provided that the Employee executes a settlement agreement
            and release in such form as may be requested by the Company,
            Restricted Stock not previously vested shall not then be forfeited,
            but thereafter shall be forfeited if there occurs a Forfeiture Event
            prior to the Vesting Date for such Restricted Stock.

      (iv)  Termination by Employee for any reason or Termination by the Company
            for Cause. In the event of Employee's Termination of Employment by
            Employee for any reason or by the Company for Cause, the portion of
            the then-outstanding Restricted Stock not vested at the date of
            termination will be forfeited, and the portion of the
            then-outstanding Restricted Stock that is vested and non-forfeitable
            at the date of Termination will be settled as promptly as
            practicable thereafter (if it had not previously been settled).

            (c) Certain Definitions. The following definitions apply for
purposes of this Agreement:

      (i)   "Cause" means Employee's:

            Neglect, failure or refusal to timely perform the duties of
            Employee's employment (other than by reason of a physical or mental
            illness or impairment), or Employee's gross negligence in the
            performance of his or her duties;

            Material breach of any agreements, covenants and representations
            made in any employment agreement or other agreement with the Company
            or any of its subsidiaries or affiliates or violation of internal
            policies or procedures as are in effect as of the date such action
            is taken, including but not limited to the Company's Code of Ethics
            and Standards of Employee Conduct, as amended from time to time;

            Violation of any law, rule, regulation or by-law of any governmental
            authority (state, federal or foreign), any securities exchange or
            association or other regulatory or self-regulatory body or agency
            applicable to Employee, the Company, its subsidiaries or affiliates
            or any material general policy or directive of the Company, its
            subsidiaries or affiliates;

            Conviction of, or plea of guilty or nolo contendere to, a crime
            involving moral turpitude, dishonesty, fraud or unethical business
            conduct, or any felony of any nature whatsoever;

            Giving or accepting undisclosed material commissions or other
            payments in cash or in kind in connection with the affairs of the
            clients of the Company, its subsidiaries or affiliates;



            Failure to obtain or maintain any registration, license or other
            authorization or approval that Employee is required to maintain or
            that the Company, its subsidiaries or affiliates reasonably believes
            is required in order for Employee to perform his or her duties,
            provided, however, that Employee shall be given written notice of
            any such registration, license or other authorization or approval
            that he or she is required to obtain and a reasonable period of time
            to obtain such registration, license, or other authorization or
            approval;

            Willful failure to execute a directive of the board of directors of
            the Company or any of its subsidiaries or affiliates, the Executive
            Committee of any of the Company's subsidiaries or affiliates, or
            Employee's supervisor (unless such directive would result in the
            commission of an act which is illegal or unethical) or commission of
            an act against the directive of such Board, such Executive Committee
            or Employee's supervisor; or

            Substantial negotiations concerning or acceptance of employment with
            a competitor of the Company or any of its subsidiaries or affiliates
            prior to Employee's Termination of Employment.

      (ii)  "Disability" means that Employee has commenced receipt of long-term
            disability benefits under the Company's long-term disability policy
            as in effect at the date of Employee's termination of employment.

      (iii) A "Forfeiture Event" means and shall be deemed to have occurred if,
            at any time after the grant of the Restricted Stock including
            following Employee's Termination of Employment, Employee shall have
            failed to comply with any of the following conditions. Without the
            consent in writing of the Board, Employee will not, at any time
            prior to an applicable Vesting Date, acting alone or in conjunction
            with others, directly or indirectly (A) render services for any
            organization or engage (either as owner, investor, partner,
            stockholder, employer, employee, consultant, advisor, or director)
            directly or indirectly, in any business, which is or becomes
            competitive with the Company, its subsidiaries or affiliates; (B)
            induce any customer or client of or investor (excluding anyone who
            is an investor solely as a holder of Common Stock of the Company) in
            the Company, its subsidiaries or affiliates with whom Employee has
            had contacts or relationships, directly or indirectly, during and
            within the scope of his employment with the Company or any of its
            subsidiaries or affiliates, to curtail, limit, or cancel their
            business with the Company, its subsidiaries or affiliates; (C)
            induce, or attempt to influence, any employee of the Company, its
            subsidiaries or affiliates to terminate employment; (D) solicit,
            hire or retain as an employee or independent contractor, or assist
            any third party in the solicitation, hire, or retention as an
            employee or independent contractor, any person who during the
            previous 12 months was an employee of the Company or any of its
            subsidiaries or affiliates; or (E) otherwise fail to comply with the
            conditions set forth in Section 7.4(a), (b) and (c) of the Plan.
            However, following Termination, Employee shall be free to purchase
            stock or other securities of an organization or



            business so long as (i) Employee does not directly or indirectly
            participate in the management of such organization or business and
            (ii) it is listed upon a recognized securities exchange or traded
            over-the-counter and such investment does not represent a greater
            than five percent equity interest in the organization or business.

      (iv)  "Retirement" means retirement after attaining the age at which an
            Employee's age plus his years of service equals 60, provided,
            however, that Employee has provided a minimum of five years of
            service to the Company, its subsidiaries or affiliates. For this
            purpose, years of service shall be credited for each twelve month
            period beginning on the date of Employee's commencement of
            employment with the Company and on each anniversary thereof during
            which the Employee was in active employment with the Company.

      (v)   "Termination of Employment" means the event by which Employee ceases
            to be employed by the Company, its subsidiaries and affiliates and
            immediately thereafter is not employed by any other entity included
            within the Company.

            (d) Evidence of Restricted Stock. Restricted Stock shall be
evidenced either (i) by issuance of one or more certificates in the name of
Employee or (ii) by an entry on the books of the Company's transfer agent. The
Restricted Stock shall bear an appropriate legend referring to the terms,
conditions, and Restrictions applicable hereunder in substantially the following
form:

      The shares of Common Stock represented by this certificate (the "Shares")
      have been granted by Jefferies Company, Inc. (the "Company") as Restricted
      Stock under the Company's 2003 Incentive Compensation Plan (the "2003
      Plan") and the Restricted Stock Agreement (the "Agreement"), dated as of [
      ], between the registered owner named hereon ("Employee") and the Company.
      Under the 2003 Plan and the Agreement, copies of which may be examined at
      the office of the Secretary of the Company, until [ ] (subject to
      acceleration in certain circumstances), Employee shall not sell, transfer,
      assign, pledge, margin, or otherwise encumber or dispose of the Shares
      (except for transfers and forfeitures to the Company), and Employee shall
      forfeit the Shares upon termination of Employee's employment with the
      Company and its subsidiaries in certain circumstances. The Shares are
      subject to certain other terms and conditions set forth in the Agreement.

Unless otherwise determined by the Company, certificates representing Restricted
Stock shall remain in the physical custody of the General Counsel of the Company
or his designee until such time as all Restrictions have expired. In addition,
Restricted Stock shall be subject to such stop-transfer orders and other
restrictive measures as the General Counsel of the Company shall deem advisable
under federal or state securities laws, rules and regulations thereunder, and
the rules of the New York Stock Exchange (the "NYSE") or any national securities
exchange or automated quotation system on which Common Stock is then listed or
quoted, or to implement the Restrictions.

            (e) Dividends and Distributions; Stock Splits. Employee shall be
entitled to receive dividends and distributions payable with respect to
Restricted Stock if and to the extent



that he or she is the record owner of such Restricted Stock on any record date
for such a dividend or distribution and he or she has not forfeited such
Restricted Stock on or before the payment date for such dividend or
distribution, and Restricted Stock shall be subject to any stock split, subject
to the following terms and conditions:

      (i)   In the event of a cash dividend or distribution on Common Stock
            which is not a large, special and non-recurring dividend or
            distribution (as determined by the Board of Directors), such
            dividend or distribution shall be paid in cash to Employee;

      (ii)  In the event of a large, special and non-recurring cash dividend
            payable on Common Stock, the Company shall retain the amount of such
            cash dividend and, in lieu of delivery thereof, shall grant to
            Employee additional shares of Restricted Stock having a fair market
            value (as determined by the Committee) at the payment date of the
            dividend or distribution equal to the amount of cash paid as a
            dividend or distribution on each share of Common Stock multiplied by
            the number of shares of Employee's Restricted Stock. Such additional
            Restricted Stock will be subject to the same Restrictions and to
            such other terms and conditions as applied to the Restricted Stock;

      (iii) In the event of any non-cash dividend or distribution in the form of
            property other than Common Stock payable on Common Stock (including
            shares of a subsidiary of the Company distributed in a spin-off),
            the Company shall retain in its custody the property so distributed
            in respect of Employee's Restricted Stock, which property will be
            subject to the same Restrictions and to such other terms and
            conditions of the 2003 Plan and this Agreement as apply to the
            Restricted Stock with respect to which such property was
            distributed, until such time as the Restrictions expire or the
            Restricted Stock (together with such property) are forfeited. To the
            greatest extent practicable, such property will be treated the same
            as such Restricted Stock with respect to which the property was
            distributed, including in the event of any dividends or
            distributions paid in respect of such property or with respect to
            the placement of any legend on certificate(s) or documents
            representing such property.

      (iv)  In the event of a dividend or distribution in the form of Common
            Stock or split-up of shares, the Common Stock issued or delivered as
            such dividend or distribution or resulting from such split-up will
            be deemed to be additional Restricted Stock and will be subject to
            the same Restrictions and to such other terms and conditions of the
            2003 Plan and this Agreement as applied to the Restricted Stock with
            respect to which such dividend or distribution was paid or which was
            subject to such split-up.

            (f) Delivery of Certificates. Upon expiration of all Restrictions on
any Restricted Stock, the shares previously issued in the name of Employee as
such Restricted Stock shall no longer be deemed to be Restricted Stock, and the
Company shall, subject to the satisfactory payment of any federal, state or
foreign taxes or other amounts referred to in Section 4, below, cause any legend
referring to the Restrictions to be removed from the certificate(s)



representing such shares and shall deliver such certificate(s) (together with
any property resulting from Section 3(e)(iii)) to Employee.

            (g) Stock Powers. Employee shall deliver to the General Counsel of
the Company, at the time of execution of this Agreement and/or at such other
time or times as the General Counsel may request, one or more executed stock
powers, in the form attached hereto as Exhibit A or such other form as may be
specified by the General Counsel, authorizing the transfer of the Restricted
Stock to the Company upon forfeiture, and Employee shall take such other steps
or perform such other actions as may be requested by the General Counsel to
effect the transfer of any forfeited Restricted Stock (together with any
property resulting from Section 3(e)(iii)) to the Company.

      4. TAX WITHHOLDING. Employee shall make arrangements satisfactory to the
Company, or, in the absence of such arrangements, the Company and any subsidiary
may deduct from any payment to be made to Employee any amount necessary, to
satisfy requirements of federal, state, local, or foreign tax law to withhold
taxes or other amounts with respect to the grant of the Restricted Stock or the
expiration of the Restrictions applicable to the Restricted Stock (and any
property resulting from Section 3(e)(iii)). In the event that Employee files,
under Section 83(b) of the Code, an election to be taxed on his receipt of
Restricted Stock as the receipt of ordinary income at the date of grant of the
Restricted Stock, Employee shall at the time of such filing notify the Company
of the making of such election and furnish a copy of the notice to the Company.
Unless Employee has made separate arrangements satisfactory to the Company, the
Company may elect to withhold shares deliverable in settlement of the Restricted
Stock grant having a fair market value (as determined by the Committee) equal to
the amount of such tax liability required to be withheld in connection with the
grant of the Restricted Stock or the expiration of the Restrictions applicable
to the Restricted Stock, but the Company shall not be obligated to withhold such
shares.

      5. LEGAL COMPLIANCE. Employee agrees to take any action the Company
reasonably deems necessary in order to comply with federal and state laws, or
the rules and regulations of the NYSE, the National Association of Securities
Dealers, Inc., or any other stock exchange, or any other obligation of the
Company or Employee relating to the Restricted Stock or this Agreement.

      6. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
conflicts of laws principles.

      7. MISCELLANEOUS. This Agreement shall be binding upon the heirs,
executors, administrators, and successors of the parties. This Agreement and the
2003 Plan constitute the entire agreement between the parties with respect to
the Restricted Stock, and supersede any prior agreements or documents with
respect thereto. No amendment, alteration, suspension, discontinuation, or
termination of this Agreement which may impose any additional obligation upon
the Company or materially impair the rights of Employee with respect to the
Restricted Stock shall be valid unless in each instance such amendment,
alteration, suspension, discontinuation, or termination is expressed in a
written instrument duly executed in the name and on behalf of the



Company and by Employee. Neither the Restricted Stock nor the granting thereof
shall constitute or be evidence of any agreement or understanding, express or
implied, that Employee has a right to continue as an officer or employee of the
Company or any subsidiary for any period of time, or at any particular rate of
compensation. Any waiver by the Company of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent breach
of such provision or any other provision hereof.

            The Employee hereby acknowledges that the type and periods of
restriction imposed in the provisions of this Agreement are fair and reasonable.
The Employee hereby further acknowledges that the provisions of this Agreement
shall be enforced to the fullest extent permissible under the laws and public
policies applied in each jurisdiction in which enforcement is sought.
Accordingly, the Employee agrees that if any particular provision of this
Agreement shall be adjudicated to be invalid or unenforceable, such provision
shall be deemed amended to delete therefrom the portion thus adjudicated to be
invalid or unenforceable, such deletion to apply only with respect to the
operation of such provision in the particular jurisdiction in which such
adjudication is made. In addition, if any one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, geographical scope, activity or subject, it shall be construed
by limiting and reducing it, so as to be enforceable to the extent compatible
with the applicable law as it shall then appear. Any provision of this Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.

      IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

Employee:                                       JEFFERIES GROUP, INC.

______________________________                  By:  ___________________________
Name
Social Sec. No.

Address:



                                   STOCK POWER

      FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto Jefferies Group, Inc. [number] shares of Common Stock, $0.0001 par value
per share, of Jefferies Group, Inc., a Delaware corporation (the "Corporation"),
registered in the name of the undersigned on the books and records of the
Corporation, and does hereby irrevocably constitute and appoint Lloyd H. Feller
and Judith O. Kester, and each of them, attorneys, to transfer the Common Stock
on the books of the Corporation, with full power of substitution in the
premises.

                     __________________________________________________________
                     (Signature should be in exact form as on Stock certificate)

                     __________________________________________________________
                     Date

EX-10.3

                                                                    EXHIBIT 10.3

                              JEFFERIES GROUP, INC.
                                OPTION AGREEMENT

      AGREEMENT dated as of [date] ("Grant Date"), between JEFFERIES GROUP,
INC., a Delaware corporation (the "Company") and [name] ("Optionee"). By
accepting the grant of the Option, the Optionee has agreed to the terms of this
Agreement.

I.    Options Granted

      The Company hereby confirms the grant, pursuant to the Company's 2003
Incentive Compensation Plan (the "Plan"), to Optionee, on Grant Date, of the
stock options specified in Part II below. Each of the options specified below
(each an "Option") represents the right to purchase the specified number of
shares of the Company's Common Stock, $.0001 par value per share, at the
specified Exercise Price per share, at such times as the right to exercise has
Vested and prior to the expiration of the Option and subject to such other terms
and conditions as are specified in Part II below and elsewhere in this
Agreement, including the Terms and Conditions of Option Grant(s) attached
hereto. The number of Shares Purchasable and the Exercise Price are subject to
adjustment as specified in the Plan.

II.   Principal Terms of Option

      Shares Purchasable:    [ ] shares
      Exercise Price:        [$XX] per share
      Vesting Date:          [date of vesting]
      Expiration Date:       2:00 p.m., Pacific Time, on the earlier of (i) the
                             date of Optionee's termination of employment with
                             the Company and its subsidiaries if such
                             termination occurs before the Vesting Date, (ii)
                             the 60th day following the termination of
                             Optionee's employment with the Company and its
                             subsidiaries if such termination occurs on or after
                             the Vesting Date, or (iii) [insert expiration date]



                     TERMS AND CONDITIONS OF OPTION GRANT(S)

The following Terms and Conditions apply to each Option granted to you by
Jefferies Group, Inc. (the "Company") identified on the preceding page. Certain
specific terms of each Option, including number of Shares Purchasable, the
Vesting and Expiration Dates, and Exercise Price, are set forth on the preceding
page.

      1. Each Option is a non-qualified stock option granted to you under the
Company's 2003 Incentive Compensation Plan (the "Plan"), a copy of which is
available to you on the Company's Intranet (www.corp.jefco.com -- go to
PeopleNet, then to Plan Documents). You may also request a copy from the
Secretary of the Company. All of the terms, conditions and other provisions of
the Plan are incorporated by reference herein. If there is any conflict between
the provisions of this document and the provisions of the Plan, the provisions
of the Plan govern. By accepting the grant of each Option, you agree to be bound
by all the terms and provisions of the Plan (as presently in effect or later
amended), rules and regulations under the Plan adopted from time to time, and
decisions and determinations of the Company's Compensation Committee (the
"Committee") made from time to time.

      2. Subject to all applicable laws, rules, regulations and Section 6 of the
Plan, you may exercise each Option if and to the extent it has become vested and
exercisable on and after the specified Vesting Date and prior to the Expiration
Date of the Option.

      3. To exercise each Option, you must (a) give written notice, signed by
you, to the Secretary of the Company and (b) pay the Exercise Price of the
Option for the number of shares of Common Stock being purchased in full to the
Company in cash (including by check), payable in United States dollars, or as
otherwise permitted under the Plan or this Section 3. The notice will be deemed
to have been received on the earlier of personal delivery to the Secretary or
the date of delivery by overnight mail or other courier service to the office of
the Secretary (the "Exercise Date"). However, if your exercise notice and
payment are received after 1:59 p.m., Pacific Time, the Exercise Date will be
the next business day.

      Once you give notice of exercise, your notice may not be revoked. When you
exercise the Option, or part thereof, the Company will transfer or will cause to
be issued a certificate or certificates for the Common Stock being purchased as
promptly as practicable, with any legend deemed necessary or advisable by the
Secretary affixed to such certificate(s). You do not have any rights as a
stockholder with respect to any shares of Common Stock covered by the Option
until the Option has been properly exercised by you and the Exercise Price for
the shares has been paid.

      Unless otherwise determined by the Committee, you may pay all or part of
the Exercise Price by delivery and transfer to the Company of that number of
shares of the Company's Common Stock owned by you (and not acquired by exercise
of an option or otherwise under a Company plan within the prior six months,
unless otherwise determined by the Committee) with an aggregate Fair Market
Value equal to the aggregate Exercise Price to be paid thereby, or in any other
manner then permitted by the Committee, in accordance with any rules and
regulations adopted by the Committee.



      4. As a condition to the exercise of each Option, the Company may require
you to make any representation and/or warranty to the Company as may be required
under any applicable law or regulation. In addition, each Option is subject to
cancellation or rescission if you fail to comply with certain conditions
relating to non-competition, confidential information, and intellectual
property, and in certain cases you may be required to repay amounts realized
upon exercise of the Option upon a failure to comply with such conditions, as
provided in Section 7.4 of the Plan.

      5. By accepting the grant of each Option, you agree to take any action
that the Company reasonably deems necessary to comply with federal and state
laws, or the rules and regulations of the New York Stock Exchange or any other
stock exchange.

      6. Unless otherwise determined by the Committee, you may not transfer any
Option to any third party other than by will or the laws of descent and
distribution, and, during your lifetime, only you or your duly appointed
guardian or legal representative may exercise the Option. You may designate one
or more beneficiaries to exercise your rights under the Option upon your death,
in the manner and to the extent permitted by the Committee under rules and
regulations adopted by the Committee under the Plan.

      7. The terms and conditions of each Option and the Plan are binding upon
the heirs, executors, administrators and successors of you and the Company.
These terms and the obligations of the Company and your rights hereunder may not
be added to or modified except in a writing signed by the Company.

      8. No Option or granting of the Option shall constitute or be evidence of
any agreement or understanding, express or implied, that you have a right to
continue as an officer or employee of the Company for any period of time, or at
any particular rate of compensation.



                              JEFFERIES GROUP, INC.
                           DEFERRED COMPENSATION PLAN
                  As Amended and Restated as of January 1, 2003

                            SHARE OPTION CERTIFICATE

                              FIRST NAME, LAST NAME

      The SHARE OPTION CERTIFICATE, dated as of the __________________ (the
"Date of Issuance"), evidences and sets forth terms and conditions of the Share
Option (the "Option") granted by JEFFERIES GROUP, INC., a Delaware corporation
(the "Company") to ("Optionee"). By accepting the grant of the Option, the
Optionee has agreed to the terms set forth and incorporated into this
Certificate.

I.    Share Option Granted

      The Company hereby confirms the grant, pursuant to the Company's Deferred
Compensation Plan (the "DCP"), together with the 2003 Incentive Compensation
Plan (the "2003 ICP" and, with the DCP, the Plans) from which the Option shares
are drawn, of the Option specified in Part II below. The Option represents the
right to purchase the specified number of shares of the Company's Common Stock,
$.0001 par value per share, at the specified Exercise Price per share, following
the Date of Issuance and prior to the expiration of the Option and subject to
such other terms and conditions as are specified in Part II below and elsewhere
in this CERTIFICATE including the Terms and Conditions of Option Grant(s)
attached hereto. The number of Shares Purchasable and the Exercise Price are
subject to adjustment as specified in the Plans.

II.   Principal Terms of the Option:

      Shares Purchasable under the Option and the corresponding Exercise Prices
are as follows:



SHARES PURCHASABLE                   EXERCISE PRICE PER SHARE                  STATED EXPIRATION DATE
- ------------------                   ------------------------                  ----------------------
                                                                         


      Vesting Date:      Option is fully Vested at Date of Issuance

      Expiration Date:        2:00 p.m., Pacific Time, on the Stated Expiration
                         Date (relating to the specified shares in the table
                         above), provided that, if Optionee's employment with
                         the Company and its subsidiaries terminates at least 60
                         days before that date, the Expiration Date will



                         be the 60th day following the later of the date of such
                         termination of employment or the Date of Issuance of
                         this Certificate.

                      TERMS AND CONDITIONS OF SHARE OPTIONS

The following Terms and Conditions apply to each Option granted to you by
Jefferies Group, Inc. (the "Company") and evidenced by the Share Option
Certificate ("Certificate") to which these Terms and Conditions are attached.
Certain specific terms of each Option, including number of shares purchasable,
the Vesting and Expiration Dates, and Exercise Price, are set forth on the
preceding page.

      1. Each Option is a non-qualified stock option granted to you under the
Company's Deferred Compensation Plan (the "DCP"), which is implemented under and
subject to the Company's 2003 Incentive Compensation Plan (the "2003 ICP" and,
with the DCP, the Plans), copies of which are available to you on the Company's
Intranet (www.corp.jefco.com -- go to PeopleNet, then to Plan Documents). You
may also request a copy from the Secretary of the Company. All of the terms,
conditions and other provisions of the Plans are incorporated by reference
herein. If there is any conflict between the provisions of this document and the
provisions of the Plans, the provisions of the Plans govern. By accepting the
grant of each Option, you agree to be bound by all the terms and provisions of
the Plans (as presently in effect or later amended), rules and regulations
adopted from time to time, and decisions and determinations made from time to
time by the Company's Compensation Committee (the "Committee") and any other
committee authorized to administer the Plan.

      2. Subject to all applicable laws, statutes, rules, regulations and
applicable provisions of the Plans, you may exercise each Option if and to the
extent it has become vested and exercisable on and after the specified Vesting
Date and prior to the Expiration Date of the Option.

      3. To exercise each Option, you must (a) give written notice, signed by
you, to the Secretary of the Company and (b) pay the Exercise Price of the
Option for the number of shares of Common Stock being purchased in full to the
Company in cash (including by check), payable in United States dollars or as
otherwise permitted under the Plans or this Section 3. This notice will be
deemed to have been received on the earlier of personal delivery to the
Secretary or the date of delivery by overnight mail or other courier service to
the office of the Secretary (the "Exercise Date"). However, if your exercise
notice and payment are received after 1:59 p.m., Pacific Time, the Exercise Date
will be the next business day.

      Once you give notice of exercise, your notice may not be revoked. When you
exercise the Option, or part thereof, the Company will transfer or will cause to
be issued a certificate or certificates for the Common Stock being purchased as
promptly as practicable, with any legend deemed necessary or advisable by the
Secretary affixed to such share certificate(s). You do not have any rights as a
stockholder with respect to any shares of Common Stock covered by the Option
until the Option with respect to such shares has been properly exercised by you
and the Exercise Price for the shares has been paid.

      Unless otherwise determined by the Committee, you may pay all or part of
the Exercise Price by delivery and transfer to the Company of that number of
shares of the Company's Common



Stock owned by you (and not acquired by exercise of an option or otherwise under
a Company plan within the prior six months, unless otherwise determined by the
Committee) with an aggregate Fair Market Value equal to the aggregate Exercise
Price to be paid thereby, or in any other manner then permitted by the
Committee, in accordance with any rules and regulations adopted by the
Committee.

      4. As a condition to the exercise of each Option, the Company may require
you to make any representation and/or warranty to the Company as may be required
under any applicable law or regulation. The provisions of Section 7.4 of the
2003 ICP will not apply to the Option(s).

      5. By accepting the grant of each Option, you agree to take any action
that the Company reasonably deems necessary to comply with federal and state
laws, or the rules and regulations of the New York Stock Exchange or any other
stock exchange.

      6. Unless otherwise determined by the Committee, you may not transfer any
Option to any third party other than by will or the laws of descent and
distribution, and, during your lifetime, only you or your duly appointed
guardian or legal representative may exercise the Option. You may designate one
or more beneficiaries to exercise your rights under the Option upon your death,
in the manner and to the extent permitted by the Committee under rules and
regulations adopted by the Committee under the Plan.

      7. The terms and conditions of each Option and the Plan are binding upon
the heirs, executors, administrators and successors of you and the Company.
These terms and the obligations of the Company and the rights of Optionee
hereunder may not be added to or modified except in a writing signed by the
Company.

      8. No Option or granting of the Option will constitute or be evidence of
any agreement or understanding, express or implied, that you have a right to
continue as an officer or employee of the Company for any period of time, or at
any particular rate of compensation.

EX-31.1

                                                                    EXHIBIT 31.1

                            RULE 13A-14(a)/15D-14(a)
                    CERTIFICATION BY CHIEF FINANCIAL OFFICER

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 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 report;

3.Based on my knowledge, the financial statements, and other financial
information included in this 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 report;

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

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, 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 report is being prepared;

      b)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      c)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal controls over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

Date: November 8, 2004                          By: /s/ Joseph A. Schenk
                                                    ---------------------------
                                                        Joseph A. Schenk
                                                        Chief Financial Officer

                                     Page 1

EX-31.2

                                                                    EXHIBIT 31.2

                            RULE 13A-14(a)/15D-14(a)
                    CERTIFICATION BY CHIEF EXECUTIVE OFFICER

I, Richard B. Handler, certify that:

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

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial
information included in this 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 report;

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

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, 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 report is being prepared;

      b)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      c)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal controls over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

Date: November 8, 2004                          By: /s/ Richard B. Handler
                                                    ---------------------------
                                                        Richard B. Handler
                                                        Chief Executive Officer

                                     Page 1

EX-32

                                                                      EXHIBIT 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

I, Richard B. Handler, Chief Executive Officer, and I, Joseph A. Schenk, Chief
Financial Officer, of Jefferies Group, Inc, a Delaware corporation (the
"Company"), each hereby certifies, pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:

(1) The Company's periodic report on Form 10-Q for the period ended September
30, 2004 (the "Form 10-Q") fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Company.

                                      * * *

CHIEF EXECUTIVE OFFICER                         CHIEF FINANCIAL OFFICER

 /s/ Richard B. Handler                           /s/ Joseph A. Schenk
- ---------------------------                     -------------------------------
     Richard B. Handler                               Joseph A. Schenk

Date: November 8, 2004                          Date: November 8, 2004

A signed original of this written statement required by Section 906 has been
provided to Jefferies Group, Inc. and will be retained by Jefferies Group, Inc.
and furnished to the Securities and Exchange Commission or its staff upon
request.

                                     Page 1