10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended December 31, 2008

OR

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

For the transition period from                             to                            

Commission File Number: 1-14947

JEFFERIES GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	95-4719745 (I.R.S. Employer Identification No.)
520 Madison Avenue New York, New York (Address of principal executive offices)	10022 (Zip Code)

Registrant’s telephone number, including area code: (212) 284-2550

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Name of each exchange on which registered:
Common Stock, $.0001 par value	New York Stock Exchange

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ      No o

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes o      No þ

     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 þ     No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. þ

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o  Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No þ

     State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $1,687,256,788 as of June 30, 2008.

     Indicate the number of shares outstanding of the registrant’s class of common stock, as of the latest practicable date. 165,853,333 shares as of the close of business February 18, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

     Information from the Registrant’s Definitive Proxy Statement with respect to the 2009 Annual Meeting of Stockholders to be held on May 18, 2009 to be filed with the SEC is incorporated by reference into Part III of this Form 10-K.

LOCATION OF EXHIBIT INDEX

The index of exhibits is contained in Part IV herein on page 103.

JEFFERIES GROUP, INC.

2008 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

	Page
PART I
Item 1. Business		1
Item 1A. Risk Factors		7
Item 1B. Unresolved Staff Comments		11
Item 2. Properties		11
Item 3. Legal Proceedings		11
Item 4. Submission of Matters to a Vote of Security Holders		11
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		12
Item 6. Selected Financial Data		14
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		46
Item 8. Financial Statements and Supplementary Data		49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		102
Item 9A. Controls and Procedures		102
Item 9B. Other Information		102
PART III
Item 10. Directors, Executive Officers and Corporate Governance		102
Item 11. Executive Compensation		102
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		102
Item 13. Certain Relationships and Related Transactions, and Director Independence		102
Item 14. Principal Accountant Fees and Services		103
PART IV
Item 15. Exhibits, Financial Statement Schedules		103
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-21
EX-23
EX-31.1
EX-31.2
EX-32

Exhibit Index located on page 103 of this report.

PART I

Item 1. Business.

Introduction

     Jefferies Group, Inc. and its subsidiaries (“we” or “us”) operate as an independent, full-service global securities and investment banking firm serving companies and their investors. We offer companies capital markets, merger and acquisition, restructuring and other financial advisory services. We provide investors fundamental research and trade execution in equity, equity-linked, and fixed income securities, including corporate bonds, US government and agency securities, repo finance, mortgage- and asset-backed securities, municipal bonds, whole loans and emerging markets debt, as well as commodities and derivatives. We also provide asset management services and products to institutions and other investors.

     Our principal operating subsidiary, Jefferies & Company, Inc. (“Jefferies”), was founded in 1962. Since 2000, we have pursued a strategy of continued growth and diversification, whereby we have sought to increase our share of the business in each of the markets we serve, while at the same time expanding the breadth of our activities in an effort to mitigate the cyclical nature of the financial markets in which we operate. Our growth plan has been achieved through internal growth supported by the ongoing addition of experienced personnel in targeted areas, as well as the acquisition from time to time of complementary businesses.

     As of December 31, 2008, we had 2,270 employees. We maintain offices in more than 25 cities throughout the world and have our executive offices located at 520 Madison Avenue, New York, New York 10022. Our telephone number is (212) 284-2550 and our Internet address is www.jefferies.com.

     We make available free of charge on our Internet website the following documents and reports:

• Code of Ethics;

• Reportable waivers, if any, from our Code of Ethics by our executive officers;

• Board of Directors Corporate Governance Guidelines;

• Charter of the Audit Committee of the Board of Directors;

• Charter of the Corporate Governance and Nominating Committee of the Board of Directors;

• Charter of the Compensation Committee of the Board of Directors;

• Annual reports on Form 10-K;

• Quarterly reports on Form 10-Q;

• Current reports on Form 8-K; and

• Beneficial ownership reports on Forms 3, 4 and 5.

     Shareholders may also obtain free of charge a printed copy of any of these documents or reports by sending a request to Investor Relations, Jefferies & Company, Inc., 520 Madison Avenue, New York, NY 10022, by calling 203-708-5975 or by sending an email to info@jefferies.com.

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Business Segments

     We currently operate in two business segments, Capital Markets and Asset Management. The Capital Markets reportable segment includes our securities trading (including the results of our partially-owned subsidiary, Jefferies High Yield Trading, LLC) and investment banking activities. The Capital Markets reportable segment is managed as a single operating segment that provides the research, sales, trading and origination effort for various equity, fixed income and advisory products and services. The Capital Markets segment comprises a number of interrelated divisions. The Asset Management segment is primarily comprised of operating activities related to our asset management businesses. Since the second quarter of 2007, we have included the results of our international convertible bond funds within the results of the Asset Management segment. Previously, operations from our international convertible bond funds were included in the Capital Markets segment. Prior period disclosures have been adjusted to conform to the current period’s presentation. This change was made in order to reflect the manner in which these segments are currently managed.

     Financial information regarding our reportable business segments as of December 31, 2008, 2007 and 2006 is set forth in note 17 of the Notes to Consolidated Financial Statements, titled “Segment Reporting” and is incorporated herein by reference.

Our Businesses

Capital Markets

     Our Capital Markets activity includes our securities execution activities, including sales, trading and research in equities, equity derivatives, convertible securities, and fixed income securities, including corporate bonds, US government and agency securities, repo finance, mortgage- and asset-backed securities, municipal bonds, loans and emerging markets debt, and prime brokerage, and our investment banking activities, which include capital markets transactions, mergers and acquisitions and other advisory transactions. In addition, our Capital Markets activities include securities lending and our proprietary trading activities, as well as commodity-related trading. We are primarily focused on serving corporations and institutional investors.

     Equities

     Our Equities Division consists of equity research, cash sales and trading, electronic execution services, equity derivatives, securities lending and prime brokerage.

     Equity Sales and Trading

     Our equity research, sales and trading unit is one of the primary foundations of our platform. We have more than 45 years of experience in equity trading. Our equity sales representatives serve institutional investors around the globe and provide execution with a focus on minimal market impact. We provide listed block trades, NASDAQ market making, bulletin board trading, capital markets/origination, risk arbitrage, statistical arbitrage, special situations, pair trades, relative value, and portfolio and electronic trading, as well as trading in American Depository Receipts (“ADR”) and Ordinary Shares. In the second half of 2008, we expanded considerably our international equities sales, trading and research team in Europe. Our clients include domestic and international investors such as investment advisors, banks, mutual funds, insurance companies, hedge funds, and pension and profit sharing plans. We have a Private Client Services group that focuses on serving smaller institutions, family offices and high net worth individuals.

     Execution

     Through our Jefferies Execution subsidiary, we provide to our institutional customers agency-only execution services for stocks and options listed on the NYSE, AMEX, and all other major exchanges, as well as OTC.

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     Equity Research

     Encompassed within equity sales and trading is research and research sales. We provide long- and short-term investment ideas. Our analysts use a variety of quantitative and qualitative tools, integrating field analysis, proprietary channel checks and ongoing dialogue with the managements of the companies they cover.

     Equity Derivatives

     We offer equity derivatives for investors seeking to manage risk and optimize returns within the equities market. Our professionals have expertise in listed and over-the-counter transactions and products. We focus on serving the diverse needs of our institutional, corporate and private client base across multiple product lines, offering listed options, ETFs, and OTC options and swaps.

     Securities Lending

     In connection with both trading and brokerage activities, we borrow securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date, and lend securities to other brokers and dealers for similar purposes. We have an active securities borrowed and lending matched book business in which we borrow securities from one party and lend them to another party. When we borrow securities, we generally provide cash to the lender as collateral, which is reflected in our Consolidated Statements of Financial Condition as securities borrowed. We earn interest revenues on this cash collateral. Similarly, when we lend securities to another party, that party provides cash to us as collateral, which is reflected in our Consolidated Statements of Financial Condition as securities loaned. We pay interest expense on the cash collateral received from the party borrowing the securities. A substantial portion of our interest revenues and interest expenses results from this matched book activity. The initial collateral advanced or received approximates or is greater than the fair value of the securities borrowed or loaned. We monitor the fair value of the securities borrowed and loaned on a daily basis and request additional collateral or return excess collateral, as appropriate.

     Prime Brokerage

     We offer prime brokerage services to hedge funds, money managers, and registered investment advisors.

     Fixed Income and Commodities

     Fixed Income and Commodities consist of Jefferies High Yield Trading, LLC, convertibles trading in both the U.S. and Europe, investment grade fixed income, research and commodity trading.

     Investment Grade Fixed Income

     We provide fixed income transaction execution for institutions. In 2008, we further strengthened our fixed income sales and trading platform. Our fixed income effort now includes more than 150 professionals focused on the sales and trading of corporate bonds, US government and agency securities, repo finance, mortgage- and asset-backed securities, municipal bonds, whole loans and emerging markets debt.

     High Yield Secondary Market Activities

     Jefferies High Yield Trading, LLC (“JHYT”) conducts our secondary market trading activities in high yield and distressed securities, as well as bank loans. JHYT is a registered broker-dealer and is a wholly-owned subsidiary of Jefferies High Yield Holdings, LLC (“JHYH”).

     JHYH had total capital of $854 million at December 31, 2008, of which $280.9 million represents our capital interest in JHYH. We and Leucadia National Corporation each have the right to nominate two of a total of four directors to JHYH’s board of directors, and each respectively own 50% of the voting securities of JHYH. JHYH provides the opportunity for additional capital investments over time from third party investors through two funds

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managed by us, Jefferies Special Opportunities Partners, LLC and Jefferies Employees Special Opportunities Partners, LLC. The term of the arrangement is for six years, with an option to extend.

     Fixed Income Research

     We have expanded our research platform over the last few years and provide long- and short-term investment ideas. Our analysts use a variety of quantitative and qualitative tools, integrating field analysis, proprietary channel checks and ongoing dialogue with the managements of the companies they cover.

     Convertibles

     Our personnel in the U.S., London, and Zurich serve the global convertible markets. We offer sales, trading and analysis of U.S. domestic and international convertible bonds, convertible preferred shares, closed-end funds, warrants, and equity-linked products.

     Commodities

     Our commodities group, Jefferies Financial Products, LLC (“JFP”), offers swaps, options and other derivatives typically linked to various commodity indexes and is a significant provider of liquidity in exchange-traded commodity index contracts. JFP provides financial products and commodity index knowledge to pension funds, mutual funds, sovereigns, foundations, endowments and other institutional investors seeking exposure to commodities as an asset class. In 2005, JFP worked with Reuters to modify the benchmark CRB Index, now renamed the Reuters/Jefferies CRB Index. In addition, JFP offers proprietary commodity indexes, such as the Jefferies Commodity Performance Index, which are designed to outperform standard benchmark indexes.

     Investment Banking

     Our Investment Banking Division offers our clients a full range of financial advisory services, as well as equity, debt, and equity-linked capital raising services.

     Underwriting

     Equity and Equity-Linked Financing — We offer direct placements, private equity, private placements, initial public offerings, and follow-on offerings of equity and equity-linked convertible securities.

     Debt Capital Markets — We offer a range of debt financing for companies and financial sponsors. We focus on structuring and distributing public and private debt in leveraged finance transactions, including leveraged buy-outs, acquisitions, growth capital financings, recapitalizations, and Chapter 11 exit financings. Our joint venture loan finance company, Jefferies Finance LLC, has the ability to commit capital for transactions that range between $50 million and $500 million.

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     Advisory Services

     Mergers & Acquisitions — We advise buyers and sellers on sales, divestitures, acquisitions, mergers, tender offers, joint ventures, strategic alliances and takeover defenses. We can facilitate and finance acquisitions and recapitalizations on both buy-side and sell-side mandates. Our service to our clients includes leveraging our industry knowledge, extensive relationships, and capital markets and restructuring expertise.

     Recapitalization & Restructuring — We offer advisory services in connection with exchange offers, consent solicitations, capital raising, recapitalization, restructuring and distressed M&A activity. We provide advice and support in the structuring, valuation and placement of securities issued in recapitalizations and restructurings. We represent issuers, bondholders and creditors, as well as buyers and sellers of assets.

     Fund Placement — We act as a placement agent for private equity fund sponsors, arranging investments from sophisticated investors throughout North America, Europe, the Middle East, Japan and Australia.

     Our approximately 400 investment banking professionals operate in the United States, Europe and Asia, and are organized into industry, product and geographic coverage groups. Industry coverage groups include Aerospace and Defense, CleanTech, Consumer & Retail, Energy, Financial Services, Gaming & Leisure, Healthcare, Industrial, Maritime & Oil Service, Media, Private Equity Sponsor Coverage, Technology, and Telecommunications.

Asset Management

     We provide investment management services to various private investment funds. In the United States, investment management services are provided through Jefferies Asset Management, LLC (“JAM”) and Jefferies Capital Management, Inc. (“JCM”). Each of JAM and JCM is registered as an investment adviser with the SEC. Our private fund products consist of long-short equity and fixed income funds, including CLOs, that focus on specific strategies. These funds are not registered under federal or state securities laws, are made available only to certain sophisticated investors and are not offered or sold to the general public. In Europe, we offer long-only investment solutions in global convertible bonds to pension funds, insurance companies and private banking clients.

     Our Sources of Revenues

     Commissions

     We derive a portion of our revenues from customer commissions and commission equivalents. We charge fees for assisting our domestic and international clients with purchasing and selling securities and other similar products.

     Principal Transactions

     In the regular course of our business, we take securities positions as a market maker to facilitate customer transactions and for proprietary risk trading. Trading profits or losses and changes in market prices of our proprietary positions are recorded as principal transactions revenues.

     Investment Banking

     Investment banking revenues are generated by fees from capital markets activities, which include debt, equity, and convertible underwriting and placement services, and fees from financial advisory activities including M&A and restructuring services.

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     Interest

     We derive a substantial portion of our interest revenues in connection with our securities borrowed / securities lending and repo activity. We also earn interest on our securities portfolio, on our operating and segregated balances, on our margin lending activity and on certain of our investments, including our investment in short-term bond funds.

Competition

     As a global securities firm and investment bank, all aspects of our business are intensely competitive. We compete directly with numerous domestic and international competitors, including firms included on the AMEX Securities Broker/Dealer Index and with other brokers and dealers, investment banking firms, investment advisors, mutual funds, hedge funds, commercial banks and bank holding companies. Many of our competitors have substantially greater capital and resources than we do. In addition, some of our competitors who traditionally operated as broker-dealers have recently transformed from traditional securities firms to bank holding companies, received capital from the government pursuant to the Emergency Economic Stabilization Act of 2008, and/or received other guarantees or assistance from the government. These developments and others may result in significant additional competition for us. We believe that the principal factors affecting competition involve market focus, reputation, the abilities of professional personnel, the ability to execute the transaction, the relative price of the service and products being offered, bundling of products and services and the quality of service.

Regulation

     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 Financial Industry Regulatory Authority (“FINRA”), are actively involved in the regulation of broker-dealers. These self-regulatory organizations conduct periodic examinations of member broker-dealers in accordance with rules they have adopted and amended from time to time, subject to approval by the SEC. Securities firms are also subject to regulation by foreign regulatory bodies, state securities commissions and state attorneys general in those foreign jurisdictions and states in which they do business.

     Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales and trading 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. Additional legislation, changes in rules promulgated by the SEC and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the mode of operation and profitability of broker-dealers. 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 SEC, 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, its officers or employees, or revocation of broker-dealer licenses. The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets, rather than protection of creditors and stockholders of broker-dealers.

     As registered broker-dealers, Jefferies, JHYT and Jefferies Execution are required by law to belong to the Securities Investor Protection Corporation (“SIPC”). In the event of a member’s insolvency, the SIPC fund provides protection for customer accounts up to $500,000 per customer, with a limitation of $100,000 on claims for cash balances. We carry an excess policy that provides additional protection for securities of up to $24.5 million per customer with an aggregate limit of $100 million for all accounts.

     The events of 2007 and 2008 have led to various suggestions for an overhaul in financial regulation. We have no meaningful insight into the likelihood or nature of any changes in the manner in which we are regulated, and cannot assess the potential impact of any changes on our business, results or prospects.

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     Net Capital Requirements. U.S. registered broker-dealers are subject to the SEC’s Uniform Net Capital Rule (the “Rule”), which specifies minimum net capital requirements. Jefferies Group is not a registered broker-dealer and is therefore not subject to the Rule; however, its United States broker-dealer subsidiaries are registered and are subject to the Rule.

     The Rule provides that a broker-dealer shall not permit its aggregate indebtedness to exceed 15 times its net capital (the “basic method”) or, alternatively, that it not permit its net capital to be less than the greater of 2% of its aggregate debit balances (primarily receivables from customers and broker-dealers) or $250,000 ($1.5 million for prime brokers) computed in accordance with such Rule (the “alternative method”). Jefferies, Jefferies Execution and JHYT use the alternative method of calculation.

     Compliance with applicable net capital rules could limit operations of our broker-dealers, such as underwriting and trading activities, that require the use of significant amounts of capital, and may also restrict loans, advances, dividends and other payments by Jefferies, Jefferies Execution, or JHYT to us.

     As of December 31, 2008, Jefferies, Jefferies Execution and JHYT’s net capital and excess net capital were as follows (in thousands of dollars):

	Net Capital		Excess Net Capital
Jefferies	$	710,906	$	691,478
Jefferies Execution	$	9,120	$	8,870
Jefferies High Yield Trading	$	545,522	$	545,272

     NYSE Regulations. Our common stock is listed on the New York Stock Exchange (“NYSE”). As a listed company, we are required to comply with the NYSE’s rules and regulations, including rules pertaining to corporate governance matters. As required by the NYSE on an annual basis, in 2008 our Chief Executive Officer, Richard Handler, certified to the NYSE that he was not aware of any violation by us of the NYSE’s corporate governance listing standards.

     Regulation Outside the United States. We are an active participant in the international fixed income and equity markets and also provide investment banking services outside of the United States. Many of our principal subsidiaries that participate in these markets and provide these services are subject to comprehensive regulations in the United States, the United Kingdom and elsewhere that include some form of capital adequacy rules, other customer protection rules and compliance with other applicable regulations. We provide investment services in and from the United Kingdom under the regulation of the Financial Services Authority.

Item 1A. Risk Factors.

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 may also be 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, continued losses, increased losses or other adverse consequences.

     Our net revenues and profits were adversely affected in 2008 by the equity and credit market turmoil, and may be further impacted by continued or further credit market dislocations or sustained market downturns. 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:

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

• Continued unfavorable financial or economic conditions could 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 or placement 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 losses from principal transactions.

• 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 on our own capital invested in managed funds. Even in the absence of a market downturn, below-market investment performance by our funds and portfolio managers could reduce asset management revenues and assets under management and result in reputational damage that might make it more difficult to attract new investors.

• Increases in credit spreads, as well as limitations on the availability of credit, such as occurred during 2008, can affect our ability to borrow on a secured or unsecured basis, which may adversely affect our liquidity and results of operations.

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

     A considerable portion of our revenues is derived from trading in which we act as principal. Although a significant portion of our principal 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. 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. In general, because our inventory is marked to market on a daily basis, 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 commercial 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. Recent changes, such as financial institution consolidations and the government’s involvement with financial institutions through the Emergency Economic Stabilization Act of 2008 and other transactions, may provide a competitive advantage for some of our competitors. 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, bundling of products and services 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.

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

     Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies, and the transactions we process have become increasingly complex. If any of our financial, accounting or other data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes, people or systems, we could suffer an impairment to our liquidity, financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our buildings. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses.

     We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability to effect transactions and manage our exposure to risk.

     In addition, despite the contingency plans we have in place, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which they are located. This may include a disruption involving electrical, communications, transportation or other services used by us or third parties with which we conduct business.

     Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.

Asset management revenue is subject to variability based on market and economic factors and the amount of assets under management.

     Asset management revenue includes revenues we receive from management, administrative 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. These revenues are dependent upon the amount of assets under management and the performance of the funds. If these funds do not perform as well as our asset management clients expect, our clients may withdraw their assets from these funds, which would reduce our revenues. Some of our revenues are derived from our own 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. Even in the absence of a market downturn, below-market investment performance by our funds and portfolio managers could reduce asset management revenues and assets under management and result in reputational damage that might make it more difficult to attract new investors.

We face numerous risks and uncertainties as we expand our business.

     We expect the growth of our business to come primarily from internal expansion and through acquisitions and strategic partnering. For example, we recently announced that we have entered into an agreement to acquire Depfa First Albany Securities LLC, a municipal securities firm. As we expand our business, there can be no assurance that our financial controls, the level and knowledge of our personnel, our operational abilities, our legal and compliance controls and our other corporate support systems will be adequate to manage our business and our growth. The ineffectiveness of any of these controls or systems could adversely affect our business and prospects. In addition, as

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we acquire new businesses, we face numerous risks and uncertainties integrating their controls and systems into ours, including financial controls, accounting and data processing systems, management controls and other operations. A failure to integrate these systems and controls, and even an inefficient integration of these systems and controls, could adversely affect our business and prospects.

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 SEC is the federal agency responsible for the administration of federal securities laws. In addition, self-regulatory organizations, principally FINRA and the securities exchanges, are actively involved in the regulation of broker-dealers. Securities firms are also subject to regulation by regulatory bodies, state securities commissions and state attorneys general in those foreign jurisdictions and states in which they do business. Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales and trading 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 CFTC and the NFA. The SEC, 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. The events of 2007 and 2008 have led to various suggestions of an overhaul in financial regulation. Additional legislation, changes in rules, changes in the interpretation or enforcement of existing laws and rules, or the entering into businesses that subject us to new rules and regulations may directly affect our mode of operation and our profitability. Continued efforts by market regulators to increase transparency and reduce the transaction costs for investors, such as decimalization and FINRA’s Trade Reporting and Compliance Engine, or TRACE, has affected and could continue to affect our trading revenue.

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 Handler, our Chief Executive Officer. We do not have an employment agreement with Mr. Handler which provides for his continued employment. 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 JHYT, investors would have the right to withdraw from the fund. 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.

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. 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, such as the municipal securities business, imposes greater risks of liability. In addition, unauthorized or illegal acts of our employees could result in substantial liability to us. 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.

Our business is subject to significant credit risk.

     In the normal course of our businesses, we are involved in the execution, settlement and financing of various customer and principal securities and derivative transactions. These activities are transacted on a cash, margin or delivery-versus-payment basis and are subject to the risk of counterparty or customer nonperformance. Although transactions are generally collateralized by the underlying security or other securities, we still face the risks

10

associated with changes in the market value of the collateral through settlement date or during the time when margin is extended and the risk of counterparty nonperformance to the extent collateral has not been secured or the counterparty defaults before collateral or margin can be adjusted. We may also incur credit risk in our derivative transactions to the extent such transactions result in uncollateralized credit exposure to our counterparties.

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

Derivative transactions may expose us to unexpected risk and potential losses.

     We are party to a large number of derivative transactions that require us to deliver to the counterparty the underlying security, loan or other obligation in order to receive payment. In a number of cases, we do not hold the underlying security, loan or other obligation and may have difficulty obtaining, or be unable to obtain, the underlying security, loan or other obligation through the physical settlement of other transactions. As a result, we are subject to the risk that we may not be able to obtain the security, loan or other obligation within the required contractual time frame for delivery, particularly if default rates increase as we have seen through 2008. This could cause us to forfeit the payments due to us under these contracts or result in settlement delays with the attendant credit and operational risk as well as increased costs to the firm.

Item 1B. Unresolved Staff Comments.

     None.

Item 2. Properties.

     Our executive offices and principal administrative offices are located at 520 Madison Avenue, New York, New York under an operating lease arrangement. We maintain offices throughout the world including New York, Stamford, Jersey City, London, and Los Angeles. In addition, we maintain back-up facilities with redundant technologies in Dallas. We lease all of our office space, which management believes is adequate for our business. For information concerning leasehold improvements and rental expense, see notes 1, 5 and 13 of the Notes to Consolidated Financial Statements.

Item 3. Legal Proceedings.

     Many aspects of our business involve substantial risks of legal liability. In the normal course of business, we have been named as defendants or co-defendants in lawsuits involving primarily claims for damages. We are also involved in a number of judicial and regulatory matters arising out of the conduct of our business. Our management, based on currently available information, does not believe that any matter will have a material adverse effect on our financial condition, although, depending on our results for a particular period, an adverse determination could be material for a particular period.

     Prior to February 2008, we bought and sold auction rate securities (“ARS”) for PCS clients and institutional customers that used our cash management desk. We did not underwrite or act as an auction agent for any issuer of auction rate securities. A number of firms that underwrote ARS have entered into settlements with various regulators to, among other measures, purchase at par ARS sold to retail customers. We have provided information on our ARS transactions to the New York Attorney General, SEC and FINRA. FINRA is currently conducting an investigation of our activities relating to ARS.

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

     None.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

     Our common stock trades on the NYSE under the symbol JEF. The following table sets forth for the periods indicated the range of high and low sales prices per share of our common stock as reported by the NYSE.

	High		Low
2008
Fourth Quarter	$	22.60	$	7.97
Third Quarter		29.00		13.19
Second Quarter		20.58		14.06
First Quarter		23.08		13.68
2007
Fourth Quarter	$	29.67	$	22.15
Third Quarter		30.98		22.40
Second Quarter		33.80		25.92
First Quarter		30.42		23.90

     There were approximately 967 holders of record of our common stock at February 12, 2009. Our transfer agent is American Stock Transfer & Trust Company, LLC and their address is 59 Maiden Lane, Plaza Level, New York, NY 10038.

     The only restrictions on our present ability to pay dividends on our common stock are the dividend preference terms of our Series A convertible preferred stock and the governing provisions of the Delaware General Corporation Law.

     Dividends per share of common stock (declared and paid):

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
2008	$	0.125	$	0.125		—		—
2007	$	0.125	$	0.125	$	0.125	$	0.125

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Issuer Purchases of Equity Securities

					(c) Total Number of		(d) Maximum Number
	(a) Total		(b)		Shares Purchased as		of Shares that May
	Number of		Average		Part of Publicly		Yet Be Purchased
	Shares		Price Paid		Announced Plans or		Under the Plans or
Period	Purchased (1)		per Share		Programs (2)(3)		Programs
October 1 - October 31, 2008		224,400		12.64		224,400		15,849,178
November 1 - November 30, 2008		752,296		8.52		751,664		15,097,514
December 1 - December 31, 2008		—		—		—		15,097,514
Total		976,696		9.46		976,064

(1)	We repurchased an aggregate of 632 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 us pursuant to the terms of our stock compensation plans.
(2)	On July 26, 2005, we issued a press release announcing the authorization by our Board of Directors to repurchase, from time to time, up to an aggregate of 3,000,000 shares of our common stock. After giving effect to the 2-for-1 stock split effected as a stock dividend on May 15, 2006, this authorization increased to 6,000,000 shares.
(3)	On January 23, 2008, we issued a press release announcing the authorization by our Board of Directors to repurchase, from time to time, up to an additional 15,000,000 shares of our common stock

Shareholder Return Performance Presentation

     Set forth below is a line graph comparing the yearly change in the cumulative total shareholder return on our common stock, after consideration of all relevant stock splits during the period, against the cumulative total return of the Standard & Poor’s 500, Financial Service Analytics Brokerage (“FSA Composite”), and Standard & Poor’s 500 Financials Indices for the period of five fiscal years, commencing January 1, 2004 (based on prices at December 31, 2003), and ending December 31, 2008 (normalized so that the value of our common stock and each index was $100 on December 31, 2003).

	2003		2004		2005		2006		2007		2008
Jefferies Group, Inc.		100		123		139		169		148		92
S&P 500		100		111		116		135		142		90
FSA Composite		100		108		130		170		134		40
S&P 500 Financials		100		111		118		141		115		51

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     Item 6. Selected Financial Data.

     The selected data presented below as of and for each of the years in the five-year period ended December 31, 2008, are derived from the Consolidated Financial Statements of Jefferies Group, Inc. and its subsidiaries. The data should be read in connection with the Consolidated Financial Statements including the related notes contained on pages 63 through 102. On April 18, 2006, we declared a 2-for-1 split of all outstanding shares of common stock, payable May 15, 2006 to stockholders of record as of April 28, 2006. The stock split was effected as a stock dividend of one share for each one share outstanding on the record date. All share, share price and per share information has been restated to retroactively reflect the effect of the two-for-one stock split. Certain reclassifications have been made to the prior period amounts to conform to the current period’s presentation.

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	Year Ended December 31,
	2008			2007		2006		2005		2004
	(In Thousands, Except Per Share Amounts)
Earnings Statement Data
Revenues:
Commissions	$	444,315		$	355,601	$	280,681	$	246,943	$	258,838
Principal transactions		87,316			390,374		468,002		349,489		358,213
Investment banking		425,887			750,192		540,596		495,014		352,804
Asset management fees and investment (loss) income from managed funds		(52,929	)		23,534		109,550		82,052		81,184
Interest		749,577			1,174,883		528,882		304,053		134,450
Other		28,573			24,311		35,497		20,322		13,150
Total revenues		1,682,739			2,718,895		1,963,208		1,497,873		1,198,639
Interest expense		660,964			1,150,805		505,606		293,173		140,394
Revenues, net of interest expense		1,021,775			1,568,090		1,457,602		1,204,700		1,058,245
Non-interest expenses:
Compensation and benefits		1,522,157			946,309		791,255		669,957		595,887
Floor brokerage and clearing fees		69,444			71,851		62,564		46,644		52,922
Technology and communications		127,357			103,763		80,840		67,666		64,555
Occupancy and equipment rental		76,255			76,765		59,792		47,040		39,553
Business development		49,376			56,594		48,634		42,512		35,006
Other		126,524			67,074		65,863		62,474		43,333
Total non-interest expenses		1,971,113			1,322,356		1,108,948		936,293		831,256
(Loss) earnings before income taxes, minority interest and cumulative effect of change in accounting principle		(949,338	)		245,734		348,654		268,407		226,989
Income taxes		(290,249	)		93,178		137,541		104,089		83,955
(Loss) earnings before minority interest and cumulative effect of change in accounting principle		(659,089	)		152,556		211,113		164,318		143,034
Minority interest in (loss) earnings of consolidated subsidiaries, net		(122,961	)		7,891		6,969		6,875		11,668
(Loss) earnings before cumulative effect of change in accounting principle, net		(536,128	)		144,665		204,144		157,443		131,366
Cumulative effect of change in accounting principle, net		—			—		1,606		—		—
Net (loss) earnings		($536,128	)	$	144,665	$	205,750	$	157,443	$	131,366
Earnings per share of Common Stock:
Basic-
(Loss) earnings before cumulative effect of change in accounting principle, net		($3.23	)	$	1.02	$	1.53	$	1.27	$	1.14
Cumulative effect of change in accounting principle, net		—			—		0.01		—		—
Net (loss) earnings		($3.23	)	$	1.02	$	1.54	$	1.27	$	1.14
Diluted-
(Loss) earnings before cumulative effect of change in accounting principle, net		($3.23	)	$	0.97	$	1.41	$	1.16	$	1.03
Cumulative effect of change in accounting principle, net		—			—		0.01		—		—
Net (loss) earnings		($3.23	)	$	0.97	$	1.42	$	1.16	$	1.03
Weighted average shares of Common Stock:
Basic		166,163			141,515		133,898		123,646		114,906
Diluted		166,163			153,807		147,531		135,569		127,815
Cash dividends per common share	$	0.25		$	0.50	$	0.42	$	0.26	$	0.18

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	December 31,
	2008		2007		2006		2005		2004
			(In Thousands, Except Per Share Amounts)
Selected Balance Sheet Data
Total assets	$	19,978,685	$	29,793,817	$	17,825,457	$	12,780,931	$	13,824,628
Long-term debt	$	1,764,274	$	1,764,067	$	1,168,562	$	779,873	$	789,067
Mandatorily redeemable convertible preferred stock	$	125,000	$	125,000	$	125,000		—		—
Total stockholders’ equity	$	2,121,271	$	1,761,544	$	1,581,087	$	1,286,850	$	1,039,133
Shares outstanding		163,216		124,453		119,547		116,220		114,578
Other Data (Unaudited)
Book value per share of Common Stock	$	13.00	$	14.15	$	13.23	$	11.07	$	9.07

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     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. Forward-looking statements include statements about our future and statements that are not historical facts. These forward-looking statements are usually preceded by the words “believe,” “intend,” “may,” “will,” or similar expressions. Forward-looking statements may contain expectations regarding revenues, earnings, operations and other financial projections, and may include statements of future performance, plans and objectives. Forward-looking statements also include statements pertaining to our strategies for future development of our business and products. Forward-looking statements represent only our belief regarding future events, many of which by their nature are inherently uncertain and outside of our control. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Information regarding important factors that could cause actual results to differ, perhaps materially, from those in our forward-looking statements is contained in this report and other documents we file. You should read and interpret any forward-looking statement together with these documents, including the following:

• the description of our business contained in this report under the caption “Business”;

• the risk factors contained in this report under the caption “Risk Factors”;

• 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 discussion of our risk management policies, procedures and methodologies contained in this report under the caption “Risk Management” included within Management’s Discussion and Analysis of Financial Condition and Results of Operations;

• the notes to the Consolidated Financial Statements contained in this report; and

• cautionary statements we make in our public documents, reports and announcements.

     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.

Critical Accounting Policies

     The consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles, which require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes. Actual results can and will differ from estimates. These differences could be material to the financial statements.

     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 subjective or complex judgments) are our valuation of financial instruments, goodwill and our use of estimates related to compensation and benefits during the year. For further discussion of these and other significant accounting policies, see Note 1, “Organization and Summary of Significant Accounting Policies,” in our consolidated financial statements.

17

Valuation of Financial Instruments

Financial instruments owned and financial instruments sold, not yet purchased are recorded at fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Unrealized gains or losses are generally recognized in principal transactions in our Consolidated Statements of Earnings.

The following is a summary of the fair value of major categories of financial instruments owned and financial instruments sold, not yet purchased, as of December 31, 2008 and December 31, 2007 (in thousands of dollars):

	December 31, 2008				December 31, 2007
			Financial				Financial
			Instruments				Instruments
	Financial		Sold,		Financial		Sold,
	Instruments		Not Yet		Instruments		Not Yet
	Owned		Purchased		Owned		Purchased
Corporate equity securities	$	945,747	$	739,166	$	2,266,679	$	1,389,099
Corporate debt securities		1,851,216		1,578,395		2,162,893		1,407,387
U.S. Government, federal agency and other sovereign obligations		447,233		211,045		730,921		206,090
Mortgage- and asset-backed securities		1,035,996		—		26,895		—
Loans		34,407		—		—		—
Derivatives		298,144		220,738		338,779		327,076
Investments at fair value		75,059		—		104,199		—
Other		—		223		2,889		314
	$	4,687,802	$	2,749,567	$	5,633,255	$	3,329,966

Fair Value Hierarchy — We adopted FASB 157, Fair Value Measurements (“FASB 157”), as of the beginning of 2007. FASB 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and enhances disclosure requirements for fair value measurements. FASB 157 maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the transparency of inputs as follows:

Level 1:	Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2:	Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level 3:	Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

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The availability of observable inputs can vary for different products. Fair value is a market-based measure; therefore, when market observable inputs are not available, our judgment is applied to reflect those judgments that a market participant would use in valuing the same asset or liability. We use prices and inputs that are current as of the measurement date even in periods of market disruption or illiquidity. Greater judgment in valuation is required when inputs are less observable or unobservable in the marketplace and judgment must be applied in determining the appropriateness of available prices, particularly in assessing whether available data reflects current prices and/or reflects the results of recent market transactions. The valuation of financial instruments classified in Level 3 of the fair value hierarchy involves the greatest amount of management judgment.

In October 2008, the FASB issued FASB Staff Position No. FAS 157-3 (“FSP FAS 157-3”), “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active,” which addresses the use of judgment in determining whether a transaction in a dislocated market represents fair value, the inclusion of market participant risk adjustments when an entity significantly adjusts observable market data based on unobservable inputs, and the degree of reliance to be placed on broker quotes or pricing services. When a market for an asset is inactive, FSP FAS 157-3 provides for management to make adjustments to observable data in determining fair value. Our fair value measurement practices are consistent with the guidance in FSP FAS 157-3.

Valuation Process for Financial Instruments — Financial instruments are valued at quoted market prices, if available. For financial instruments that do not have readily determinable fair values through quoted market prices, the determination of fair value is based upon consideration of available information, including current financial information, restrictions on dispositions, fair values of underlying financial instruments and quotations for similar instruments. Certain financial instruments have bid and ask prices that can be observed in the marketplace. For financial instruments whose inputs are based on bid-ask prices, mid-market pricing is applied and adjusted to the point within the bid-ask range that meets our best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid-ask spread is used to measure both the long and short positions.

The valuation process for financial instruments may include the use of valuation models and other techniques. Adjustments to valuations derived from valuation models may be made when, in management’s judgment, either the size of the position in the financial instrument in a nonactive market or other features of the financial instrument such as its complexity, or the market in which the financial instrument is traded require that an adjustment be made to the value derived from the models. An adjustment may be made if a financial instrument is subject to sales restrictions that would result in a price less than the quoted market price. Adjustments from the price derived from a valuation model reflect management’s judgment that other participants in the market for the financial instrument being measured at fair value would also consider in valuing that same financial instrument and are adjusted for assumptions about risk uncertainties and market conditions. Results from valuation models and valuation techniques in one period may not be indicative of future period fair value measurements.

Cash products — Where quoted prices are available in an active market, cash products are classified in Level 1 of the fair value hierarchy and valued based on the quoted exchange price, which is generally obtained from pricing services. Level 1 cash products are highly liquid instruments and include listed equity and money market securities and G-7 government and agency securities. Cash products classified within Level 2 of the fair value hierarchy are based primarily on broker quotations, pricing service data from external providers and prices observed for recently executed market transactions. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of cash products with similar characteristics or discounted cash flow models. Examples of cash products classified within Level 2 of the fair value hierarchy are corporate, convertible and municipal bonds and agency and non-agency mortgage-backed securities. If there is limited transaction activity or less transparency to observe market-based inputs to valuation models, cash products presented at fair value are classified in Level 3 of the fair value hierarchy. Fair values of cash products classified in Level 3 are generally based on an assessment of each underlying investment, cash flow models, market data of any recent comparable company transactions and trading multiples of companies considered comparable to the instrument being valued and incorporate assumptions regarding market outlook, among other factors. Cash products in this category include illiquid equity securities, equity interests in private companies, auction rate

19

securities, commercial loans, private equity and hedge fund investments, distressed debt instruments and certain mortgage-backed securities as little external price information is currently available for these products. For distressed debt instruments and commercial loans, loss assumptions must be made based on default scenarios and market liquidity and prepayment assumptions must be made for mortgage-backed securities.

Derivative products — Exchange-traded derivatives are valued using quoted market prices, which are generally obtained from pricing services, and are classified within Level 1 of the fair value hierarchy. Over-the-counter (“OTC”) derivative products are generally valued using models, whose inputs reflect assumptions that we believe market participants would use in valuing the derivative in a current period transaction. Inputs to valuation models are appropriately calibrated to market data, including, but not limited to, yield curves, interest rates, volatilities, equity, debt and commodity prices and credit curves. Fair value can be modeled using a series of techniques, including the Black-Scholes option pricing model and other comparable simulation models. For certain OTC derivative contracts, inputs to valuation models do not involve a high degree of subjectivity as the valuation model inputs are readily observable or can be derived from actively quoted markets. OTC derivative contracts classified in Level 2 include credit default swaps, interest rate swaps, foreign currency forwards, commodity swaps and option contracts, equity option contracts and to-be-announced securities. Derivative products that are valued based on models with significant unobservable market inputs are classified within Level 3 of the fair value hierarchy. Level 3 derivative products include equity warrant and option contracts where the volatility of the underlying equity securities is not observable due to the terms of the contracts and the correlation sensitivity to market indices is not transparent for the term of the derivatives.

At December 31, 2008, the measurements of our cash products and derivative products at fair value were based on the following:

				Financial
	Financial			Instruments Sold,
Valuation Basis	Instruments Owned			Not Yet Purchased
Exchange closing prices		14	%		21	%
Recently observed transaction prices		1	%		7	%
Data providers/pricing services		70	%		68	%
Broker quotes		2	%		1	%
Valuation techniques		13	%		3	%
		100	%		100	%

Pricing information obtained from external data providers may incorporate a range of market quotes from dealers, recent market transactions and benchmarking model derived prices to quoted market prices and trade data for comparable securities. External pricing data is subject to evaluation for reasonableness using a variety of means including comparisons of prices to those of similar product types, quality and maturities, consideration of the narrowness or wideness of the range of prices obtained, knowledge of recent market transactions and an assessment of the similarity in prices to comparable dealer offerings in a recent time period.

20

Certain cash products and derivative products trade infrequently and therefore have little price transparency. As a result, we may use alternative valuation techniques or valuation models as methods for determining fair value. When using alternative valuation techniques or valuation models, the following techniques are applied to different financial instruments classes:

Financial Instrument Classes	Valuation Techniques
Equity securities and convertible bonds	Valuations based on pending transactions involving the issuer or comparable companies, subsequent financings or recapitalizations, changes in financial ratios and cash flows of the underlying issuer and prices of comparable securities
High-yield corporate bonds	Valuations based on pending transactions involving the issuer or comparable companies, subsequent financings or recapitalizations, changes in financial ratios and cash flows of the underlying issuer and prices of comparable securities
Non-agency mortgage-backed and other asset-backed securities	Benchmarked to yields from market prices for comparable securities and calibrated based on expected cash flow characteristics of the underlying assets
Auction rate securities	Internal methodology based on projected cash flows discounted for lack of liquidity for the securities
Corporate bank and other commercial loans and other receivables	References to prices for other debt instruments of the same issuer; estimates of expected future cash flows incorporating assumptions regarding creditor default and/or recovery
Investments in hedge funds, funds of funds and certain private equity funds	Net asset values, as adjusted for any redemption restrictions
Investments in certain private equity funds	Discounted cash flow techniques
OTC equity and commodity options and equity warrants	Black-Scholes and comparable simulation models
Interest rate, credit default, commodity and total return swaps and foreign exchange forward contracts	Modeling, primarily involving discounted cash flows, which incorporate observable inputs related to interest rate curves, commodity indices, equity prices and volatilities, foreign currency spot curves and credit spreads of the underlying credit

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Level 3 Assets and Liabilities — Level 3 assets were $469.4 million and $352.6 million as of December 31, 2008 and December 31, 2007, respectively, and represented approximately 10% and 6%, respectively, of total assets measured at fair value. Level 3 liabilities were $11.7 million and $21.6 million as of December 31, 2008 and December 31, 2007, respectively, and represented approximately 0.4% and 0.6%, respectively, of total liabilities measured at fair value. At December 31, 2008 and 2007, Level 3 financial instruments were comprised of the following asset and liability classes:

							Financial Instruments Sold,
	Financial Instruments Owned						Not Yet Purchased
	December 31,			December 31,			December 31,			December 31,
(in thousands)	2008			2007			2008			2007
Corporate bonds	$	165,248		$	118,541		$	3,515		$	—
Loans and other receivables		107,929			42,329			—			8,703
Investments in hedge funds, fund of funds, and private equity funds		75,059			104,199			—			—
Mortgage and asset-backed securities		65,154			—			—			—
Equity securities and warrants		43,227			53,724			—			—
Auction rate securities		10,579			1,000			—			—
Collateralized loan obligations		2,179			32,803			—			—
Derivative instruments		—			—			8,197			12,929
Total Level 3 financial instruments		469,375			352,596			11,712			21,632
Level 3 financial instruments for which the firm bears no economic exposure		(146,244	)		(106,106	)		(3,920	)		(5,349	)
Level 3 financial instruments for which the firm bears economic exposure	$	323,131		$	246,490		$	7,792		$	16,283

During the year ended December 31, 2008, we had transfers of assets of $222.4 million from Level 2 to Level 3. These reclassifications were primarily related to high yield corporate bonds as market quotes became less observable throughout the year due to less frequent or nominal market activity for the asset class and the opaqueness of observable credit spreads. During the year ended December 31, 2008, we had transfers of assets of $143.5 million from Level 3 to Level 2. These reclassifications were primarily related to high yield corporate bonds where trading activity observed and recently executed transactions provided transparency for purposes of determining fair values. During the year ended December 31, 2008, we had net transfers of liabilities of $22.5 million from Level 2 to Level 3. Net losses on Level 3 assets of $123.3 million for the year ended December 31, 2008 are attributed primarily to equity warrants due to declining underlying equity prices and increased market volatility, collateralized loan obligations due to widening corporate credit spreads during the quarter, certain trade claims due to increasing default probabilities and declines in valuations for investments in private equity and hedge funds. Net gains on Level 3 liabilities of $20.2 million for the year ended December 31, 2008 are attributed to gains on short equity options due to decreases in underlying equity prices.

See Note 4, “Financial Instruments,” to the consolidated financial statements for information regarding the classification of our assets and liabilities measured at fair value.

Controls Over the Valuation Process for Financial Instruments — Our Risk Management Department, independent of the trading function, plays an important role in determining that our financial instruments are appropriately valued and that fair value measurements are reliable. This is particularly important where prices or valuations that require inputs are less observable. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable. These control processes include reviews of the pricing model’s theoretical soundness and appropriateness by risk management personnel with relevant expertise who are independent from the trading desks.

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Where a pricing model is used to determine fair value, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model. An independent price verification process, separate from the trading process, is in place to ensure that observable market prices and market-based inputs are applied in valuation where possible.

     Goodwill

     As a result of acquisitions, we have acquired goodwill; of which the balance of $358.8 million at December 31, 2008 is wholly attributed to our Capital Markets segment, which is our reporting unit under Statement of Financial Accounting Standards No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets. At least annually, we are required to assess goodwill for impairment by comparing the estimated fair value of the operating segment with its net book value. Periodically estimating the fair value of the Capital Markets segment requires significant judgment. We estimate the fair value of the operating segment based on valuation methodologies we believe market participants would use, including consideration of control premiums for recent acquisitions observed in the marketplace. We completed our annual impairment test as of September 30, 2008 and no impairment was identified.

     During 2008, the financial services sector and the equity markets in general were affected by declines in stock prices and by lack of liquidity. Our market capitalization declined below recorded book value at various points during the year, particularly in the second half of 2008; though we believe that market capitalization as a fair value indicator should be considered in the context of a reasonable time frame and general market conditions. We have updated our goodwill impairment assessment subsequent to our annual testing date and no impairment was identified as of December 31, 2008. The judgments applied in estimating the fair value of our operating segment have an impact on the evaluation of any impairment and continued weakness in the financial markets and broad economy could unfavorably affect our assessments in the future.

     Compensation and Benefits

     The use of estimates is important in determining compensation and benefits expenses for interim periods. A portion of our compensation and benefits represents discretionary bonuses, which are finalized at year end. In addition to the level of net revenues, our overall compensation expense in any given year is influenced by prevailing labor markets, revenue mix and, through 2008, our use of share-based compensation programs. We believe the most appropriate way to allocate estimated annual discretionary bonuses among interim periods is in proportion to projected net revenues earned. Consequently, during the year we accrue compensation and benefits based on annual targeted compensation ratios, taking into account the guidance contained in FASB 123R regarding the timing of expense recognition for non-retirement-eligible and retirement-eligible employees. Our fourth quarter of 2008 reflects changes in our interim estimates of total compensation and benefits we determine to be paid for the full year based on finalized levels of compensation.

Business Environment

     During the first half of 2008, economic growth slowed and the U.S. entered a recession. The lessening of liquidity that began in 2007 accelerated during 2008 and the U.S. markets experienced unprecedented challenges as credit further contracted, the downturn in economic growth broadened, and a number of major financial institutions faced serious problems. Concerns regarding future economic growth and corporate earnings, as well as illiquidity in the credit markets created challenging conditions for the equity markets which experienced significant broad-based declines, with equity indices significantly lower at the end of 2008 as compared to the end of 2007. Fixed income and equity markets experienced high levels of volatility, broad-based declines in asset prices and further reduced levels of liquidity, particularly in the fourth quarter of 2008. The impact of these events created extreme uncertainty around company and asset values, creating a challenging environment for investment banking advisory businesses and sharply narrowing opportunities to distribute securities in the equity and debt capital markets. The U.S. dollar initially weakened against major currencies during the first part of 2008, but recovered in the latter half of the year as the economic slowdown accelerated in non-U.S. economies in the second half of 2008, with significant depreciation in the British pound and Euro against the U.S. dollar by year-end.

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     The financial landscape has also been altered dramatically over the course of the year with the bankruptcy of Lehman Brothers Holdings Inc., acquisitions and consolidations of major financial institutions, the Federal Government assuming a conservatorship role of both the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association and the conversion of Goldman Sachs Group, Inc. and Morgan Stanley into bank holding companies. In early October 2008, the Emergency Economic Stabilization Act of 2008 was enacted, which, among other matters, enables the U.S. Treasury to purchase mortgage-related and other trouble assets from U.S. financial institutions. The U.S. Treasury has taken additional measures to provide liquidity to the capital markets and the U.S. Federal Reserve reduced its federal funds target rate to a range of 0 to 0.25%, its lowest level since 2003. The yield on the 10-year U.S. Treasury note declined to 2.25% at the end of 2008 from 3.91% at the beginning of the year.

     Markets outside of the U.S. experienced similar conditions with foreign governments taking similar actions within their borders to provide liquidity to financial institutions, including reductions in benchmark interests by the central banks, and also, in some cases, assuming conservatorship roles over certain financial institutions. Growth declined across virtually all global economies and the equity indices across Europe, Asia and emerging markets ended 2008 notably lower for the year.

     The results of our operations for 2008 reflect these challenging market factors, which contributed to declining inventory valuations and reduced levels of capital markets activity. Competitor consolidation and the destabilization of the financial markets during these periods have conversely had a positive impact on business prospects as we have seen new customer activity across many of our businesses. However, a continuation of the volatile markets and unfavorable economic conditions of 2008 could have a material impact on our business and results of operations for the near term of 2009 and possibly subsequent years.

Consolidated Results of Operations

     The following table provides an overview of our consolidated results of operations:

	Year Ended December 31,
(Dollars in Thousands)	2008			2007			2006
Net revenues	$	1,021,775		$	1,568,090		$	1,457,602
Non-interest expenses	$	1,971,113		$	1,322,356		$	1,108,948
(Loss) income before taxes and minority interest	$	(949,338	)	$	245,734		$	348,654
Income tax (benefit) expense	$	(290,249	)	$	93,178		$	137,541
Minority interest in (loss) earnings of consolidated subsidiaries, net	$	(122,961	)	$	7,891		$	6,969
Net (loss) earnings	$	(536,128	)	$	144,665		$	205,750
(Loss) earnings per diluted share	$	(3.23	)	$	0.97		$	1.42
Effective tax rate		30.6	%		37.9	%		39.4	%

     Our consolidated results of operations for the year ended December 31, 2008 include the effect of certain adjustments to the financial results for our fourth quarter and year ended December 31, 2008 announced in our Current Report on Form 8-K, dated January 20, 2009.

     Net revenues for 2008 (total revenues, net of interest expense) declined 35% from 2007 to $1,021.8 million as challenging market conditions negatively affected our operations this year. Non-interest expenses of $1,971.1 million for 2008 increased 49% from 2007 primarily due to increased compensation and benefit costs, including

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certain significant unusual items, increased technology and communication costs and losses incurred due to the bankruptcies of Lehman Brothers and Landsbankinn and other bad debt expenses.

     Net revenues for 2007 increased 8% to $1,568.1 million as compared to $1,457.6 million for 2006 as increasing revenues in investment banking and equity products were partially offset by declines in revenues in other product areas. Non-interest expenses of $1,322.4 million for 2007 reflected an increase of 19% over the comparable 2006 period primarily attributable to increases in compensation, technology and occupancy costs as part of growth initiatives.

     The effective tax rate was 30.6% for 2008, a decline in comparison to an effective tax rate of 37.9% for 2007. The decrease in our effective tax rate for the year ended December 31, 2008 was as a result of the net loss for the year. The effective tax rate for 2006 was 39.4%.

     In April 2008, we sold 26,585,310 shares of our common stock to Leucadia National Corporation (see Note 1, “Organization and Summary of Significant Accounting Policies,” to the consolidated financial statements for additional discussion).

     At December 31, 2008, we had 2,270 employees globally compared to 2,568 at December 31, 2007 and 2,275 employees at December 31, 2006.

     On February 12, 2009, we entered into a definitive agreement with Depfa Bank, plc to acquire all of the membership interests of Depfa First Albany Securities, LLC, a New York City-based municipal securities firm and broker-dealer that provides integrated investment banking, advisory and sales and trading services. The acquisition is subject to regulatory approvals and other closing conditions with the acquisition expected to close during the first quarter of 2009. Approximately 70 employees are expected to join us as a result of the acquisition.

     Our business, by its nature, does not produce predictable earnings. Our results in any given period can be materially affected by conditions in global financial markets and economic conditions generally. For a further discussion of the factors that may affect our future operating results, see “Risk Factors” in Part I, Item IA of this Annual Report on Form 10-K.

Revenues by Source

     The Capital Markets reportable segment includes our traditional securities trading activities, including the results of Jefferies High Yield Trading, LLC as of the second quarter of 2007, and our investment banking activities. The Capital Markets reportable segment is managed as a single operating segment that provides the sales, trading and origination effort for various equity, fixed income and advisory products and services. The Capital Markets segment comprises many divisions, with interactions among each. In addition, we choose to voluntarily disclose the Asset Management segment, even though it is currently an “immaterial non-reportable” segment as defined by FASB 131, Disclosures about Segments of an Enterprise and Related Information.

     For presentation purposes, the remainder of “Results of Operations” is presented on a detailed product and expense basis rather than on a business segment basis because the Asset Management segment is immaterial as compared to the consolidated Results of Operations.

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The composition of our net revenues has varied over time as financial markets and the scope of our operations have changed. The composition of net revenues can also vary over the shorter term due to fluctuations in economic and market conditions. The following provides a summary of revenues by source for the past three years:

	Year Ended December 31,
	2008						2007						2006
				% of Net						% of Net						% of Net
	Amount			Revenues			Amount			Revenues			Amount			Revenues
							(Dollars in Thousands)
Equity	$	495,362			48	%	$	597,164			38	%	$	538,891			37	%
Fixed income and commodities:
Fixed income (excluding high yield) and commodities (1)		238,240			23			139,274			9			165,170			11
JHYT (2)		(173,398	)		(17	)		33,848			2			80,119			6
Total		64,842			6			173,122			11			245,289			17
Investment banking		425,887			42			750,192			48			540,596			37
Asset management fees and investment income from managed funds (3):
Asset management fees		19,612			2			28,533			2			55,462			4
Investment (loss) income from managed funds		(72,541	)		(7	)		(4,999	)		(1	)		54,088			4
Total		(52,929	)		(5	)		23,534			1			109,550			8
Interest		749,577			73			1,174,883			75			528,882			36
Total revenues	$	1,682,739			165	%	$	2,718,895			173	%	$	1,963,208			135	%
Interest expense		(660,964	)		(65	)		(1,150,805	)		(73	)		(505,606	)		(35	)
Net revenues	$	1,021,775			100	%	$	1,568,090			100	%	$	1,457,602			100	%

(1)	Fixed income and commodities revenue is primarily comprised of investment grade fixed income, mortgage-backed securities, convertible and commodities product revenue.
(2)	High yield revenue is comprised of revenue generated by our reorganized high yield secondary market trading activities during 2008 and the second, third, and fourth quarter of 2007 and revenue generated by our pari passu share of high yield revenue during the first quarter of 2007 and the full year of 2006.
(3)	First quarter 2007 and 2006 amounts include asset management revenue from high yield funds. Effective April 2, 2007, with the commencement of our reorganized high yield secondary market trading activities, we do not record asset management revenue associated with these activities.

     Net Revenues

     2008 v. 2007 — Net revenues for the year ended December 31, 2008 were $1,021.8 million, a decrease of 35%, as compared to net revenues of $1,568.1 million for 2007. The decrease was primarily due to decreases in equity revenues of $101.8 million, investment banking revenues of $324.3 million, high yield revenues of $207.2 million and asset management revenues of $76.5 million as we experienced significantly unfavorable market conditions as compared with the same period last year; partially offset by an increase in fixed income (excluding high yield) and commodities revenues of $99.0 million due to continued expansion of our fixed income business throughout 2008. Net revenues were also impacted by an increase in net interest revenues (interest revenues net of interest expense), which totaled $88.6 million for 2008 as compared to $24.1 million for 2007.

     2007 v. 2006 — Net revenues for 2007 increased $110.5 million, or 8%, to $1,568.1 million, compared to $1,457.6 million for 2006. The increase was primarily due to a $209.6 million, or 39%, increase in investment banking revenues and a $58.3 million, or 11%, increase in equities revenues; partially offset by a $25.9 million, or 16%, decrease in fixed income (excluding high yield) and commodities revenues, a $46.3 million, or 58%, decrease

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in high yield revenues and a $86.0 million, or 79%, decrease in asset management fees and investment income (loss) from managed funds.

     Equities Revenues

     Equities revenue is comprised of equity commissions and principal transactions revenue, correspondent clearing and prime brokerage, and execution product revenues.

     2008 v. 2007 — Total equities revenue was $495.4 million and $597.2 million, respectively, in 2008 and 2007, representing an 17% decrease from 2007, primarily driven by principal transaction losses due to trading volatility and net write downs in equity trading, partially offset by an increase in our core equity customer sales and trading and equity finance businesses. Equities revenues generated in our customer businesses are reflective of higher trading volumes, including better contributions from derivative equity products. Increased volatility in the global equity markets and higher frequency trading resulted in increased principal transaction revenues for certain trading strategies, which was offset by principal transaction losses on certain equity investments and block trading activities due to the sharp overall declines in the equity markets, including losses on our equity method investment in Jefferies Finance, LLC.

     2007 v. 2006 — Equities revenue was $597.2 million, up 11% from 2006 primarily attributable to strong contributions from U.S. and international agency cash equity and derivative products partially offset by principal trading losses from certain derivative and cash proprietary equity trading activities for the later half of 2007. These principal trading losses were caused by illiquidity and volatility in the U.S. equity marketplace.

     Fixed Income and Commodities Revenue

     Fixed income and commodities revenue is primarily comprised of commissions and principal transactions revenue from high yield and distressed securities, investment grade fixed income, convertible debt, mortgage-backed securities, energy markets debt and commodities trading activities.

     2008 v. 2007 — Fixed income (excluding high yield) and commodities revenue was $238.2 million, up 71% from revenue of $139.3 million for 2007. The increased revenues for 2008 reflected the continued growth of our fixed income businesses due to increased customer flow in our corporate bond, emerging markets, treasury and agencies, and mortgage-backed securities trading businesses, in part due to declining competition and our focused efforts to grow our business in certain fixed income asset classes that have strong client demand. Fixed income customer trading revenues were partially offset by net principal transaction losses in our convertibles and commodities trading activities given the difficult market conditions, the high market volatility in those sectors for the year and writedowns on our shares in certain commodity exchanges.

     High yield recognized a loss of $173.4 million for the year ended December 31, 2008, as compared to high yield revenue of $33.8 million for 2007, which is attributed primarily to unrealized principal transaction losses due to deteriorating market conditions, partially offset by increased commission revenue as sales production increased given the market dislocation affecting competitors. Of the losses recognized in Jefferies High Yield Trading, LLC (our high yield and distressed securities trading and investment business), approximately 65% of such losses are allocated to the minority investors.

     2007 v. 2006 — Fixed income and commodities revenue totaled $173.1 million and $245.3 million respectively, for 2007 and 2006. The decrease was driven by (1) extremely challenging and illiquid U.S. high yield credit markets for the latter half of 2007 characterized by wider spreads and reduced levels of liquidity, and (2) strong prior period performance in high yield secondary market trading; offset by (1) consistent contributions throughout 2007 from our investment grade fixed income products despite a severe decline in fixed income liquidity and (2) a strong fourth quarter 2007 performance from Jefferies Financial Products due to volatility in energy related commodities markets.

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     Investment Banking Revenues

     Our investment banking division provides a full range of financial advisory services to our clients across all industry sectors, as well as debt, equity and equity-linked capital raising services, and encompasses both U.S. and international capabilities. Capital markets revenues include underwriting revenues related to debt, equity and convertible financing services. Advisory revenues are generated from our business advisory services with respect to merger, acquisition and restructuring transactions and fund placement activities. The following table sets forth our investment banking revenues:

	Year Ended
							% Change			% Change
(in thousands)	December 31, 2008		December 31, 2007		December 31, 2006		2008/2007			2007/2006
Capital markets	$	117,662	$	388,675	$	231,261		-70	%		+68	%
Advisory		308,225		361,517		309,335		-15	%		+17	%
Total	$	425,887	$	750,192	$	540,596		-43	%		+39	%

     2008 v. 2007 — Capital markets revenues totaled $117.7 million for the year ended December 31, 2008, compared to $388.7 million for 2007, a decrease of 70% reflecting the overall deterioration in market activity for both equity and debt underwritings as credit spreads reached historically wide levels in the fourth quarter of 2008. Revenues from our advisory business of $308.2 million for 2008 declined only 15% compared to the prior year revenues of $361.5 million, reflecting the continuing strength of our franchise given the general industry-wide decrease in advisory activity for 2008 versus the relatively robust market for the investment banking advisory sector as a whole in 2007.

     2007 v. 2006 — Capital markets revenues were $388.7 million for 2007, an increase of 68% from 2006. The increase in capital markets revenues was a result of increased U.S. and international debt underwritings and increased activity from our leverage finance group. Revenues from advisory activities for 2007 were $361.5 million, an increase of 17% from 2006. The increase in advisory revenues was led by services rendered on assignments in the technology, industrial, energy, maritime and shipping, healthcare and aerospace and defense sectors.

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     Asset Management Fees and Investment (Loss) Income from Managed Funds

     Asset management revenue includes revenues from management, administrative and performance fees from funds managed by us, revenues from asset management and performance fees from third-party managed funds and investment (loss) income from our investments in these funds. The following summarizes revenues from asset management fees and investment (loss) income for the years ended December 31, 2008, 2007 and 2006 (in thousands of dollars):

	2008			2007			2006
Asset management fees:
Fixed Income (1)	$	8,548		$	12,129		$	24,604
Equities		1,430			4,140			16,366
Convertibles		9,619			12,264			12,256
Real Assets		15			—			2,236
		19,612			28,533			55,462
Investment (loss) income from managed funds(1)		(72,541	)		(4,999	)		54,088
Total (2)	$	(52,929	)	$	23,534		$	109,550

(1)

Of the total investment (loss) income from managed funds, $1.7 million, $1.3 million and $7.1 million is attributed to minority interest holders for the years ended December 31, 2008, December 31, 2007 and December 31, 2006, respectively.

(2)

With the reorganization of our high yield secondary market trading activities, we no longer record asset management fees and investment income from managed funds related to these activities as of April 2, 2007. Asset management fees and investment income from managed funds related to our high yield funds of $3.9 million for the first quarter of 2007 and $37.5 million for the year ended December 31, 2006 are included within these results.

     2008 v. 2007 — Asset management fees declined to $19.6 million for the year ended December 31, 2008 as compared asset management fees of $28.5 million for 2007, primarily as a result of the liquidation and closure of certain funds managed by us, as well as limited fee revenue generation from other managed funds due to declines in assets under management, partially offset by increased asset management fee income from our managed collateralized loan obligations (“CLOs”). In addition, asset management fees in 2008 reflect a decrease from 2007 as performance from our high yield funds is no longer included within asset management as of April 2, 2007. Investment loss from managed funds totaled $72.5 million for 2008 as compared to an investment loss of $5.0 million for 2007 primarily due to declines in asset valuations experienced by several of our managed funds, particularly within the retail and credit sectors, partially offset by investment revenues generated from portfolio strategies in our managed technology and financial services funds.

     2007 v. 2006 — Asset management revenues were $23.5 million, down $86.1 million over 2006. The decrease in asset management revenue was a result of a strong prior period performance from our High Yield Funds, which are no longer included in asset management as of April 2, 2007 and weaker operating performance from our equity funds and managed CLOs offset by strong operating performance and increased assets under management in our international global convertible funds.

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     Assets under Management

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

	December 31, 2008		December 31, 2007
Assets under management (1):
Fixed Income	$	1,136	$	1,802
Equities		85		122
Convertibles		1,670		2,872
		2,891		4,796
Assets under management by third parties (2):
Equities, Convertibles and Fixed Income		—		179
Private Equity		600		600
		600		779
Total	$	3,491	$	5,575

(1)	Assets under management include assets actively managed by us and third parties including hedge funds, collateralized loan obligations (“CLOs”), managed accounts and other private investment funds. Assets under management do not include the assets of funds that are consolidated due to the level or nature of our investment in such funds.
(2)	Third party managed funds in which we have a 50% or less interest in the entities that manage these assets or otherwise receive a portion of the management fees.

     Change in Assets under Management

	Year Ended			Year Ended		%
(in millions)	December 31, 2008			December 31, 2007		Change
Balance, beginning of period	$	5,575		$	5,176		8	%
Net cash flow (out) in		(983	)		179
Net market (depreciation)		(1,101	)		220
		(2,084	)		399
Balance, end of period	$	3,491		$	5,575		-37	%

     The net cash outflow during 2008 is primarily attributable to customer redemptions from our global convertible bond funds. Net market depreciation for the year ending December 31, 2008 is primarily attributable to declines in valuation of our managed CLOs and convertible bond funds. Net cash inflow during 2007 is primarily attributable to the launch of the Clear Lake and St. James managed CLOs during the year, which is partially offset by redemptions from our managed global convertible bonds funds and other equity funds. Net market appreciation for the year ending December 31, 2007 is primarily attributed to increased valuations in our global convertible bond funds, partially offset by asset value declines experienced by our managed CLOs and other fixed income funds due to the deteriorating credit market conditions experienced in 2007.

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     The following table presents our invested capital in managed funds at December 31, 2008 and December 31, 2007 (in thousands):

	December 31, 2008		December 31, 2007
Unconsolidated funds (1)	$	66,104	$	272,643
Consolidated funds (2)		70,465		169,773
Total	$	136,569	$	442,416

(1)

Our invested capital in unconsolidated funds is reported within Investments in managed funds on the Consolidated Statement of Financial Condition.

(2)

Assets under management include assets actively managed by us and third parties including hedge funds, CLOs, managed accounts and other private investment funds. Due to the level or nature of our investment in such funds, certain funds are consolidated and the assets and liabilities of these funds are reflected in our consolidated financial statements primarily within financial instruments owned or financial instruments sold, not yet purchased. We do not recognize asset management fees for funds that we have consolidated.

     Net Interest

     2008 v. 2007 — Interest revenue decreased by 36% to $749.6 million for 2008 as compared to 2007 primarily due to the overall decline in market interest rates across all products and decreased securities lending activity, partially offset by growth in interest-bearing trading assets, including mortgage-backed securities inventory and deposit margins. Interest expense decreased by 43% to $661.0 million for 2008 as compared to interest expense of $1,150.8 million for 2007 primarily due to the overall decline in market interest rates, offset by an increase in interest expense due to the issuance of $600 million of senior unsecured debentures in June 2007. Overall net interest revenues (interest income less interest expense) decreased by $64.5 million to $88.6 million for the year ended December 31, 2008.

     2007 v. 2006 — Interest revenue increased by $646.0 million primarily as a result of increased stock borrowing, securities purchased under agreements to resell and increases in interest rates. Interest expense for 2007 increased by $645.2 million as compared to 2006 primarily as a result of increased stock lending and securities sold under agreements to repurchase activities, increases in interest rates and the issuance of $600 million senior unsecured debentures in June 2007.

     Compensation and Benefits

     Compensation and benefits totaled $1,522.2 million, $946.3 million and $791.3 million in 2008, 2007 and 2006, respectively. Compensation and benefits expense consists primarily of salaries, benefits, cash bonuses, commissions and the amortization of share-based compensation to employees. Employees totaled approximately 2,270, 2,568 and 2,275 at December 31, 2008, 2007 and 2006, respectively. Due to reduction in force actions announced in December 2008, additional employees will transition out during the first quarter of 2009.

     2008 v. 2007 — Compensation and benefits expense of $1,522.2 million for the year ended December 31, 2008 includes the cost of expensing in 2008 share-based compensation awarded to employees in previous years of approximately $302.6 million, expenses associated with share-based compensation awards granted to employees in December 2008 of approximately $74.0 million, expenses associated with the modification of outstanding employee loans of approximately $33.0 million, and severance costs incurred during 2008 of $71.0 million. Excluding these items, compensation and benefits expense totaled $1,041.6 million for 2008. Compensation and benefits expense of $946.3 million for the year ended December 31, 2007 includes amortization expense associated with share-based compensation awards of $144.4 million, which relates to share-based compensation awards granted in 2007 and in previous years.

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     In December 2008, we approved an overall compensation strategy that modified the terms of all outstanding restricted stock and restricted stock unit (“RSUs”) awards of active employees and of future restricted stock and RSUs granted as part of year-end compensation. We modified outstanding awards such that employees who terminate their employment or are terminated without cause may continue to vest, so long as the awards are not forfeited as a result of other forfeiture provisions of those awards. As a result of the removal of the service requirements, we accelerated the expensing of any remaining unamortized share-based compensation costs in December 2008 with respect to previously granted awards on the modification date, with a total compensation cost of $302.6 million. Prior to this modification, restricted stock and RSUs awarded to employees were generally subject to continued service and employment requirements with the grant date fair value of these awards amortized as compensation expense over the required service period, which was typically five years. As part of our annual compensation process, we granted approximately 5.9 million shares of restricted stock and RSUs to employees in December 2008. As these year end awards contain termination provisions comparable to the terms of the overall approved compensation strategy, we recognized the full grant date fair value expense associated with these restricted stock and RSUs awards of $74.0 million immediately upon grant date in the current year. We believe these changes to share-based compensation more economically manage our overall employee compensation commensurate with the related production of revenues by our businesses.

     Excluding the impact of modifications to our share-based compensation awards and severance costs, the higher ratio of compensation expense to net revenues for 2008 as compared to 2007 results primarily from weaker than anticipated revenue production from certain business lines in which a minimum level of compensation costs are necessary in order to maintain appropriate personnel levels for competitiveness, as well as commission-based compensation paid in respect of revenue production in certain divisions where revenues include substantial trading losses. Additionally, while we have sizably reduced our employee headcount at year end as compared to the beginning of 2008, during the year we made significant hires both domestically and internationally in connection with expanding our mortgage, corporate bond and international equity trading capabilities, which temporarily increases compensation costs as production revenues build. These key hires allow us to selectively take advantage of the dislocation in the markets in certain sectors and enhance our business mix and product offering capabilities.

     2007 v. 2006 — Compensation and benefits expense, including the amortization of previously awarded restricted stock and RSUs increased $155.1 million, or 20%, to a total of $946.3 million as compared to $791.3 million for 2006. Employee headcount increased 13% from 2,275 at December 31, 2006 to 2,568 at December 31, 2007. The increase in compensation and benefits expense was driven by increased business activities and growth initiatives, both domestically and internationally. Specifically, during 2007 we hired certain senior level employees as part of our growth initiatives. Compensation and benefits expense for 2007 also reflects an increase in amortization expense of share-based awards from prior years as compared to 2006 as compensation policy changes in 2005 caused greater amounts of share-based awards to be issued to senior level employees as compared to cash compensation.

     Additional information relating to issuances pursuant to our employee share-based compensation plans is contained in Consolidated Statements of Changes in Stockholders’ Equity on page 56, Share-Based Compensation included in Note 1 of the Notes to the Consolidated Financial Statements, and Compensation Plans included in Note 22 of the Notes to the Consolidated Financial Statements.

     Non-Compensation Expense

     2008 v. 2007 — Non-compensation expenses were $449.0 million for 2008, a 19% increase as compared to 2007, which reflects increased technology and communications costs consistent with our expanding business activities and trading platforms, as well as other significant costs incurred in 2008. Included within Other non-interest expenses are $8 million in non-recoverable legal fees for investment banking transactions that did not close and other bad debt expense items for which we have fully reserved at year end. Additionally, during 2008 we recognized costs incurred in the unwinding of securities lending transactions with Lehman Brothers, Inc. and Landsbankinn as counterparties and other credit losses attributed to exposures from Lehman Brothers totaling approximately $20.7 million and we recognized reorganization costs for fixed asset write-offs and lease exit costs of $0.7 million as part of our announced office closings and other structural changes.

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     2007 v. 2006 — Non-compensation expenses were $376.0 million for 2007 versus $317.7 million for 2006, an increase of 18%. The increase in non-personnel expenses is consistent with our revenue growth and primarily attributable to increased compliance, technology and communications costs as well as increased occupancy related to the expansion of our London and New York offices.

     (Loss) / Earnings before Income Taxes and Minority Interest

     Loss before income taxes and minority interest was $949.3 million for 2008 down from earnings before income taxes and minority interest of $245.7 million and $348.7 million for 2007 and 2006, respectively.

     Income Taxes

     The provision for income taxes totaled a tax benefit of $290.2 million, tax expense of $93.2 million and tax expense of $137.5 million for 2008, 2007 and 2006, respectively. The provision for income taxes resulted in effective tax rates of 30.6%, 37.9% and 39.4%, respectively. The decrease in our effective tax rate for the year ended December 31, 2008 as compared to 2007 was as a result of the net loss for the year. The change in effective tax rates in 2007 and 2006 rate is due to (1) the minority interest holdings in JHYH which are not taxed at the Jefferies Group level, (2) a decrease in state and local income taxes and (3) return to provision adjustments for amounts previously deemed to be non-deductible.

     Minority Interest

     Minority interest consists of third party interests in JHYH (effective April 2, 2007) and our consolidated asset management funds. Minority interest in loss of consolidated subsidiaries was $123.0 million for 2008 compared to minority interest in earnings of consolidated subsidiaries of $7.9 million for 2007 and $7.0 million for 2006. For the year ended December 31, 2008, the decrease in earnings attributable to minority interest holders from 2007 is primarily due to net losses for 2008 recognized by Jefferies High Yield Holdings, LLC, which is consolidated by us. The increase in minority interest for 2007 as compared to 2006 is due to consolidating the operations of Jefferies High Yield Holdings, LLC beginning with the second quarter of 2007.

     (Loss) Earnings per Share

     Diluted net loss per share was $3.23 for 2008 on 166,163,000 shares compared to diluted earnings per share of $0.97 for 2007 on 153,807,000 shares and $1.42 per share on 147,531,000 shares for 2006. The diluted earnings per share calculations for 2007 and 2006 include an addition of $4.1 and $3.5 million, respectively, to net earnings for preferred dividends. Convertible preferred stock dividends were not included in the calculation of diluted (loss) per share for the year ended December 31, 2008 due to their anti-dilutive effect on (loss) per share.

Mortgage and Lending Related Trading Exposures

     We have exposure to residential mortgage-backed securities through our fixed income mortgage- and asset-backed sales and trading business and exposure to other credit products through our corporate lending and investing activities.

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     The following table provides a summary of these exposures as of December 31, 2008 and December 31, 2007 (in millions):

	December 31, 2008			December 31, 2007
Residential mortgage-backed agency securities (1)	$	952		$	27
TBA securities (2)		(534	)		—
Net agency residential mortgage-backed security exposure (2)		418			27
Prime mortgage-backed securities (3)		20
Alt-A mortgage-backed securities (4)		74			—
Subprime mortgage-backed securities (4)		30			—
Other asset-backed securities (4)		3			—
Total mortgage- and asset-backed security exposure	$	545		$	27
Corporate loans (5)	$	95.2		$	—
Collateralized loan obligations (“CLOs”) certificates (6)	$	6.3		$	49.5
Indirect investments in CLOs (7)	$	1.1		$	16.4

     Mortgage- and asset backed securities at December 31, 2008 were purchased during the second half of 2008. Additionally, we have executed interest rate derivatives to reduce certain interest rate risk exposure arising from the above instruments.

(1)	Residential mortgage-backed agency securities are represented at fair value and classified within Financial Instruments Owned in our Consolidated Statements of Financial Condition and represent securities issued by government sponsored entities backed by mortgage loans with an implicit guarantee from the U.S. government as to payment of principal and interest. These assets are classified within Level 2 of the fair value hierarchy.
(2)	Our exposure to residential mortgage-backed agency securities is reduced through the forward sale of such securities as represented by the notional amount of outstanding TBA securities at December 31, 2008. Such contracts are accounted for as derivatives with a fair value of $1.7 million at December 31, 2008, which are included in Financial Instruments Sold, Not Yet Purchased in our Consolidated Statements of Financial Condition and are classified in Level 2 of the fair value hierarchy.
(3)	Prime mortgage-backed securities are presented at fair value, are classified within Level 2 of the fair value hierarchy and included within Financial Instruments Owned in our Consolidated Statements of Financial Condition.
(4)	Alt-A mortgage-backed securities are backed by mortgage loans which are categorized between prime mortgage loans and subprime mortgage loans due to certain underwriting and other loan characteristics. Subprime mortgage-backed securities are backed by mortgage loans secured by real property made to a borrower with diminished, impaired or limited credit history. Amounts at December 31, 2008 are presented at their fair value, are classified within Level 3 of the fair value hierarchy and included within Financial Instruments Owned in our Consolidated Statements of Financial Condition.
(5)	Corporate loans represent primarily senior unsecured bank loans purchased or issued in connection with our trading and investing activities are presented at fair value as included within Financial Instruments Owned in our Consolidated Statements of Financial Condition and are classified within Level 3 of the fair value hierarchy at December 31, 2008.
(6)	We own interests consisting of various classes of senior, mezzanine and subordinated notes in CLO vehicles which are comprised of corporate senior secured loans, unsecured loans and high yield bonds, of which $2.1 million are reported at fair value and included within Financial Instruments Owned in our Consolidated Statements of Financial Condition and classified within Level 3 of the fair value hierarchy and $4.2 million are accounted for at fair value and included in Investments in Managed Funds in our Consolidated Statements of Financial Condition. At December 31, 2007, approximately $32.8 million of our interests consisted of a warehouse loan to a CLO, which was subsequently repaid from the proceeds of the issuance of CLO interests to third parties and to us.
(7)	Through our equity method investment in Jefferies Finance, Inc. we have an indirect interest in certain CLOs and warehouse loans to CLOs comprised of corporate senior secured loans, unsecured loans and high yield bonds.

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     Of our prime, Alt-A and subprime mortgage-backed securities and other asset-backed securities at December 31, 2008, the following table provides further information regarding the credit ratings of the securities and the issue date of the securities:

	Credit Ratings
									Below
							BBB+ to		Investment
Vintage year	AAA		AA+ to AA-		A+ to A-		BBB-		Grade		Fair Value
2007	$	19.1	$	1.7		—	$	0.3	$	3.3	$	24.4
2006	$	23.5	$	0.3	$	1.4	$	1.7	$	3.8	$	30.7
2005	$	37.8	$	0.8	$	2.2	$	0.9	$	1.2	$	42.9
2004 and prior	$	24.5	$	0.8	$	1.5	$	1.4	$	0.5	$	28.7
Total	$	104.9	$	3.6	$	5.1	$	4.3	$	8.8	$	126.7

Liquidity, Financial Condition and Capital Resources

     Our Chief Financial Officer and Treasurer are responsible for developing and implementing our liquidity, funding and capital management strategies. These policies are determined by the nature of our day to day business operations, business growth possibilities, regulatory obligations, and liquidity requirements.

     Recent market conditions have been, and continue to be, volatile, with tightening in the availability of funding with illiquid credit markets and wider credit spreads. Lending within the interbank market has been reduced and concerns as to counterparty stability have led to further reduction in available borrowings from institutional investors and lenders. We have no scheduled maturities on our long-term borrowings until 2012, nominal short-term borrowings and significant cash balances on hand. We continue to actively manage our liquidity profile and counterparty relationships given current credit market conditions.

     Our actual level of capital, total assets, and financial leverage are a function of a number of factors, including, asset composition, business initiatives, regulatory requirements and cost availability of both long term and short term funding. We have historically maintained a highly liquid balance sheet, with a substantial portion of our total assets consisting of cash, highly liquid marketable securities and short-term receivables, arising principally from traditional securities brokerage activity. The highly liquid nature of these assets provides us with flexibility in financing and managing our business.

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Liquidity

     The following are financial instruments that are cash and cash equivalents or are deemed by management to be generally readily convertible into cash, marginable or accessible for liquidity purposes within a relatively short period of time (in thousands of dollars):

	December 31, 2008		December 31, 2007
Cash and cash equivalents:
Cash in banks	$	765,056	$	248,174
Money market investments		529,273		649,698
Total cash and cash equivalents		1,294,329		897,872
Cash and securities segregated (1)		1,151,522		614,949
	$	2,445,851	$	1,512,821

(1) Consists of deposits at exchanges and clearing organizations, as well as deposits in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, which subjects Jefferies, as a broker dealer carrying client accounts, to requirements related to maintaining cash or qualified securities in a segregated reserve account for the exclusive benefit of its clients.

     Bank loans represent short-term borrowings that are payable on demand and generally bear interest at a spread over the federal funds rate. We had no outstanding secured bank loans as of December 31, 2008 and 2007. Unsecured bank loans are typically overnight loans used to finance financial instruments owned or clearing related balances. We had $-0- and $280.4 million of outstanding unsecured bank loans as of December 31, 2008 and 2007, respectively. Average daily bank loans for the years ended December 31, 2008 and 2007 were $94.9 million and $267.1 million, respectively.

     A substantial portion of our assets are 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. In addition, receivables from brokers and dealers are primarily current open transactions, margin deposits or securities borrowed transactions, which are typically settled or closed out within a few days. Receivable from customers includes margin balances and amounts due on transactions in the process of settlement. Most of our receivables are secured by marketable securities.

     Our assets are funded by equity capital, senior debt, mandatorily redeemable convertible preferred stock, securities loaned, securities sold under agreements to repurchase, 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 various banks for financing of up to $718.4 million, including $623.0 million of bank loans and $95.4 million of letters of credit. Of the $718.4 million of uncommitted lines of credit, $468.4 million is unsecured and $250.0 million is secured. Secured amounts are collateralized by a combination of customer, non-customer and firm securities. Letters of credit are used in the normal course of business mostly to satisfy various collateral requirements in lieu of depositing cash or securities.

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Liquidity Management Policies

     The primary goal of our liquidity management activities is to ensure adequate funding over a range of market environments. The key objectives of the liquidity management framework are to support the successful execution of our business strategies while ensuring sufficient liquidity through the business cycle and during periods of financial distress. Our liquidity management policies are designed to mitigate the potential risk that we may be unable to access adequate financing to service our financial obligations without material franchise or business impact.

     The principal elements of our liquidity management framework are the Funding Action Plan and the Cash Capital Policy.

• Funding Action Plan. The Funding Action Plan models a potential liquidity contraction over a one-year time period. Our funding action plan model scenarios incorporate potential cash outflows during a liquidity stress event, including, but not limited to, the following: (a) repayment of all unsecured debt maturing within one year and no incremental unsecured debt issuance; (b) maturity roll-off of outstanding letters of credit with no further issuance and replacement with cash collateral; (c) higher margin requirements on or lower availability of secured funding; (d) client cash withdrawals; (e) the anticipated funding of outstanding investment commitments and (f) certain accrued expenses and other liabilities and fixed costs.

• Cash Capital Policy. We maintain a cash capital model that measures long-term funding sources against requirements. Sources of cash capital include our equity, preferred stock and the non-current portion of long-term borrowings. Uses of cash capital include the following: (a) illiquid assets such as buildings, equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets and certain investments; (b) a portion of securities inventory that is not expected to be financed on a secured basis in a credit-stressed environment (i.e., margin requirements) and (c) drawdowns of unfunded commitments. We seek to maintain a surplus cash capital position. Our equity capital of $2,121.3 million, mandatorily redeemable convertible preferred stock of $125.0 million and long-term borrowings (debt obligations scheduled to mature in more than 12 months) of $1,764.3 million comprise our total capital of $4,010.6 million as of December 31, 2008, which exceeded cash capital requirements.

     Analysis of Financial Condition and Capital Resources

     Financial Condition

     As previously discussed, we have historically maintained a highly liquid balance sheet, with a substantial portion of our total assets consisting of cash, highly liquid marketable securities and short-term receivables, arising principally from traditional securities brokerage activity. Total assets decreased $9,815.1 million, or 33%, from $29,793.8 million at December 31, 2007 to $19,978.7 million at December 31, 2008 primarily due to decreased reverse repurchase agreement activity and a decrease in the level of our financial instruments owned inventory. Our financial instruments owned, including securities pledged to creditors, decreased $945.5 million, while our financial instruments sold, not yet purchased also decreased by $580.4 million to $2,749.6 million at December 31, 2008. Our securities borrowed and securities purchased under agreements to resell decreased by $9,535.5 million, or 48%, while our securities loaned and securities sold under agreements to repurchase decreased $9,020.1 million, or 47%.

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

	December 31, 2008			December 31, 2007
Stockholders’ equity	$	2,121,271		$	1,761,544
Less: Goodwill		(358,837	)		(344,063	)
Tangible stockholders’ equity	$	1,762,434		$	1,417,481
Shares outstanding		163,216,038			124,453,174
Outstanding restricted stock units (5)		34,260,077			32,125,316
Adjusted shares outstanding		197,476,115			156,578,490
Book value per share (1)	$	13.00		$	14.15
Pro forma book value per share (2)	$	10.74		$	11.25
Tangible book value per share (3)	$	10.80		$	11.39
Pro forma tangible book value per share (4)	$	8.92		$	9.05

(1)	Book value per share equals stockholders’ equity divided by common shares outstanding.
(2)	Pro forma book value per share equals stockholders’ equity divided by common shares outstanding adjusted for outstanding restricted stock units.
(3)	Tangible book value per share equals tangible stockholders’ equity divided by common shares outstanding.
(4)	Pro forma tangible book value per share equals tangible stockholders’ equity divided by common shares outstanding adjusted for outstanding restricted stock units.
(5)	Outstanding restricted stock units, which give the recipient the right to receive common shares at the end of a specified deferral period, are granted in connection with our share-based employee incentive plans and include both awards that contain future service requirements and awards for which the future service requirements have been met.

     Tangible stockholders’ equity, tangible book value per share, pro forma book value per share and pro forma 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, specifically goodwill. Goodwill is subtracted from stockholders’ equity in determining tangible stockholders’ equity as we believe that goodwill does not constitute an operating asset, which can be deployed in a liquid manner. We calculate tangible book value per share by dividing tangible stockholders’ equity by common stock outstanding. We calculate pro forma book value per share as stockholders’ equity divided by common shares outstanding adjusted for outstanding restricted stock units. We calculate pro forma tangible book value per share by dividing tangible stockholders’ equity by common shares outstanding adjusted for outstanding restricted stock units. We believe the adjustment to shares outstanding for outstanding restricted stock units reflects potential economic claims on our net assets enabling shareholders to better assess their standing with respect to our financial condition. Valuations of financial companies are often measured as a multiple of tangible stockholders’ equity, inclusive of any dilutive effects, making these ratios, and changes in these ratios, a meaningful measurement for investors.

     On December 30, 2008 we granted 5,138,821 shares of restricted stock as part of year-end compensation. The closing price of our common stock was $13.80 on December 30, 2008. We expect to issue the shares of restricted stock during the first quarter of 2009, which will increase shares outstanding. In January 2009, we repurchased approximately 4.3 million shares of our common stock in the open market at an average price of $13.00 per share.

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     In February 2006, we issued $125.0 million of our Series A convertible preferred stock to Massachusetts Mutual Life Insurance Company (“MassMutual”). As of December 31, 2008, our Series A convertible preferred stock is convertible into 4,105,138 shares of our common stock at an effective conversion price of approximately $30.45 per share

Capital Resources

     We had total long-term capital of $4.0 billion and $3.7 billion resulting in a long-term debt to total capital ratio of 44% and 48%, at year end 2008 and 2007, respectively. Our total capital base as of December 31, 2008 and 2007 was as follows (in thousands):

	December 31,		December 31,
	2008		2007
Long-Term Debt	$	1,764,274	$	1,764,067
Mandatorily Redeemable Convertible Preferred Stock		125,000		125,000
Total Stockholders’ Equity		2,121,271		1,761,544
Total Capital	$	4,010,545	$	3,650,611

     Our ability to support increases in total assets is largely a function of our ability to obtain short-term secured and unsecured funding, primarily through securities lending, and through our $718.4 million of uncommitted secured and unsecured bank lines. Our ability is further enhanced by the cash proceeds from our $600 million senior unsecured debt issuance in June 2007 and the sale of 26,585,310 shares of our common stock to Leucadia National Corporation in April 2008 (see Note 1, “Organization and Summary of Significant Accounting Policies,” to the consolidated financial statements for additional discussion). We had no outstanding secured bank loans as of December 31, 2008 and December 31, 2007, respectively, and we had $-0- and $280.4 million of outstanding unsecured bank loans as of December 31, 2008 and December 31, 2007, respectively. We did not declare dividends to be paid during the third or fourth quarter of 2008.

     At December 31, 2008, our senior long-term debt, net of unamortized discount, consisted of contractual principal payments (adjusted for amortization) of $492.4 million, $346.3 million, $348.7 million, $248.6 million and $328.2 million due in 2036, 2027, 2016, 2014 and 2012, respectively. At December 31, 2008, contractual interest payment obligations related to our senior long-term debt are $113.0 million for each of the years 2009 through 2011, $93.0 million for 2012 and $1,128.9 million for all of the remaining periods after 2012.

     We rely upon our cash holdings and external sources to finance a significant portion of our day-to-day operations. Access to these external sources, as well as the cost of that financing, is dependent upon various factors, including our debt ratings. Our current debt ratings are dependent upon many factors, including industry dynamics, operating and economic environment, operating results, operating margins, earnings trend and volatility, balance sheet composition, liquidity and liquidity management, our capital structure, our overall risk management, business diversification and our market share and competitive position in the markets in which we operate. Deteriorations in any of these factors could impact our credit ratings thereby increasing the cost of obtaining funding and impacting certain trading revenues, particularly where collateral agreements are referenced to our external credit ratings.

     Our long-term debt ratings are as follows:

	Rating
Moody’s Investors Services	Baa2
Standard and Poor’s	BBB
Fitch Ratings	BBB

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     Net Capital

     Jefferies, Jefferies Execution and Jefferies High Yield Trading are subject to the net capital requirements of the SEC and other regulators, which are designed to measure the general financial soundness and liquidity of broker-dealers. Jefferies, Jefferies Execution and Jefferies High Yield Trading use the alternative method of calculation.

     As of December 31, 2008, Jefferies, Jefferies Execution and Jefferies High Yield Trading’s net capital and excess net capital were as follows (in thousands of dollars):

	Net Capital		Excess Net Capital
Jefferies	$	710,906	$	691,478
Jefferies Execution	$	8,688	$	8,438
Jefferies High Yield Trading	$	545,522	$	545,272

     Contractual Obligations and Commitments

     The tables below provide information about our commitments related to debt obligations, leases, and investments and guarantees as of December 31, 2008. For debt obligations, leases and investments, the table presents principal cash flows with expected maturity dates.

		Expected Maturity Date
		2009		2010		2011		2012		2013		After 2013		Total
	(Dollars in Millions)
Debt obligations:
Senior notes			—		—		—	$	325.0		—	$	1,450.0	$	1,775.0
Mandatorily redeemable convertible preferred stock			—		—		—		—		—	$	125.0	$	125.0
Leases:
Gross lease commitments		$	43.2	$	42.7	$	40.5	$	36.7	$	35.1	$	138.9	$	337.1
Sub-leases		$	7.2	$	6.7	$	5.7	$	5.5	$	5.6	$	9.2	$	39.9
Net lease commitments		$	36.0	$	36.0	$	34.8	$	31.2	$	29.5	$	129.7	$	297.2
Bank credit			—	$	18.0		—	$	18.0		—		—	$	36.0
Equity commitments		$	0.1	$	250.0		—	$	2.0	$	1.4	$	171.0	$	424.5
Loan commitments		$	168.9	$	5.0		—		—	$	0.2		—	$	174.1
Derivative contracts- non credit		$	896.1	$	42.8	$	14.5		—	$	2.9		—	$	956.3
Derivative contracts- credit related			—		—		—	$	5.0		—		—	$	5.0

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     In accordance with FIN No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements or Guarantees, Including Indirect Guarantees of Indebtedness of Others, certain derivative contracts meet the definition of a guarantee under FIN 45 and are therefore included in the above table. For additional information on these commitments, see Note 16, “Commitments, Contingencies and Guarantees,” to the consolidated financial statements.

     In the normal course of business we engage in other off-balance sheet arrangements, including derivative contracts. Neither derivatives’ notional amounts nor underlying instrument values are reflected as assets or liabilities in on our consolidated Statements of Financial Condition. Rather, the fair value of derivative contracts are reported in the consolidated Statements of Financial Condition as Financial instruments owned — derivative contracts or Financial instruments sold, not yet purchased — derivative contracts as applicable. Derivative contracts are reflected net of cash paid or received pursuant to credit support agreements and are reported on a net-by-counterparty basis when a legal right of offset exists under an enforceable master netting agreement. For additional information about our accounting policies and our derivative activities see Note 1, “Organization and Summary of Significant Accounting Policies,” and Note 4, “Financial Instruments,” to the consolidated financial statements.

     We are routinely involved with variable interest entities (“VIEs”) and qualifying special purpose entities (“QSPEs”) in connection with our mortgage-backed securities securitization activities. As December 31, 2008, we did not have any ongoing involvement with or commitments to purchase assets from QSPEs. For additional information regarding our involvement with VIEs, see Note 20, “Securitization Activities and Variable Interest Entities,” to the consolidated financial statements.

     In January 2009, we purchased approximately $56.5 million of specified auction rate securities from certain individual customers at par value.

     Due to the uncertainty regarding the timing and amounts that will ultimately be paid, our liability for unrecognized tax benefits has been excluded from the above contractual obligations table. See Note 9 to the Consolidated Financial Statements for further information on FIN 48.

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     Leverage Ratios

     The following table presents total assets, adjusted assets, total stockholders’ equity and tangible stockholders’ equity with the resulting leverage ratios as of December 31, 2008 and December 31, 2007:

	December 31, 2008			December 31, 2007
Total assets	$	19,978,685		$	29,793,817
Deduct: Securities borrowed		(9,011,903	)		(16,422,130	)
Securities purchased under agreements to resell		(1,247,002	)		(3,372,294	)
Add:      Financial instruments sold, not yet purchased		2,749,567			3,329,966
Less derivative liabilities		(220,738	)		(327,076	)
Subtotal		2,528,829			3,002,890
Deduct: Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations		(1,151,522	)		(614,949	)
Goodwill		(358,837	)		(344,063	)
Adjusted assets	$	10,738,250		$	12,043,271
Total stockholders’ equity	$	2,121,271		$	1,761,544
Deduct: Goodwill		(358,837	)		(344,063	)
Tangible stockholders’ equity	$	1,762,434		$	1,417,481
Leverage ratio (1)		9.4			16.9
Adjusted leverage ratio (2)		6.1			8.5

(1)	Leverage ratio equals total assets divided by total stockholders’ equity.
(2)	Adjusted leverage ratio equals adjusted assets divided by tangible stockholders’ equity.

     Adjusted assets excludes certain assets that are considered self-funded and, therefore, of lower risk, which are generally financed by customer liabilities through our securities lending activities. We view the resulting measure of adjusted leverage as a more relevant measure of financial risk when comparing financial services companies.

Risk Management

     Risk is an inherent part of our business and activities. The extent to which we properly and effectively identify, assess, monitor and manage each of the various types of risk involved in our activities is critical to our financial soundness and profitability. We seek to identify, assess, monitor and manage the following principal risks involved in our business activities: market, credit, operational, legal and compliance, new business, reputational and other. Risk management is a multi-faceted process that requires communication, judgment and knowledge of financial products and markets. Senior management takes an active role in the risk management process and requires specific administrative and business functions to assist in the identification, assessment and control of various risks. Our risk management policies, procedures and methodologies are fluid in nature and are subject to ongoing review and modification.

     Market Risk. The potential for changes in the value of financial instruments is referred to as market risk. Our market risk generally represents the risk of loss that may result from a change in the value of a financial instrument as a result of fluctuations in interest rates, credit spreads, equity prices, commodity prices and foreign exchange rates, along with the level of volatility. Interest rate risks result primarily from exposure to changes in the yield curve, the volatility of interest rates, and credit spreads. Equity price risks result from exposure to changes in prices and volatilities of individual equities, equity baskets and equity indices. Commodity price risks result from

42

exposure to the changes in prices and volatilities of individual commodities, commodity baskets and commodity indices. We make dealer markets in equity securities, debt securities and commodities. We attempt to hedge our exposure to market risk by managing our net long or short positions. Due to imperfections in correlations, gains and losses can occur even for positions that are hedged. Position limits in trading and inventory accounts are established and monitored on an ongoing basis. Each day, consolidated position and exposure reports are prepared and distributed to various levels of management, which enable management to monitor inventory levels and results of the trading groups.

     Credit Risk. Credit risk represents the loss that we would incur if a client, counterparty or issuer of financial instruments, such as securities and derivatives, held by us fails to perform its contractual obligations. We follow industry practices to reduce credit risk related to various trading, investing and financing activities by obtaining and maintaining collateral. We adjust margin requirements if we believe the risk exposure is not appropriate based on market conditions. Liabilities to other brokers and dealers related to unsettled transactions (i.e., securities failed-to-receive) are recorded at the amount for which the securities were purchased, and are paid upon receipt of the securities from other brokers or dealers. In the case of aged securities failed-to-receive, we may purchase the underlying security in the market and seek reimbursement for losses from the counterparty in accordance with standard industry practices.

     Operational Risk. Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our operating systems, business disruptions and inadequacies or breaches in our internal control processes. Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies. In addition, the transactions we process have become increasingly complex. If any of our financial, accounting or other data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes, people or systems, we could suffer an impairment to our liquidity, financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our buildings. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses.

     We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability to effect transactions and manage our exposure to risk.

     In addition, despite the contingency plans we have in place, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which they are located. This may include a disruption involving electrical, communications, transportation or other services used by us or third parties with which we conduct business.

     Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.

     Legal and Compliance Risk. Legal and compliance risk includes the risk of non-compliance with applicable legal and regulatory requirements. We are subject to extensive regulation in the different jurisdictions in which we conduct our business. We have various procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, anti-money

43

laundering and record keeping. We also maintain an anonymous hotline for employees or others to report suspected inappropriate actions by us or by our employees or agents.

     New Business Risk. New business risk refers to the risks of entering into a new line of business or offering a new product. By entering a new line of business or offering a new product, we may face risks that we are unaccustomed to dealing with and may increase the magnitude of the risks we currently face. We review proposals for new businesses and new products to determine if we are prepared to handle the additional or increased risks associated with entering into such activities.

     Reputational Risk. We recognize that maintaining our reputation among clients, investors, regulators and the general public is an important aspect of minimizing legal and operational risks. Maintaining our reputation depends on a large number of factors, including the selection of our clients and the conduct of our business activities. We seek to maintain our reputation by screening potential clients and by conducting our business activities in accordance with high ethical standards.

     Other Risk. Other risks encountered by us include political, regulatory and tax risks. These risks reflect the potential impact that changes in local and international laws and tax statutes have on the economics and viability of current or future transactions. In an effort to mitigate these risks, we continuously review new and pending regulations and legislation and participate in various industry interest groups.

Accounting and Regulatory Developments

     FASB 141R. In December 2007, the FASB issued FASB 141 (revised 2007), Business Combinations (“FASB 141R”). Under FASB 141R, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at their fair value at the acquisition date for any business combination consummated after the effective date. It further requires that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, we will apply the provisions of FASB 141R to business combinations occurring after January 1, 2009. Adoption of FASB 141R will not affect our financial condition, results of operations or cash flows, but may have an effect on accounting for future business combinations.

     FASB 160. In December 2007, the FASB issued FASB 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“FASB 160”). FASB 160 requires an entity to clearly identify and present ownership interests in subsidiaries held by parties other than the entity in the consolidated financial statements within the equity section but separate from the entity’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; changes in ownership interest be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008 and shall be applied prospectively, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. Accordingly, we adopted FASB 160 effective January 1, 2009. The adoption of FASB 160 resulted in an increase to stockholders’ equity of $287.8 million and a decrease to total liabilities of $287.8 million on our opening 2009 consolidated statement of financial condition; however, we do not expect the adoption of FASB 160 to have material effect on our results of operations or cash flows.

     FSP FAS 140-3. In February 2008, the FASB issued FSP FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (“FSP FAS 140-3”). FSP FAS 140-3 requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction under FASB 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (“FASB No. 140”) unless certain criteria are met. FSP FAS 140-3 is effective for fiscal years beginning after November 15, 2008. FSP FAS 140-3 is to be applied prospectively for new transactions entered into after the adoption date. We do not expect the adoption of FSP FAS 140-3 to have a material effect on financial condition or cash flows; and adoption of FSP FAS 140-3 will have no effect on our results of operations.

44

     FASB 161. In March 2008, the FASB issued FASB 161, Disclosures about Derivative Instruments and Hedging Activities (“FASB 161”). FASB 161 amends and expands the disclosure requirements of FASB 133, Accounting for Derivative Instruments and Hedging Activities, and requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts and disclosures about credit-risk-related contingent features in derivative agreements. FASB 161 is effective for the fiscal years and interim periods beginning after November 15, 2008. Accordingly, we adopted FASB 161 effective January 1, 2009. Since FASB 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of FASB 161 will not affect our financial condition, results of operations or cash flows.

     FSP APB 14-1. In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by APB 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants and specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for fiscal years and interim periods beginning after December 31, 2008. We are currently evaluating the impact of FSP APB 14-1 on our financial condition and results of operations.

     FSP EITF 03-6-1. In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in FASB 128, Earnings per Share. Under FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years and interim periods beginning after December 31, 2008. All prior-period EPS data presented will be adjusted retrospectively. We are currently evaluating the impact of FSP EITF 03-6-1 on our presentation of earnings per share.

     FSP FAS 133-1 and FIN 45-4. In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (“FSP FAS 133-1 and FIN 45-4”). FSP FAS 133-1 and FIN 45-4 require enhanced disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument, and require additional disclosure about the current status of the payment/performance risk of a guarantee. We adopted FSP FAS 133-1 and FIN 45-4 for our year end consolidated financial statements as of December 31, 2008. Since FSP FAS 133-1 and FIN 45-4 require only additional disclosures, the adoption did not have an effect on our financial condition, results of operations or cash flows.

     FSP FAS 157-3. In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is not Active (“FSP FAS 157-3”). FSP FAS 157-3 is consistent with the joint press release the FASB issued with the Securities and Exchange Commission on September 30, 2008, which provides general clarification guidance on determining fair value under FASB 157 when markets are inactive. FSP FAS 157-3 specifically addresses the use of judgment in determining whether a transaction in a dislocated market represents fair value, the inclusion of market participant risk adjustments when an entity significantly adjusts observable market data based on unobservable inputs, and the degree of reliance to be placed on broker quotes or pricing services. FSP FAS 157-3 was effective immediately upon issuance and did not have an effect on our financial condition, results of operations or cash flows.

     FSP FAS 140-4 and FIN 46(R)-8. In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4 and FIN 46(R)-8 require public entities to provide additional disclosures about transfers of financial assets and require public enterprises to provide additional

45

disclosures about their involvement with variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 were adopted for our year end consolidated financial statements as of December 31, 2008 and did not affect our financial condition, results of operations or cash flows as it requires only additional disclosures.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

     We use a number of quantitative tools to manage our exposure to market risk. These tools include:

• inventory position and exposure limits, on a gross and net basis;

• scenario analyses, stress tests and other analytical tools that measure the potential effects on our trading net revenues of various market events, including, but not limited to, a large widening of credit spreads, a substantial decline in equities markets and significant moves in selected emerging markets; and

• risk limits based on a summary measure of risk exposure referred to as Value-at-Risk.

Value-at Risk

     We estimate Value-at-Risk (VaR) using a model that simulates revenue and loss distributions on all financial instruments by applying historical market changes to the current portfolio. Using the results of this simulation, VaR measures potential loss of trading revenues at a given confidence level over a specified time horizon. We calculate VaR over a one day holding period measured at a 95% confidence level which implies that, on average, we expect to realize a loss of daily trading revenue at least as large as the VaR amount on one out of every twenty trading days.

     VaR is one measurement of potential loss in trading revenues that may result from adverse market movements over a specified period of time with a selected likelihood of occurrence. As with all measures of VaR, our estimate has substantial limitations due to our reliance on historical performance, which is not necessarily a predictor of the future. Consequently, this VaR estimate is only one of a number of tools we use in our daily risk management activities.

     VaR is a model that predicts the future risk based on historical data. We could incur losses greater than the reported VaR because the historical market prices and rates changes may not be an accurate measure of future market events and conditions. In addition, the VaR model measures the risk of a current static position over a one-day horizon and might not predict the future position. When comparing our VaR numbers to those of other firms, it is important to remember that different methodologies could produce significantly different results

     The VaR numbers below are shown separately for interest rate, equity, currency and commodity products, as well as for our overall trading positions, excluding corporate investments in asset management positions, using a historical simulation approach. The aggregated VaR presented here is less than the sum of the individual components (i.e., interest rate risk, foreign exchange rate risk, equity risk and commodity price risk) due to the benefit of diversification among the risk categories. Diversification benefit equals the difference between aggregated VaR and the sum of VaRs for the four risk categories. The following table illustrates the VaR for each component of market risk.

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	Daily VaR (1)
	(In Millions)
	Value at Risk in trading portfolios
	At 12-31				Year ending 12-31-2008						Year ending 12-31-2007
Risk Categories	2008		2007		Average		High		Low		Average		High		Low
Interest Rates	$	3.70	$	1.70	$	2.57	$	4.66	$	1.13	$	1.60	$	2.24	$	0.97
Equity Prices	$	2.31	$	16.73	$	7.12	$	24.01	$	2.16	$	8.42	$	17.01	$	4.94
Currency Rates	$	0.15	$	0.47	$	0.53	$	0.98	$	0.09	$	0.41	$	1.06	$	0.13
Commodity Prices	$	0.55	$	2.07	$	1.10	$	3.21	$	0.23	$	1.22	$	2.36	$	0.27
Diversification Effect	-$	2.55	-$	7.24	-$	4.32					-$	3.53
Firmwide	$	4.16	$	13.73	$	7.00	$	23.35	$	3.31	$	8.12	$	14.02	$	5.31

(1) VaR is the potential loss in value of our trading positions due to adverse market movements over a defined time horizon with a specific confidence level. For the VaR numbers reported above, a one-day time horizon and 95% confidence level were used.

     Average VaR of $7.00 million during 2008 decreased from the $8.12 million average during 2007 due mainly to a decrease in exposure to Equity Prices. 2008 VaR levels were elevated for a period of time after we acquired 10 million common shares of Leucadia National Corp. in April.

     The following table presents our daily VaR over the last four quarters:

VaR Back-Testing

     The comparison of daily actual revenue fluctuations with the daily VaR estimate is the primary method used to test the efficacy of the VaR model. Back testing is performed at various levels of the trading portfolio, from the holding company level down to specific business lines. A back-testing exception occurs when the daily loss exceeds the daily VaR estimate. Results of the process at the aggregate level demonstrated 23 outliers when comparing the 95% one-day VaR with the back-testing profit and loss in 2008. A 95% confidence one-day VaR model usually should not have more than twelve (1 out of 20 days) back-testing exceptions on an annual basis. Back-testing profit and loss is a subset of actual trading revenue and includes only the profit and loss effects relevant to the VaR model, excluding fees, commissions and certain provisions. We compare the trading revenue with VaR for back-testing purposes because VaR assesses only the potential change in position value due to overnight movements in financial market variables such as prices, interest rates and volatilities under normal market conditions. The graph below illustrates the relationship between daily back-testing trading profit and loss and daily VaR for us in 2008.

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Daily Trading Net Revenue
($ in millions)

     Trading revenue used in the histogram below entitled “2008 vs. 2007 Distribution of Daily Trading Revenue” is the actual daily trading revenue which is excluding fees, commissions and certain provisions. The histogram below shows the distribution of daily trading revenue for substantially all of our trading activities.

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Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Management’s Report on Internal Control over Financial Reporting	50
Report of Independent Registered Public Accounting Firm	51
Report of Independent Registered Public Accounting Firm	52
Consolidated Statements of Financial Condition as of December 31, 2008 and 2007	53
Consolidated Statements of Earnings for Each of the Years in the Three-Year Period Ended December 31, 2008	55
Consolidated Statements of Changes in Stockholders’ Equity for Each of the Years in the Three- Year Period Ended December 31, 2008	56
Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period Ended December 31, 2008	57
Consolidated Statements of Comprehensive Income for Each of the Years in the Three-Year Period Ended December 31, 2008	60
Notes to Consolidated Financial Statements	61

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Management’s Report on Internal Control over Financial Reporting

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     Management evaluated our internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. As a result of this assessment and based on the criteria in this framework, management has concluded that, as of December 31, 2008, our internal control over financial reporting was effective.

50

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Jefferies Group, Inc.:

We have audited the accompanying consolidated statements of financial condition of Jefferies Group, Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of earnings, changes in stockholders’ equity, cash flows and comprehensive income for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jefferies Group, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Jefferies Group, Inc.’s and subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

New York, New York
February 27, 2009

51

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Jefferies Group, Inc.:

We have audited Jefferies Group, Inc. and subsidiaries (the Company) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Jefferies Group, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Jefferies Group, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of earnings, changes in stockholders’ equity, cash flows and comprehensive income for each of the years in the three-year period ended December 31, 2008, and our report dated February 27, 2009 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

New York, New York
February 27, 2009

52

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Consolidated Statements of Financial Condition
December 31, 2008 and 2007
(Dollars in thousands, except per share amounts)

	December 31,		December 31,
	2008		2007
ASSETS
Cash and cash equivalents	$	1,294,329	$	897,872
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations		1,151,522		614,949
Financial instruments owned, including securities pledged to creditors of $361,765 and $1,087,906 in 2008 and 2007, respectively:
Corporate equity securities		945,747		2,266,679
Corporate debt securities		1,851,216		2,162,893
U.S. Government, federal agency and other sovereign obligations		447,233		730,921
Mortgage- and asset-backed securities		1,035,996		26,895
Loans		34,407		—
Derivatives		298,144		338,779
Investments at fair value		75,059		104,199
Other		—		2,889
Total financial instruments owned		4,687,802		5,633,255
Investments in managed funds		100,245		293,523
Other investments		140,012		78,715
Securities borrowed		9,011,903		16,422,130
Securities purchased under agreements to resell		1,247,002		3,372,294
Receivable from brokers, dealers and clearing organizations		710,199		715,919
Receivable from customers		499,315		764,833
Premises and equipment		139,390		141,472
Goodwill		358,837		344,063
Other assets		638,129		514,792
Total assets	$	19,978,685	$	29,793,817

See accompanying notes to Consolidated Financial Statements.

53

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Consolidated Statements of Financial Condition — (Continued)
December 31, 2008 and 2007
(Dollars in thousands, except per share amounts)

	December 31,			December 31,
	2008			2007
LIABILITIES AND STOCKHOLDERS’ EQUITY
Bank loans	$	—		$	280,378
Financial instruments sold, not yet purchased:
Corporate equity securities		739,166			1,389,099
Corporate debt securities		1,578,395			1,407,387
U.S. Government, federal agency and other sovereign obligations		211,045			206,090
Derivatives		220,738			327,076
Other		223			314
Total financial instruments sold, not yet purchased		2,749,567			3,329,966
Securities loaned		3,259,575			7,681,464
Securities sold under agreements to repurchase		6,727,390			11,325,562
Payable to brokers, dealers and clearing organizations		291,291			878,740
Payable to customers		1,736,971			1,415,803
Accrued expenses and other liabilities		634,618			627,597
		15,399,412			25,539,510
Long-term debt		1,764,274			1,764,067
Mandatorily redeemable convertible preferred stock		125,000			125,000
Minority interest		568,728			603,696
Total liabilities		17,857,414			28,032,273
STOCKHOLDERS’ EQUITY
Common stock, $.0001 par value. Authorized 500,000,000 shares; issued 171,167,666 shares in 2008 and 155,375,808 shares in 2007		17			16
Additional paid-in capital		1,870,120			1,115,011
Retained earnings		418,445			1,031,764
Less:
Treasury stock, at cost, 7,951,628 shares in 2008 and 30,922,634 shares in 2007		(115,190	)		(394,406	)
Accumulated other comprehensive (loss) income:
Currency translation adjustments		(43,675	)		10,986
Additional minimum pension liability		(8,446	)		(1,827	)
Total accumulated other comprehensive (loss) income		(52,121	)		9,159
Total stockholders’ equity		2,121,271			1,761,544
Total liabilities and stockholders’ equity	$	19,978,685		$	29,793,817

See accompanying notes to Consolidated Financial Statements.

54

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Consolidated Statements of Earnings
For each of the years in the three-year period ended December 31, 2008
(In thousands, except per share amounts)

	2008			2007		2006
Revenues:
Commissions	$	444,315		$	355,601	$	280,681
Principal transactions		87,316			390,374		468,002
Investment banking		425,887			750,192		540,596
Asset management fees and investment (loss) income from managed funds		(52,929	)		23,534		109,550
Interest		749,577			1,174,883		528,882
Other		28,573			24,311		35,497
Total revenues		1,682,739			2,718,895		1,963,208
Interest expense		660,964			1,150,805		505,606
Revenues, net of interest expense		1,021,775			1,568,090		1,457,602
Non-interest expenses:
Compensation and benefits		1,522,157			946,309		791,255
Floor brokerage and clearing fees		69,444			71,851		62,564
Technology and communications		127,357			103,763		80,840
Occupancy and equipment rental		76,255			76,765		59,792
Business development		49,376			56,594		48,634
Other		126,524			67,074		65,863
Total non-interest expenses		1,971,113			1,322,356		1,108,948
(Loss) earnings before income taxes, minority interest and cumulative effect of change in accounting principle		(949,338	)		245,734		348,654
Income taxes		(290,249	)		93,178		137,541
(Loss) earnings before minority interest and cumulative effect of change in accounting principle		(659,089	)		152,556		211,113
Minority interest in (loss) earnings of consolidated subsidiaries, net		(122,961	)		7,891		6,969
(Loss) earnings before cumulative effect of change in accounting principle, net		(536,128	)		144,665		204,144
Cumulative effect of change in accounting principle, net		—			—		1,606
Net (loss) earnings	$	(536,128	)	$	144,665	$	205,750
Earnings per share:
Basic-
(Loss) earnings before cumulative effect of change in accounting principle, net	$	(3.23	)	$	1.02	$	1.53
Cumulative effect of change in accounting principle, net		—			—		0.01
Net (loss) earnings	$	(3.23	)	$	1.02	$	1.54
Diluted-
(Loss) earnings before cumulative effect of change in accounting principle, net	$	(3.23	)	$	0.97	$	1.41
Cumulative effect of change in accounting principle, net		—			—		0.01
Net (loss) earnings	$	(3.23	)	$	0.97	$	1.42
Weighted average shares of common stock:
Basic		166,163			141,515		133,898
Diluted		166,163			153,807		147,531

See accompanying notes to Consolidated Financial Statements.

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JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity
For each of the years in the three-year period ended December 31, 2008
(Dollars in thousands, except per share amounts)

	Year Ended December 31,
	2008			2007			2006
Common stock, par value $0.0001 per share
Balance, beginning of year		16			14			7
Issued / stock dividend		1			2			7
Balance, end of year		17			16			14
Additional paid in capital
Balance, beginning of year		1,115,011			876,393			709,447
Benefit plan share activity (1)		52,912			38,053			33,360
Share-based amortization expense		561,661			144,382			83,137
Proceeds from exercise of stock options		840			5,233			17,543
Acquisitions and contingent consideration		5,647			9,240			—
Tax benefits for issuance of share-based awards		6,233			41,710			32,906
Issuance of treasury stock		90,160			—			—
Dividend equivalents on restricted stock units		37,656			—			—
Balance, end of year		1,870,120			1,115,011			876,393
Retained earnings
Balance, beginning of year		1,031,764			952,263			803,262
Cumulative effect of adjustment from adoption of FIN 48		—			(410	)		—
Net (loss) earnings		(536,128	)		144,665			205,750
Dividends		(76,477	)		(64,754	)		(56,749	)
Acquisition adjustments		(714	)		—			—
Balance, end of year		418,445			1,031,764			952,263
Treasury stock, at cost
Balance, beginning of year		(394,406	)		(254,437	)		(220,703	)
Purchases		(21,765	)		(147,809	)		(23,972	)
Returns / forfeitures		(42,438	)		(7,785	)		(9,762	)
Issued		343,419			15,625			—
Balance, end of year		(115,190	)		(394,406	)		(254,437	)
Accumulated other comprehensive income (loss)
Balance, beginning of year		9,159			6,854			(5,163	)
Currency adjustment, net of tax		(54,661	)		1,222			8,802
Pension adjustment, net of tax		(6,619	)		1,083			3,215
Balance, end of year		(52,121	)		9,159			6,854
Total stockholders’ equity		2,121,271			1,761,544			1,581,087

(1) Includes grants related to the Incentive Plan, Deferred Compensation Plan, and Director Plan.

See accompanying notes to Consolidated Financial Statements.

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JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows
Three years ended December 31, 2008
(Dollars in thousands)

	2008			2007			2006
Cash flows from operating activities:
Net (loss) earnings	$	(536,128	)	$	144,665		$	205,750
Adjustments to reconcile net (loss) earnings to net cash provided by (used in) operating activities:
Cumulative effect of accounting change, net		—			—			(1,606	)
Depreciation and amortization		29,482			27,863			19,891
Accruals related to various benefit plans, stock issuances, net of forfeitures		572,136			174,652			109,505
Deferred income taxes		(180,706	)		(6,269	)		(37,982	)
Minority interest		(122,961	)		7,891			6,969
(Increase) decrease in cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations		(535,091	)		(285,852	)		89,488
Decrease (increase) in receivables:
Securities borrowed		7,395,756			(6,710,158	)		(1,568,414	)
Brokers, dealers and clearing organizations		(69,932	)		(304,629	)		160,676
Customers		256,038			(101,261	)		(186,651	)
Decrease (increase) in financial instruments owned		987,021			(645,716	)		(2,758,246	)
Increase in other investments		(61,297	)		(35,955	)		(16,084	)
Decrease (increase) in investments in managed funds		196,691			20,653			(94,753	)
Decrease (increase) in securities purchased under agreements to resell		2,125,292			(3,146,118	)		(226,176	)
Decrease (increase) in other assets		57,313			(21,559	)		(65,031	)
(Decrease) increase in payables:
Securities loaned		(4,421,889	)		920,290			(934,990	)
Brokers, dealers and clearing organizations		(540,086	)		284,713			349,913
Customers		337,771			405,368			183,265
(Decrease) increase in financial instruments sold, not yet purchased		(567,777	)		(339,094	)		2,298,436
(Decrease) increase in securities sold under agreements to repurchase		(4,598,172	)		9,232,724			2,092,838
Increase (decrease) in accrued expenses and other liabilities		29,821			(51,785	)		103,636
Net cash provided by (used in) operating activities		353,282			(429,577	)		(269,566	)
Cash flows from investing activities:
Decrease in short-term bond funds		—			—			7,037
Purchase of premises and equipment		(35,957	)		(76,893	)		(39,342	)
Business acquisitions, net of cash received		—			(33,437	)		—
Deconsolidation of asset management entity		(63,665	)		—			—
Cash paid for contingent consideration		(37,670	)		(25,720	)		(19,944	)
Net cash flows used in investing activities		(137,292	)		(136,050	)		(52,249	)

Continued on next page.

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JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows — (Continued)
Three years ended December 31, 2008
(Dollars in thousands)

	2008			2007			2006
Cash flows from financing activities:
Tax benefits from the issuance of share-based awards	$	6,233		$	41,710		$	32,906
Proceeds from reorganization of high yield secondary market trading		—			361,735			—
Redemptions and distributions related to our reorganization of high yield secondary market trading		—			(31,858	)		—
Repayment of long-term debt		—			(100,000	)		—
Net proceeds from (payments on):
Equity financing		433,579			—			—
Bank loans		(283,033	)		280,386			—
Issuance of senior notes		—			593,176			492,155
Termination of interest rate swaps		—			8,452			—
Issuance of mandatorily redeemable convertible preferred stock		—			—			125,000
Minority interest holders of consolidated subsidiaries		85,283			3,849			(11,553	)
Repurchase of treasury stock		(21,765	)		(147,809	)		(23,972	)
Dividends		(38,821	)		(64,754	)		(56,749	)
Exercise of stock options, not including tax benefits		840			5,233			17,543
Net cash provided by financing activities		182,316			950,120			575,330
Effect of foreign currency translation on cash and cash equivalents		(1,849	)		338			3,593
Net increase in cash and cash equivalents		396,457			384,831			257,108
Cash and cash equivalents at beginning of year		897,872			513,041			255,933
Cash and cash equivalents at end of year	$	1,294,329		$	897,872		$	513,041
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest	$	695,177		$	1,133,861		$	492,179
Income taxes		(23,753	)		69,973			198,294
Acquisitions:
Fair value of assets acquired, including goodwill					61,999
Liabilities assumed					(6,150	)
Stock issued					(22,412	)
Cash paid for acquisition					33,437
Cash acquired in acquisition					—
Net cash paid for acquisition					33,437
Supplemental disclosure of non-cash financing activities:
Non-cash proceeds from reorganization of high yield secondary market trading		—			230,169			—

In 2006 and 2007, the additional minimum pension liability included in stockholders’ equity of $2,910 and $1,827, respectively, resulted from a decrease of $3,215 and $1,083, respectively, to accrued expenses and other liabilities and an offsetting increase in stockholders’ equity.

In 2008, the additional minimum pension liability included in stockholders’ equity of $8,446 resulted from an increase of $6,619 to accrued expenses and other liabilities and an offsetting decrease in stockholders’ equity.

58

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows — (Continued)
Three years ended December 31, 2008
(Dollars in thousands)

On April 21, 2008, we issued 26,585,310 shares of common stock and made a cash payment to Leucadia National Corporation (“Leucadia”) of approximately $100 million. In exchange, we received from Leucadia 10,000,000 common shares of Leucadia. During 2008, we sold the 10,000,000 common shares of Leucadia and thus realized approximately $433.6 million in net cash from the issuance of our shares.

During 2008, we deconsolidated an entity related to our asset management activities due to changes in the nature and level of our investment in the entity. Prior to deconsolidation, total assets (including cash and cash equivalents) and total liabilities of the entity were $79.6 million and $22.8 million, respectively, and minority interest related to the entity was $0.7 million. Upon deconsolidation, we recorded an investment in this entity of $56.1 million, which is included in investments in managed funds on our Consolidated Statements of Financial Condition.

See accompanying notes to Consolidated Financial Statements.

59

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income
For each of the years in the three-year period ended December 31, 2008
(Dollars in thousands)

	2008			2007		2006
Net (loss) earnings	$	(536,128	)	$	144,665	$	205,750
Other comprehensive (loss) income, net of tax:
Currency translation adjustments		(54,661	)		1,222		8,802
Minimum pension liability adjustments, net of tax (1)		(6,619	)		1,083		3,215
Total other comprehensive (loss) income, net of tax		(61,280	)		2,305		12,017
Comprehensive (loss) income	$	(597,408	)	$	146,970	$	217,767

(1) Includes income tax expense (benefit) of $(4.3) million, $0.9 million and $2.3 million for the years ended December 31, 2008, 2007 and 2006, respectively.

See accompanying notes to Consolidated Financial Statements.

60

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 2008 and 2007

Index

Note	Page
(1) Organization and Summary of Significant Accounting Policies		62
(2) Cash, Cash Equivalents, and Short-Term Investments		71
(3) Receivable from, and Payable to, Customers		72
(4) Financial Instruments Owned and Financial Instruments Sold, Not Yet Purchased		72
(5) Premises and Equipment		75
(6) Short-Term Borrowings		75
(7) Long-Term Debt		76
(8) Mandatorily Redeemable Convertible Preferred Stock		76
(9) Income Taxes		77
(10) Benefit Plans		80
(11) Minority Interest		82
(12) Earnings Per Share		83
(13) Leases		84
(14) Derivative Financial Instruments		84
(15) Net Capital Requirements		86
(16) Commitments, Contingencies and Guarantees		87
(17) Segment Reporting		89
(18) Goodwill		91
(19) Quarterly Dividends		92
(20) Securitization Activities and Variable Interest Entities (“VIEs”)		92
(21) Jefferies Finance LLC		96
(22) Compensation Plans		96
(23) Related Party Transactions		100
(24) Selected Quarterly Financial Data (Unaudited)		101
(25) Subsequent Event		101

61

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

(1) Organization and Summary of Significant Accounting Policies

     Organization

     The accompanying audited Consolidated Financial Statements include the accounts of Jefferies Group, Inc. and all its subsidiaries (together, “we” or “us”), including Jefferies & Company, Inc. (“Jefferies”), Jefferies Execution Services, Inc., (“Jefferies Execution”), Jefferies International Limited, Jefferies Asset Management, LLC, Jefferies Financial Products, LLC and all other entities in which we have a controlling financial interest or are the “primary beneficiary”, including Jefferies High Yield Holdings, LLC (“JHYH”), Jefferies Special Opportunities Partners, LLC and Jefferies Employees Special Opportunities Partners, LLC. The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for financial information and with the instructions to Form 10-K.

     On April 21, 2008, we issued 26,585,310 shares of common stock and made a cash payment of approximately $100 million to Leucadia National Corporation (“Leucadia”). In exchange, we received from Leucadia 10,000,000 common shares of Leucadia. During the second quarter of 2008, we sold the 10,000,000 common shares of Leucadia and thus realized approximately $433.6 million in net cash from the issuance of our shares.

Reclassifications

     Starting in the third quarter of 2007, we include investments and investments in managed funds as a component of cash flows from operating activities rather than cash flows from investing activities and accordingly have reclassed the prior period to be consistent with the current presentation. We believe that a change in classification of a cash flow item represents a reclassification of information and not a change in accounting principle. The amounts involved are immaterial to the Consolidated Financial Statements taken as a whole. In addition, the change only affects the presentation within the Consolidated Statements of Cash Flows and does not impact the Consolidated Statements of Financial Condition or the Consolidated Statements of Earnings, debt balances or compliance with debt covenants.

     Certain other reclassifications have been made to previously reported balances to conform to the current presentation.

Common Stock

     On April 18, 2006, we declared a 2-for-1 split of all outstanding shares of our common stock, payable May 15, 2006 to stockholders of record as of April 28, 2006. The stock split was effected as a stock dividend of one share for each one share outstanding on the record date. All share, share price and per share information included in this annual report, including the Consolidated Financial Statements and the notes thereto, have been restated to retroactively reflect the effect of the 2-for-1 stock split.

62

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

     Summary of Significant Accounting Policies

Principles of Consolidation

     Our policy is to consolidate all entities in which we own more than 50% of the outstanding voting stock and have control. In addition, in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), Consolidation of Variable Interest Entities (“FIN 46(R)”), as revised, we consolidate entities which lack characteristics of an operating entity or business for which we are the primary beneficiary. Under FIN 46(R), 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, direct or implied. In situations where we have significant influence but not control of an entity that does not qualify as a variable interest entity, we apply the equity method of accounting or fair value accounting. We also have formed nonconsolidated investment vehicles with third-party investors that are typically organized as limited partnerships. We act as general partner for these investment vehicles and have generally provided the third-party investors with termination or “kick-out” rights as defined by Emerging Issues Task Force (“EITF”) EITF 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.

     All material intercompany accounts and transactions are eliminated in consolidation.

Revenue Recognition Policies

     Commissions. All customer securities transactions are reported on the Consolidated Statements of Financial Condition on a settlement date basis with related income reported on a trade-date basis. Under clearing agreements, we clear trades for unaffiliated correspondent brokers and retain a portion of commissions as a fee for our services. Correspondent clearing revenues are included in other revenue. We permit institutional customers to allocate a portion of their gross commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. Soft dollar expenses amounted to $42.9 million, $39.3 million and $32.1 million for 2008, 2007 and 2006, respectively. We account for the cost of these arrangements on an accrual basis. Our accounting policy for commission revenues incorporates the guidance contained in Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenues Gross versus Net, because we are not the primary obligor of such arrangements, and accordingly, expenses relating to soft dollars are netted against the commission revenues.

     Principal Transactions. Financial instruments owned, securities pledged and financial instruments sold, but not yet purchased (all of which are recorded on a trade-date basis) are carried at fair value with unrealized gains and losses reflected in principal transactions in the Consolidated Statement of Earnings on a trade date basis, except for unrealized gains and losses on financial instruments held by consolidated asset management entities, which are presented in asset management fees and investment (loss) income from managed funds.

     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 assignment or engagement. Expenses associated with such transactions are deferred until reimbursed by the client, the related revenue is recognized or the engagement is otherwise concluded. Expenses are recorded net of client reimbursements. Revenues are presented net of related unreimbursed expenses. Unreimbursed expenses with no related revenues are included in business development in the Consolidated Statement of Earnings. Reimbursed expenses totaled approximately $14.3 million, $11.2 million and $17.9 million for the years ended December 31, 2008, 2007 and 2006, respectively.

63

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

     Asset Management Fees and Investment (Loss) Income From Managed Funds. Asset management fees and investment (loss) income from managed funds include revenues we receive from management, administrative and performance fees from funds managed by us, revenues from management and performance fees we receive from third-party managed funds, and investment (loss) income from our investments in these funds. We receive fees in connection with management and investment advisory services performed for various funds and managed accounts. These fees are based on the value of assets under management and may include performance fees based upon the performance of the funds. Management and administrative 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 fees are accrued on a monthly basis and are not subject to adjustment once the measurement period ends (annually) and performance fees have been realized.

     Interest Revenue and Expense. We recognize contractual interest on financial instruments owned and financial instruments sold, but not yet purchased, on an accrual basis as a component of interest revenue and expense. Interest flows on derivative trading transactions and dividends are included as part of the fair valuation of these contracts in principal transactions in the Consolidated Statement of Earnings and are not recognized as a component of interest revenue or expense. We account for our short-term, long-term borrowings and our mandatorily redeemable convertible preferred stock on an accrual basis with related interest recorded as interest expense. In addition, we recognize interest revenue related to our securities borrowed and securities purchased under agreements to resell activities and interest expense related to our securities loaned and securities sold under agreements to repurchase activities on an accrual basis.

Cash Equivalents

     Cash equivalents include highly liquid investments not held for resale with original maturities of three months or less.

Cash and Securities Segregated and on Deposit for Regulatory Purposes or Deposited With Clearing and Depository Organizations

     In accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, Jefferies & Company, Inc., as a broker-dealer carrying client accounts, is subject to requirements related to maintaining cash or qualified securities in a segregated reserve account for the exclusive benefit of its clients. In addition, certain financial instruments used for initial and variation margin purposes with clearing and depository organizations are recorded in this caption.

Foreign Currency Translation

     Assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at exchange rates at the end of a period. Revenues and expenses are translated at average exchange rates during the period. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars, net of hedging gains or losses and taxes, if any, are included in other comprehensive (loss) income. Gains or losses resulting from foreign currency transactions are included in principal transactions in the Consolidated Statements of Earnings.

Financial Instruments Owned and Financial Instruments Sold, not yet Purchased and Fair Value

     Financial instruments owned and financial instruments sold, not yet purchased are recorded at fair value, either through the fair value option election or as required by other accounting pronouncements. These instruments primarily represent our trading activities and include both cash and derivative products. Realized and unrealized gains and losses are recognized in principal transactions in our Consolidated Statements of Earnings. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).

64

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

Fair Value Hierarchy

     We adopted FASB 157, Fair Value Measurements (“FASB 157”), as of the beginning of 2007. FASB 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and enhances disclosure requirements for fair value measurements. FASB 157 maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the transparency of inputs as follows:

Level 1:	Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2:	Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level 3:	Instruments that have little to no pricing observability as of the reported date. These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Valuation Process for Financial Instruments

     Financial instruments are valued at quoted market prices, if available. For financial instruments that do not have readily determinable fair values through quoted market prices, the determination of fair value is based upon consideration of available information, including current financial information, restrictions on dispositions, fair values of underlying financial instruments and quotations for similar instruments. Certain financial instruments have bid and ask prices that can be observed in the marketplace. For financial instruments whose inputs are based on bid-ask prices, mid-market pricing is applied and adjusted to the point within the bid-ask range that meets our best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid-ask spread is used to measure both the long and short positions.

     The valuation process for financial instruments may include the use of valuation models and other techniques. Adjustments to valuations derived from valuation models may be made when, in management’s judgment, either the size of the position in the financial instrument in a nonactive market or other features of the financial instrument such as its complexity, or the market in which the financial instrument is traded require that an adjustment be made to the value derived from the models. An adjustment may be made if a financial instrument is subject to sales restrictions that would result in a price less than the quoted market price. Adjustments from the price derived from a valuation model reflect management’s judgment that other participants in the market for the financial instrument being measured at fair value would also consider in valuing that same financial instrument and are adjusted for assumptions about risk uncertainties and market conditions. Results from valuation models and valuation techniques in one period may not be indicative of future period fair value measurements.

     Cash products — Where quoted prices are available in an active market, cash products are classified in Level 1 of the fair value hierarchy and valued based on the quoted exchange price, which is generally obtained from pricing services. Level 1 cash products are highly liquid instruments and include listed equity and money market securities

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JEFFERIES GROUP, INC.
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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

and G-7 government and agency securities. Cash products classified within Level 2 of the fair value hierarchy are based primarily on broker quotations, pricing service data from external providers and prices observed for recently executed market transactions. If quoted market prices are not available for the specific security then fair values are estimated by using pricing models, quoted prices of cash products with similar characteristics or discounted cash flow models. Examples of cash products classified within Level 2 of the fair value hierarchy are corporate, convertible and municipal bonds and agency and non-agency mortgage-backed securities. If there is limited transaction activity or less transparency to observe market-based inputs to valuation models, cash products presented at fair value are classified in Level 3 of the fair value hierarchy. Fair values of cash products classified in Level 3 are generally based on an assessment of each underlying investment, cash flow models, market data of any recent comparable company transactions and trading multiples of companies considered comparable to the instrument being valued and incorporate assumptions regarding market outlook, among other factors. Cash products in this category include illiquid equity securities, equity interests in private companies, auction rate securities, commercial loans, private equity and hedge fund investments, distressed debt instruments and certain non-agency mortgage-backed securities as little external price information is currently available for these products. For distressed debt instruments and commercial loans, loss assumptions must be made based on default scenarios and market liquidity and prepayment assumptions must be made for mortgage-backed securities.

     Derivative products — Exchange-traded derivatives are valued using quoted market prices, which are generally obtained from pricing services and are classified within Level 1 of the fair value hierarchy. Over-the-counter (“OTC”) derivative products are generally valued using models, whose inputs reflect assumptions that we believe market participants would use in valuing the derivative in a current period transaction. Inputs to valuation models are appropriately calibrated to market data, including but not limited to yield curves, interest rates, volatilities, equity, debt and commodity prices and credit curves. Fair value can be modeled using a series of techniques, including the Black-Scholes option pricing model and other comparable simulation models. For certain OTC derivative contracts, inputs to valuation models do not involve a high degree of subjectivity as the valuation model inputs are readily observable or can be derived from actively quoted markets. OTC derivative contracts thus classified in Level 2 include certain credit default swaps, interest rate swaps, foreign currency forwards, commodity swaps and option contracts, equity option contracts and to-be-announced (“TBA”) securities. Derivative products that are valued based on models with significant unobservable market inputs are classified within Level 3 of the fair value hierarchy. Level 3 derivative products include equity warrant and option contracts where the volatility of the underlying equity securities are not observable due to the terms of the contracts and the correlation sensitivity to market indices is not transparent for the term of the derivatives.

Investments in Managed Funds

     Investments in managed funds include our investments in funds managed by us and our investments in third-party managed funds in which we are entitled to a portion of the management and/or performance fees. Investments in nonconsolidated managed funds are accounted for using the equity method or at fair value depending on the nature and level of our investment. Gains or losses on our investments in managed funds are included in asset management fees and investment (loss) income from managed funds in the Consolidated Statements of Earnings.

Other Investments

     Other investments includes investments entered into where we exercise significant influence over operating and capital decisions in private equity and other operating entities in connection with our capital market activities and loans issued in connection with such activities. Other investments are accounted for on the equity method or at cost, as appropriate.

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

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 consolidated financial statements. Receivable from officers and directors represents balances arising from their individual security transactions. These transactions are subject to the same regulations as customer transactions and are provided on substantially the same terms.

Securities Borrowed and Securities Loaned

     Securities borrowed and securities loaned are carried at cost. In connection with both trading and brokerage activities, we borrow securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date, and lend securities to other brokers and dealers for similar purposes. We have an active securities borrowed and lending matched book business in which we borrow securities from one party and lend them to another party. When we borrow securities, we generally provide cash to the lender as collateral, which is reflected in our Consolidated Statements of Financial Condition as securities borrowed. We earn interest revenues on this cash collateral. Similarly, when we lend securities to another party, that party provides cash to us as collateral, which is reflected in our Consolidated Statements of Financial Condition as securities loaned. We pay interest expense on the cash collateral received from the party borrowing the securities. A substantial portion of our interest revenues and interest expenses results from this matched book activity. We monitor the fair value of the securities borrowed and loaned on a daily basis and request additional collateral or return excess collateral, as appropriate.

Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase

     Securities purchased under agreements to resell and securities sold under agreements to repurchase (collectively “repos”) are accounted for as collateralized financing transactions and are recorded at their contracted repurchase or resale amount. We earn net interest revenues from this activity which is reflected in our Consolidated Statements of Earnings.

     We monitor the fair value of the underlying securities daily versus the related receivable or payable balances. Should the fair value of the underlying securities decline or increase, additional collateral is requested or excess collateral is returned, as appropriate.

     We carry repos on a net basis when permitted under the provisions of FASB Interpretation No. 41, Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements (“FIN 41”).

Premises and Equipment

     Premises and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to ten years). Leasehold improvements are amortized using the straight-line method over the term of the related leases or the estimated useful lives of the assets, whichever is shorter.

Goodwill

     At least annually, and more frequently if warranted, we assess whether goodwill has been impaired by comparing the estimated fair value of each reporting unit with its estimated net book value, by estimating the amount of stockholders’ equity required to support each reporting unit. Periodically estimating the fair value of a reporting unit requires significant judgment and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. As of December 31, 2008, no impairment has been identified.

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JEFFERIES GROUP, INC.
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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

     Our Jefferies Execution subsidiary recorded a goodwill impairment charge of $26 million during the fourth quarter of 2007. Jefferies Execution is a registered broker-dealer. Therefore, goodwill relating to the acquisition of Jefferies Execution in 2001, formerly Helfant Group, Inc., was “pushed down” from us to Jefferies Execution in accordance with Emerging Issues Task Force Issue No. D-97, Push Down Accounting.

     We have two reporting units, Capital Markets and Asset Management, as defined by FASB 142, Goodwill and Other Intangible Assets. Jefferies Execution is not a reporting unit of ours and we have not recorded this $26 million goodwill impairment charge in our Consolidated Financial Statements.

Income Taxes

     We file a consolidated U.S. federal income tax return, which includes all of our qualifying subsidiaries. We also are subject to income tax in various states and municipalities and those foreign jurisdictions in which we operate. Amounts provided for income taxes are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income taxes are provided for temporary differences in reporting certain items, principally, amortization of share-based compensation, deferred compensation, unrealized gains and losses on investments and tax amortization on intangible assets. The realization of deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more likely than not that any portion of the deferred tax asset will not be realized. Tax credits are recorded as a reduction of income taxes when realized.

     We adopted EITF Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF 06-11”), as of January 1, 2008. EITF 06-11 requires that the tax benefit related to dividends and dividend equivalents paid on nonvested share based payment awards and outstanding equity options should be recognized as an increase to additional paid in capital. Prior to EITF 06-11, such income tax benefit was recognized as a reduction of income tax expense. These amounts are included in tax benefits for issuance of share-based awards in the Consolidated Statement of Changes in Stockholders’ Equity.

Legal Reserves

     We recognize a liability for a contingency when it is probable that a liability has been incurred and when the amount of loss can be reasonably estimated. When a range of probable loss can be estimated, we accrue the most likely amount of such loss, and if such amount is not determinable, then we accrue the minimum of the range of probable loss.

     We record reserves related to legal proceedings in accrued expenses and other liabilities. Such reserves are established and maintained in accordance with FASB 5, Accounting for Contingencies, and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss an Interpretation of FASB Statement No. 5. The determination of these reserve amounts requires significant judgment on the part of management. Our management considers many factors including, but not limited to: the amount of the claim; the basis and validity of the claim; previous results in similar cases; and legal precedents and case law. Each legal proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management.

Share-based Compensation

     We account for share-based compensation under the guidance of FASB 123R, Share-Based Payment (“FASB 123R”). Share-based awards are measured based on the grant-date fair value of the award and recognized over the

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JEFFERIES GROUP, INC.
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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

period from the service inception date through the date the employee is no longer required to provide service to earn the award. Expected forfeitures are included in determining share-based compensation expense.

Earnings per Common Share

     Basic earnings per share of common stock are computed by dividing net earnings by the average number of shares outstanding and certain other shares committed to be, but not yet issued. Basic earnings per share include restricted stock and restricted stock units (“RSUs”) for which no future service is required. Diluted earnings per share of common stock are computed by dividing net earnings plus dividends on dilutive mandatorily redeemable convertible preferred stock divided by the average number of shares outstanding of common stock and all dilutive common stock equivalents outstanding during the period. Diluted earnings per share include the dilutive effects of restricted stock and RSUs for which future service is required.

Securitization Activities

     We engage in securitization activities related to residential mortgage-backed securities. Generally, such transfers of financial assets are accounted for as sales when we have relinquished control over the transferred assets. The gain or loss on sale of such financial assets depends, in part, on the previous carrying amount of the assets involved in the transfer allocated between the assets sold and the retained interests, if any, based upon their respective fair values at the date of sale.

Accounting and Regulatory Developments

     FASB 141R. In December 2007, the FASB issued FASB 141 (revised 2007), Business Combinations (“FASB 141R”). Under FASB 141R, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at their fair value at the acquisition date for any business combination consummated after the effective date. It further requires that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, we will apply the provisions of FASB 141R to business combinations occurring after January 1, 2009. Adoption of FASB 141R will not affect our financial condition, results of operations or cash flows, but may have an effect on accounting for future business combinations.

     FASB 160. In December 2007, the FASB issued FASB 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“FASB 160”). FASB 160 requires an entity to clearly identify and present ownership interests in subsidiaries held by parties other than the entity in the consolidated financial statements within the equity section but separate from the entity’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the Consolidated Statement of Earnings; changes in ownership interest be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008 and shall be applied prospectively, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. Accordingly, we adopted FASB 160 effective January 1, 2009. The adoption of FASB 160 resulted in an increase to stockholders’ equity of $287.8 million and a decrease to total liabilities of $287.8 million on our opening 2009 Consolidated Statement of Financial Condition; however, we do not expect the adoption of FASB 160 to have material effect on our results of operations or cash flows.

     FSP FAS 140-3. In February 2008, the FASB issued FSP FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (“FSP FAS 140-3”). FSP FAS 140-3 requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction under FASB 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (“FASB No. 140”) unless certain criteria are met. FSP FAS 140-

69

JEFFERIES GROUP, INC.
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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

3 is effective for fiscal years beginning after November 15, 2008. FSP FAS 140-3 is to be applied prospectively for new transactions entered into after the adoption date. We do not expect the adoption of FSP FAS 140-3 to have a material effect on financial condition or cash flows; and adoption of FSP FAS 140-3 will have no effect on our results of operations.

     FASB 161. In March 2008, the FASB issued FASB 161, Disclosures about Derivative Instruments and Hedging Activities (“FASB 161”). FASB 161 amends and expands the disclosure requirements of FASB 133, Accounting for Derivative Instruments and Hedging Activities, and requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts and disclosures about credit-risk-related contingent features in derivative agreements. FASB 161 is effective for the fiscal years and interim periods beginning after November 15, 2008. Accordingly, we adopted FASB 161 effective January 1, 2009. Since FASB 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of FASB 161 will not affect our financial condition, results of operations or cash flows.

     FSP APB 14-1. In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by APB 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants and specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for fiscal years and interim periods beginning after December 31, 2008. We are currently evaluating the impact of FSP APB 14-1 on our financial condition and results of operations.

     FSP EITF 03-6-1. In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in FASB 128, Earnings per Share. Under FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years and interim periods beginning after December 31, 2008. All prior-period EPS data presented will be adjusted retrospectively. We are currently evaluating the impact of FSP EITF 03-6-1 on our presentation of earnings per share.

     FSP FAS 133-1 and FIN 45-4. In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (“FSP FAS 133-1 and FIN 45-4”). FSP FAS 133-1 and FIN 45-4 require enhanced disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument, and require additional disclosure about the current status of the payment/performance risk of a guarantee. We adopted FSP FAS 133-1 and FIN 45-4 for our year end consolidated financial statements as of December 31, 2008. Since FSP FAS 133-1 and FIN 45-4 require only additional disclosures, the adoption did not have an effect on our financial condition, results of operations or cash flows.

     FSP FAS 157-3. In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is not Active (“FSP FAS 157-3”). FSP FAS 157-3 is consistent with the joint press release the FASB issued with the Securities and Exchange Commission on September 30, 2008, which provides general clarification guidance on determining fair value under FASB 157 when markets are inactive. FSP FAS 157-3 specifically addresses the use of judgment in determining whether a transaction in a dislocated market represents fair value, the inclusion of market participant risk adjustments when an entity significantly adjusts observable market data based on unobservable inputs, and the degree of reliance to be placed on broker quotes or

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JEFFERIES GROUP, INC.
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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

pricing services. FSP FAS 157-3 was effective immediately upon issuance and did not have an effect on our financial condition, results of operations or cash flows.

     FSP FAS 140-4 and FIN 46(R)-8. In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4 and FIN 46(R)-8 require public entities to provide additional disclosures about transfers of financial assets and require public enterprises to provide additional disclosures about their involvement with variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 were adopted for our year end consolidated financial statements as of December 31, 2008 and did not affect our financial condition, results of operations or cash flows as it requires only additional disclosures.

Use of Estimates

     Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with U.S. generally accepted accounting principles. The most important of these estimates and assumptions relate to fair value measurements and compensation and benefits. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

(2) Cash, Cash Equivalents, and Short-Term Investments

     We generally invest our excess cash in money market funds and other short-term investments. Cash equivalents include highly liquid investments not held for resale with original maturities of three months or less. The following are financial instruments that are cash and cash equivalents or are deemed by our management to be generally readily convertible into cash as of December 31, 2008 and 2007 (in thousands of dollars):

	December 31, 2008		December 31, 2007
Cash and cash equivalents:
Cash in banks	$	765,056	$	248,174
Money market investments		529,273		649,698
Total cash and cash equivalents		1,294,329		897,872
Cash and securities segregated (1)		1,151,522		614,949
	$	2,445,851	$	1,512,821

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

(1) Consists of deposits at exchanges and clearing organizations, as well as deposits in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, which subjects Jefferies, as a broker dealer carrying client accounts, to requirements related to maintaining cash or qualified securities in a segregated reserve account for the exclusive benefit of its clients.

(3) Receivable from, and Payable to, Customers

     The following is a summary of the major categories of receivables from and payable to customers as of December 31, 2008 and 2007 (in thousands of dollars):

	2008		2007
Receivable from Customers:
Customers (net of allowance for uncollectible accounts of $4,355 in 2008 and $1,493 in 2007)	$	496,590	$	754,472
Officers and directors		2,725		10,361
	$	499,315	$	764,833
Payable to Customers	$	1,736,971	$	1,415,803

     Receivable from officers and directors represents standard margin loan balances arising from their individual security transactions. These transactions are subject to the same terms and conditions as customer transactions.

(4) Financial Instruments Owned and Financial Instruments Sold, Not Yet Purchased

     The following is a summary of the fair value of major categories of financial instruments owned and financial instruments sold, not yet purchased, as of December 31, 2008 and 2007 (in thousands of dollars):

	December 31, 2008				December 31, 2007
			Financial				Financial
			Instruments				Instruments
	Financial		Sold,		Financial		Sold,
	Instruments		Not Yet		Instruments		Not Yet
	Owned		Purchased		Owned		Purchased
Corporate equity securities	$	945,747	$	739,166	$	2,266,679	$	1,389,099
Corporate debt securities		1,851,216		1,578,395		2,162,893		1,407,387
U.S. Government, federal agency and other sovereign obligations		447,233		211,045		730,921		206,090
Mortgage- and asset-backed securities		1,035,996		—		26,895		—
Loans		34,407		—		—		—
Derivatives		298,144		220,738		338,779		327,076
Investments at fair value		75,059		—		104,199		—
Other		—		223		2,889		314
	$	4,687,802	$	2,749,567	$	5,633,255	$	3,329,966

     We elected to apply the fair value option to loans and loan commitments made in connection with our investment banking activities and certain investments held by subsidiaries that are not registered broker-dealers as defined in the AICPA Audit and Accounting Guide, Brokers and Dealers in Securities. The fair value option was

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

elected for loans and loan commitments and investments held by subsidiaries that are not registered broker-dealers because they are risk managed by us on a fair value basis.

     Financial instruments owned includes securities pledged to creditors. The following is a summary of the fair value of major categories of securities pledged to creditors as of December 31, 2008 and 2007 (in thousands of dollars):

	December 31, 2008		December 31, 2007
Corporate equity securities	$	360,356	$	985,783
Corporate debt securities		1,409		102,123
	$	361,765	$	1,087,906

     At December 31, 2008 and December 31, 2007, the approximate fair value of securities received by us in connection with resale agreements and securities borrowings that may be sold or repledged by us was $9.7 billion and $19.8 billion, respectively. At December 31, 2008 and December 31, 2007, a substantial portion of these securities received by us had been sold or repledged.

The following is a summary of our financial assets and liabilities that are accounted for at fair value as of December 31, 2008 and December 31, 2007 by level within the fair value hierarchy (in thousands of dollars):

	As of December 31, 2008
								Counterparty
								and Cash
								Collateral
	Level 1		Level 2		Level 3			Netting			Total
Assets:
Financial instruments owned:
Securities	$	1,125,752	$	2,782,707	$	371,733		$	—		$	4,280,192
Loans		—		11,824		22,583			—			34,407
Derivative instruments		258,827		920,687		—			(881,370	)		298,144
Investments at fair value		—		—		75,059			—			75,059
Total financial instruments owned		1,384,579		3,715,218		469,375			(881,370	)		4,687,802
Level 3 assets for which the firm does not bear economic exposure (1)						(146,244	)
Level 3 assets for which the firm bears economic exposure						323,131
Liabilities:
Financial instruments sold, not yet purchased:
Securities		757,260		1,768,054		3,515			—			2,528,829
Derivative instruments		187,806		491,876		8,197			(467,141	)		220,738
Total financial instruments sold, not yet purchased		945,066		2,259,930		11,712			(467,141	)		2,749,567

(1) Consists of Level 3 assets which are attributable to minority investors or attributable to employee interests in certain consolidated entities.

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JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

	As of December 31, 2007
								Counterparty
								and Cash
								Collateral
	Level 1		Level 2		Level 3			Netting			Total
Assets:
Financial instruments owned:
Securities	$	2,122,640	$	2,819,240	$	248,397		$	—		$	5,190,277
Derivative instruments		316,176		118,905		—			(96,302	)		338,779
Investments at fair value		—		—		104,199			—			104,199
Total financial instruments owned		2,438,816		2,938,145		352,596			(96,302	)		5,633,255
Level 3 assets for which the firm does not bear economic exposure (1)						(106,106	)
Level 3 assets for which the firm bears economic exposure						246,490
Liabilities:
Financial instruments sold, not yet purchased:
Securities		1,425,789		1,568,398		8,703			—			3,002,890
Derivative instruments		243,553		642,507		12,929			(571,913	)		327,076
Total financial instruments sold, not yet purchased		1,669,342		2,210,905		21,632			(571,913	)		3,329,966

(1) Consists of Level 3 assets which are attributable to minority investors or attributable to employee interests in certain consolidated entities.

The following is a summary of changes in fair value of our financial assets and liabilities that have been classified as Level 3 for the year ended December 31, 2008 and 2007 (in thousands of dollars):

	Year ended December 31, 2008
	Non-derivative			Non-derivative			Derivative			Derivative
	instruments -			instruments -			instruments -			instruments -
	Assets			Liabilities			Assets			Liabilities			Investments
Balance, December 31, 2007	$	248,397		$	(8,703	)	$	—		$	(12,929	)	$	104,199
Total gains/ (losses) (realized and unrealized) (1)		(102,313	)		1,610			184			18,635			(21,133	)
Purchases, sales, settlements, and issuances		169,892			2,049			(727	)		8,577			(8,007	)
Net transfers into Level 3		221,866			(63	)		543			(22,480	)		—
Net transfers out of Level 3		(143,526	)		1,592			—			—			—
Balance, December 31, 2008	$	394,316		$	(3,515	)	$	—		$	(8,197	)	$	75,059
Change in unrealized gains/ (losses) relating to instruments still held at December 31, 2008 (1)	$	(89,235	)	$	1,187		$	—		$	14,592		$	(16,283	)

(1) Realized and unrealized gains/ (losses) are reported in principal transactions in the Consolidated Statements of Earnings.

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

	Year ended December 31, 2007
	Non-derivative			Non-derivative			Derivative
	instruments -			instruments -			instruments -
	Assets			Liabilities			Liabilities			Investments
Balance, December 31, 2006	$	205,278		$	—		$	—		$	97,289
Total gains/ (losses) (realized and unrealized) (1)		(6,139	)		(46	)		(22,962	)		23,494
Purchases, sales, settlements, and Issuances		(13,492	)		(9,154	)		26,385			(16,584	)
Net transfers into Level 3		140,667			(23,569	)		(16,352	)		—
Net transfers out of Level 3		(77,917	)		24,066			—			—
Balance, December 31, 2007	$	248,397		$	(8,703	)	$	(12,929	)	$	104,199
Change in unrealized gains/ (losses) relating to instruments still held at December 31, 2007 (1)	$	(7,866	)	$	—		$	(7,384	)	$	23,474

(1) Realized and unrealized gains/ (losses) are reported in principal transactions in the Consolidated Statements of Earnings.

Level 3 cash instruments are frequently hedged with instruments classified within Level 1 and Level 2, and accordingly, gains or losses that have been reported in Level 3 are frequently offset by gains or losses attributable to instruments classified within Level 1 or Level 2 or by gains or losses on derivative contracts classified in Level 3 of the fair value hierarchy.

(5) Premises and Equipment

     The following is a summary of premises and equipment as of December 31, 2008 and 2007 (in thousands of dollars):

	2008		2007
Furniture, fixtures and equipment	$	218,758	$	189,376
Leasehold improvements		104,710		109,895
Total		323,468		299,271
Less accumulated depreciation and amortization		184,078		157,799
	$	139,390	$	141,472

     Depreciation and amortization expense amounted to $29,275,000 $27,047,000, and $18,902,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

(6) Short-Term Borrowings

     Bank loans represent short-term borrowings that are payable on demand and generally bear interest at a spread over the federal funds rate. We had no outstanding secured bank loans as of December 31, 2008 and 2007. Unsecured bank loans are typically overnight loans used to finance securities owned or clearing related balances. We had $-0- and $280.4 million of outstanding unsecured bank loans as of December 31, 2008 and 2007, respectively. Average daily bank loans for the years ended December 31, 2008 and 2007 were $94.9 million and $267.1 million, respectively.

75

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

(7) Long-Term Debt

     The following summarizes long-term debt outstanding at December 31, 2008 and 2007 (in thousands of dollars):

	2008		2007
7.75% Senior Notes, due 2012, net of unamortized discount of $3,068 (2008)	$	328,215	$	328,594
5.875% Senior Notes, due 2014, net of unamortized discount of $1,392 (2008)		248,608		248,402
5.5% Senior Notes, due 2016, net of unamortized discount of $1,317 (2008)		348,683		348,501
6.45% Senior Debentures, due 2027, net of unamortized discount of $3,667 (2008)		346,333		346,236
6.25% Senior Debentures, due 2036, net of unamortized discount of $7,564 (2008)		492,435		492,334
	$	1,764,274	$	1,764,067

     We previously entered into a fair value hedge with no ineffectiveness using interest rate swaps in order to convert $200 million aggregate principal amount of unsecured 7.75% senior notes due March 15, 2012 into floating rates based upon LIBOR. During the third quarter of 2007 we terminated these interest rate swaps and received cash consideration less accrued interest of $8.5 million. The $8.5 million basis difference related to the fair value of the interest rate swaps at the time of the termination is being amortized as a reduction in interest expense of $1.9 million per year over the remaining life of the notes through March 2012.

     In June 2007, we sold in a registered public offering $600.0 million aggregate principal amount of our senior debt, consisting of $250.0 million of 5.875% senior notes due June 8, 2014 and $350.0 million of 6.45% senior debentures due June 8, 2027.

(8) Mandatorily Redeemable Convertible Preferred Stock

     In February 2006, MassMutual purchased in a private placement $125.0 million of our Series A convertible preferred stock. Our Series A convertible preferred stock has a 3.25% annual, cumulative cash dividend and is currently convertible into 4,105,138 shares of our common stock at an effective conversion price of approximately $30.45 per share. The preferred stock is callable beginning in 2016 and will mature in 2036. As of December 31, 2008, 10,000,000 shares of preferred stock were authorized and 125,000 shares of preferred stock were issued and outstanding. The dividend is recorded as a component of interest expense as the Series A convertible preferred stock is treated as debt for accounting purposes. The dividend is not deductible for tax purposes because the Series A convertible preferred stock is considered “equity” for tax purposes.

76

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

(9) Income Taxes

     Total income taxes for the years ended December 31, 2008, 2007 and 2006 were allocated as follows (in thousands of dollars):

	2008			2007			2006
(Loss)/ earnings	$	(290,249	)	$	93,178		$	137,541
Stockholders’ equity, for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes		(6,233	)		(41,710	)		(32,906	)
	$	(296,482	)	$	51,468		$	104,635

     Income taxes (benefits) for the years ended December 31, 2008, 2007 and 2006 consist of the following (in thousands of dollars):

	2008			2007			2006
Current:
Federal	$	(110,458	)	$	78,715		$	129,648
State and local		5,949			9,379			31,557
Foreign		(5,034	)		11,353			14,318
		(109,543	)		99,447			175,523
Deferred:
Federal		(101,482	)		(13,030	)		(29,414	)
State and local		(38,575	)		4,218			(6,938	)
Foreign		(40,649	)		2,543			(1,630	)
		(180,706	)		(6,269	)		(37,982	)
	$	(290,249	)	$	93,178		$	137,541

     Income taxes differed from the amounts computed by applying the Federal income tax rate of 35% for 2008, 2007 and 2006 as a result of the following (in thousands of dollars):

	2008						2007						2006
	Amount			%			Amount			%			Amount			%
Computed expected income taxes	$	(332,269	)		35.0	%	$	86,007			35.0	%	$	122,029			35.0	%
Increase (decrease) in income taxes resulting from:
State and city income taxes, net of Federal income tax benefit		(21,207	)		2.2			8,838			3.6			16,002			4.6
Limited deductibility of meals and entertainment		2,008			(0.2	)		1,801			0.7			1,972			0.5
Minority interest, not subject to tax		43,036			(4.5	)		(2,762	)		(1.1	)		(2,439	)		(0.7	)
Foreign income		16,948			(1.8	)		2,593			1.1			(143	)		(0.1	)
Other, net		1,235			(0.1	)		(3,299	)		(1.4	)		120			0.1
Total income taxes	$	(290,249	)		30.6	%	$	93,178			37.9	%	$	137,541			39.4	%

77

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

     The following table presents a reconciliation of gross unrecognized tax benefits between January 1, 2008 and December 31, 2008 (in thousands of dollars):

Balance at January 1, 2008	$	8,825
Additions for tax positions related to current year		2,395
Reductions for tax positions related to current year		(145	)
Additions for tax positions related to prior years		3,372
Reductions for tax positions related to prior years		(265	)
Settlements		(697	)
Balance at December 31, 2008	$	13,485

     The total amount of unrecognized benefits that, if recognized, would affect the effective tax rate was $8.8 million (net of federal benefit of state issues) at December 31, 2008. We recognize interest accrued related to unrecognized tax benefits in interest expense. Penalties, if any, are recognized in other general and administrative expenses. During the years ended December 31, 2008 and 2007, we recognized approximately $2.3 million and $1.0 million, respectively, in interest. We had approximately $3.7 million and $1.4 million for the payment of interest and penalties accrued at December 31, 2008, and 2007, respectively.

     We are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. We have concluded all U.S federal income tax matters for the years through 2004. Substantially all material state and local, and foreign income tax matters have been concluded for the years through 1999. New York State and New York City income tax returns for the years 2001 through 2004 and 2000 through 2002, respectively, are currently under examination. The final outcome of these examinations is not yet determinable. We do not expect that unrecognized tax benefits for tax positions taken with respect to 2008 and prior years will significantly change in 2009.

78

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

     The cumulative tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2008 and 2007 are presented below (in thousands of dollars):

	2008			2007
Deferred tax assets:
Long-term compensation	$	350,742		$	225,803
State income taxes		279			652
Pension		5,540			1,241
Net operating loss		44,117			5,326
Investments		10,729			—
Other		8,180			2,417
Sub-total		419,587			235,439
Valuation allowance		(5,185	)		(2,294	)
Total deferred tax assets		414,402			233,145
Deferred tax liabilities:
Premises and equipment		3,301			2,467
Goodwill amortization		22,513			18,480
Investments		—			11,600
Other		7,622			4,041
Total deferred tax liabilities		33,436			36,588
Net deferred tax asset, included in other assets	$	380,966		$	196,557

     A valuation allowance of $5.2 million and $2.3 million was recorded at December 31, 2008 and 2007, respectively, and represents the portion of our deferred tax assets for which it is more likely than not that the benefit of such items will not be realized. Such valuation allowance increased by approximately $2.9 million and $0.8 million for the years ended December 31, 2008 and 2007, respectively. We believe that the realization of the net deferred tax asset of $381.0 million (after valuation allowance) is more likely than not based on expectations of future taxable income in the jurisdictions in which we operate.

     At December 31, 2008, we had U.S. net operating loss carryforwards of approximately $350 million and United Kingdom loss carryforwards of approximately $61.9 million. The U.S. losses are primarily state carryforwards expiring in various years from 2013 to 2028. The United Kingdom loss carryforwards have an unlimited carryforward period. A tax benefit has been recorded for the associated deferred tax assets with no valuation allowance. Finally, at December 31, 2008, we had loss carryforwards in other countries in which we operate of approximately $13.3 million. These losses begin to expire in the year 2013 and have been fully offset by a valuation allowance.

     The current tax receivable, included in other assets, was $130.5 million and $37.3 million as of December 31, 2008 and 2007, respectively.

     Cumulative losses of non-U.S. subsidiaries were approximately $75.2 million at December 31, 2008. Such losses would become deductible upon the sale or liquidation of these non-U.S. subsidiaries.

     To the extent these non-U.S. subsidiaries have future earnings, no deferred U.S. federal income taxes will be provided for the undistributed earnings because we have permanently reinvested these earnings in such operations.

79

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

(10) Benefit Plans

Pension Plan

     We have a defined benefit pension plan which covers certain of our employees. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. Benefits are based on years of service and the employee’s career average pay. Our funding policy is to contribute to the plan at least the minimum amount that can be deducted for Federal income tax purposes. Differences in each year, if any, between expected and actual returns in excess of a 10% corridor (as defined in FASB 87, Employers’ Accounting for Pensions) are amortized in net periodic pension calculations. Effective December 31, 2005, benefits under the pension plan have been frozen. Accordingly, there are no further benefit accruals for future service after December 31, 2005.

     On December 31, 2006, we adopted the recognition and disclosure provisions of FASB 158. FASB 158 required us to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of our benefit plan in the December 31, 2006 Consolidated Statement of Financial Condition. Upon adoption of FASB 158, the projected benefit obligation was equal to the accumulated benefit obligation, consequently no adjustment to the Consolidated Statement of Financial Condition was required.

     The following tables set forth the plan’s funded status and amounts recognized in our accompanying consolidated statements of financial condition and Consolidated Statements of Earnings (in thousands of dollars):

	December 31,
	2008			2007
Accumulated benefit obligation	$	41,492		$	40,828
Projected benefit obligation for service rendered to date	$	41,492		$	40,828
Plan assets, at fair value		33,731			41,634
Funded status	$	(7,761	)	$	806
Unrecognized net loss		14,017			3,068
Prepaid benefit cost	$	6,256		$	3,874
Accumulated other comprehensive loss, before taxes		(14,017	)		(3,068	)
Pension (liability) asset	$	(7,761	)	$	806

	Year ended December 31,
	2008			2007			2006
Net pension cost included the following components:
Service cost — benefits earned during the period	$	200		$	275		$	275
Interest cost on projected benefit obligation		2,531			2,378			2,361
Expected return on plan assets		(3,113	)		(2,923	)		(2,514	)
Net amortization		—			—			562
Net periodic pension (income) cost	$	(382	)	$	(270	)	$	684

80

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

	Year ended December 31
	2008			2007
Fair value of assets, beginning of year	$	41,634		$	39,484
Employer contributions		2,000			2,000
Benefit payments made		(1,492	)		(2,394	)
Administrative expenses paid		(209	)		(174	)
Total investment return		(8,202	)		2,718
Fair value of assets, end of year	$	33,731		$	41,634

	Year ended December 31
	2008			2007
Projected benefit obligation, beginning of year	$	40,828		$	42,892
Service cost		200			275
Interest cost		2,531			2,378
Actuarial losses		(366	)		(2,149	)
Administrative expenses paid		(209	)		(174	)
Benefits paid		(1,492	)		(2,394	)
Projected benefit obligation, end of year	$	41,492		$	40,828

     The plan assets consist of approximately 47% equities, 50% fixed income and 3% other securities in 2008 versus approximately 56% equities, 41% fixed income and 3% other securities in 2007. The target allocation of plan assets for 2009 is approximately 60% equities and 40% fixed income securities. The weighted average discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 6.50% and 0.00%, respectively, in 2008, 6.25% and 0.00%, respectively, in 2007, and 5.90% and 0.00%, respectively, in 2006. The expected long-term rate of return on assets was 7.5% in 2008, 2007 and 2006. The expected long-term rate of return assumption is based on an analysis of historical experience of the portfolio and the summation of prospective returns for each asset class in proportion to the fund’s current asset allocation. The target asset allocation was determined based on the risk tolerance characteristics of the plan and, at times, may be adjusted to achieve the plan’s investment objective and to minimize any concentration of investment risk.

     We have contributed $2.0 million to our pension plan during 2008. Effective December 31, 2005, benefits under the pension plan have been frozen. There will be no further benefit accruals for service after December 31, 2005. The amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost include $14.0 million and $3.1 million as of December 31, 2008 and 2007, respectively.

     During 2009, we expect to recognize an amortization of net loss of $0.9 million as a component of net periodic benefit cost.

     Expected benefit payments through December 31, 2018 are as follows (in thousands of dollars):

2009	$	1,974
2010		2,666
2011		1,323
2011		3,011
2013		2,222
2014 through 2018		12,554

81

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

(11) Minority Interest

     Under FASB 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“FASB 150”), certain minority interests in consolidated entities may meet the definition of a mandatorily redeemable financial instrument and thus require reclassification as liabilities and remeasurement at the estimated amount of cash that would be due and payable to settle such minority interests under the applicable entity’s organization agreement, assuming an orderly liquidation of the entity, net of estimated liquidation costs. Our consolidated financial statements include certain minority interests that meet the definition of mandatorily redeemable financial instruments. These mandatorily redeemable minority interests represent interests held by third parties in Jefferies High Yield Holdings, LLC (“JHYH”). The mandatorily redeemable minority interests are entitled to a pro rata share of the profits and losses of JHYH, as set forth in JHYH’s organization agreements, and are scheduled to terminate in 2013, with an option to extend up to three additional one-year periods. A certain portion of these mandatorily redeemable minority interests represents investments from Jefferies Special Opportunities Partners, LLC (“JSOP”) and Jefferies Employees Special Opportunities Partners, LLC (“JESOP”), and are eliminated in consolidation as JSOP and JESOP are included within our consolidated group. The carrying amount of the mandatorily redeemable minority interests, after consolidation, was approximately $280.9 million and $354.3 million at December 31, 2008 and 2007, respectively.

     Minority interest also includes the minority equity holders’ proportionate share of the equity of JSOP and JESOP. At December 31, 2008, minority interest related to JSOP and JESOP was approximately $252.3 million and $29.4 million, respectively. At December 31, 2007, minority interest related to JSOP and JESOP was approximately $212.1 million and $26.5 million, respectively.

     At December 31, 2008 and 2007, we had other minority interests of approximately $6.1 million and $10.8 million, respectively, primarily related to our consolidated asset management entities.

82

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

(12) Earnings per Share

     The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years 2008, 2007 and 2006 (in thousands, except per share amounts):

	Year ended December 31,
	2008			2007		2006
Earnings:
(Loss) earnings before cumulative effect of change in accounting principle, net	$	(536,128	)	$	144,665	$	204,144
Cumulative effect of change in accounting principle, net		—			—		1,606
Net (loss) earnings		(536,128	)		144,665		205,750
Add: Convertible preferred stock dividends		—			4,063		3,543
Net (loss) earnings for diluted earnings per share	$	(536,128	)	$	148,728	$	209,293
Shares:
Average shares used in basic computation		166,163			141,515		133,898
Stock options		—			388		1,251
Mandatorily redeemable convertible preferred stock		—			4,068		3,521
Unvested restricted stock / restricted stock units		—			7,836		8,861
Average shares used in diluted computation		166,163			153,807		147,531
Earnings per share:
Basic-
(Loss) earnings before cumulative effect of change in accounting principle, net	$	(3.23)		$	1.02	$	1.53
Cumulative effect of change in accounting principle, net		—			—		0.01
Net (loss) earnings	$	(3.23)		$	1.02	$	1.54
Diluted-
(Loss) earnings before cumulative effect of change in accounting principle, net	$	(3.23	)	$	0.97	$	1.41
Cumulative effect of change in accounting principle, net		—			—		0.01
Net (loss) earnings	$	(3.23	)	$	0.97	$	1.42

     As a result of the net loss that was recorded in the year ended December 31, 2008, our diluted (loss) per share for those periods does not assume the dilutive effects of unvested restricted stock and restricted stock units, the exercise of stock options or the conversion of our mandatorily redeemable convertible preferred stock as this would result in an antidilutive per-share amount. Therefore, our diluted (loss) per share equal our basic (loss) per share for the year ended December 31, 2008. At December 31, 2008, we had outstanding stock options of 59,720 and our mandatorily redeemable convertible preferred stock was convertible into 4,105,138 common shares. We had no unvested restricted stock and restricted stock units at December 31, 2008.

     We had no anti-dilutive securities for purposes of the annual earnings per share computations in 2007 and 2006.

83

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

(13) Leases

     As lessee, we lease certain premises and equipment under noncancelable agreements expiring at various dates through 2022 which are operating leases. Future minimum lease payments for all noncancelable operating leases at December 31, 2008 are as follows (in thousands of dollars):

	Gross		Sub-leases		Net
2009	$	43,214	$	7,247	$	35,967
2010		42,663		6,673		35,990
2011		40,494		5,701		34,793
2012		36,702		5,525		31,177
2013		35,095		5,553		29,542
Thereafter		138,886		9,151		129,735

     Rental expense amounted to $50,529,000, $50,443,000 and $43,406,000, in 2008, 2007 and 2006, respectively.

(14) Derivative Financial Instruments

Off-Balance Sheet Risk

     We have contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to resell, repurchase agreements, future purchases and sales of foreign currencies, securities transactions on a when-issued basis and underwriting. Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the fair 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 our consolidated financial statements.

Derivative Financial Instruments

     Our derivative activities are recorded at fair value in the Consolidated Statements of Financial Condition, with realized and unrealized gains and losses recognized in principal transactions in the Consolidated Statements of Earnings on a trade date basis and as a component of cash flows from operating activities in the Consolidated Statements of Cash Flows. Acting in a trading capacity, we may enter into derivative transactions to satisfy the needs of our clients and to manage our own exposure to market and credit risks resulting from our trading activities.

     Derivatives are subject to various risks similar to other financial instruments, including market, credit and operational risk. In addition, we may be exposed to legal risks related to derivative activities. The risks of derivatives should not be viewed in isolation, but rather should be considered on an aggregate basis along with our other trading-related activities. We manage the risks associated with derivatives on an aggregate basis along with the risks associated with proprietary trading as part of our firmwide risk management policies.

     A significant portion of our derivative activities are performed by Jefferies Financial Products, LLC (“JFP”). JFP is a market maker in commodity index products and a trader in commodity futures and options. Where appropriate, JFP utilizes various credit enhancements, including guarantees, collateral and margin agreements to mitigate the credit exposure relating to these swaps and options. JFP establishes credit limits based on, among other things, the creditworthiness of the counterparties, the transaction’s size and tenor, and estimated potential exposure. JFP maintains credit intermediation facilities with highly rated European banks (the “Banks”), which allow JFP customers that require a counterparty with a high credit rating for commodity index transactions to transact with the Banks. The Banks simultaneously enter into offsetting transactions with JFP and receive a fee from JFP for providing credit support. In certain cases, JFP is responsible to the Banks for the performance of JFP’s customers.

84

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

     The following table presents the fair value of derivatives at December 31, 2008 and December 31, 2007. The fair value of assets/liabilities related to derivative contracts at December 31, 2008 and December 31, 2007 represent our receivable/payable for derivative financial instruments, gross of related collateral received and pledged:

	December 31, 2008				December 31, 2007
(in thousands)	Assets		Liabilities		Assets		Liabilities
Derivative instruments included in financial instruments owned and financial instruments sold, not yet purchased:
Swaps (1)	$	553,524	$	139,608	$	2,424	$	417,020
Option contracts (1)		277,272		199,030		355,119		404,525
Forward contracts		12,663		13,186		3,348		3,254
Total	$	843,459	$	351,824	$	360,891	$	824,799

(1) Option and swap contracts in the table above are gross of collateral received and/ or collateral pledged. Option and swap contracts are recorded net of collateral received and/ or collateral pledged on the Consolidated Statement of Financial Condition. At December 31, 2008, collateral received and collateral pledged were $545.4 million and $131.1 million, respectively. At December 31, 2007, collateral received and collateral pledged were $22.1 million and $497.7 million, respectively.

     The following tables set forth the remaining contract maturity of the fair value of OTC derivative assets and liabilities as of December 31, 2008 (in thousands):

	OTC derivative assets
	0 – 12 Months		1 – 5 Years		5 – 10 Years		Total
Commodity swaps	$	526,815	$	548	$	—	$	527,363
Commodity options		12,933		16,566		—		29,499
Total return swaps		—		10,111		—		10,111
Interest rate swaps		—		—		16,050		16,050
Equity options		84		—		—		84
Forward contracts		12,663		—		—		12,663
Total	$	552,495	$	27,225	$	16,050	$	595,770

85

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

	OTC derivative liabilities
	0 – 12 Months		1 – 5 Years		5 – 10 Years		Total
Commodity swaps	$	120,418	$	—	$	—	$	120,418
Commodity options		996		15,733		—		16,729
Total return swaps		—		9,110		—		9,110
Interest rate swaps		—		—		9,722		9,722
Credit default swaps		—		358		—		358
Equity options		120		5,764		—		5,884
Forward contracts		8,478		4,708		—		13,186
Total	$	130,012	$	35,673	$	9,722	$	175,407

     At December 31, 2008, the counterparty credit quality with respect to the fair value of our OTC derivatives assets was as follows (in thousands):

	Total pre-credit		Credit			Total post- credit
	enhancement		enhancement			enhancement
	netting		netting (1)			netting
Counterparty credit quality:
A or higher	$	592,370	$	(6,779	)	$	585,591
B to BBB		52		—			52
Unrated		10,127		—			10,127
Total	$	602,549	$	(6,779	)	$	595,770

(1) Credit enhancement netting relates to JFP credit intermediation facilities with AA-rated European banks.

(15) Net Capital Requirements

     As registered broker-dealers, Jefferies, Jefferies Execution and Jefferies High Yield Trading are subject to the Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. Jefferies, Jefferies Execution and Jefferies High Yield Trading have elected to use the alternative method permitted by the Rule.

     As of December 31, 2008, Jefferies, Jefferies Execution and Jefferies High Yield Trading’s net capital and excess net capital were as follows (in thousands of dollars):

	Net Capital		Excess Net Capital
Jefferies	$	710,906	$	691,478
Jefferies Execution	$	9,120	$	8,870
Jefferies High Yield Trading	$	545,522	$	545,272

86

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

(16) Commitments, Contingencies and Guarantees

     The following table summarizes other commitments and guarantees at December 31, 2008:

			Maturity Date
	Notional /						2011		2013		2015
	Maximum						and		and		and
	Payout		2009		2010		2012		2014		Later
			(Dollars in Millions)
Bank credit	$	36.0		—	$	18.0	$	18.0		—		—
Equity commitments	$	424.5	$	0.1	$	250.0	$	2.0	$	26.0	$	146.4
Loan commitments	$	174.1	$	168.9	$	5.0		—	$	0.2		—
Derivative contracts- non credit related	$	956.3	$	896.1	$	42.8	$	14.5	$	2.9		—
Derivative contracts- credit related:
Single name credit default swaps	$	5.0		—		—	$	5.0		—		—

     The following table summarizes the external credit ratings of the underlyings or referenced assets for credit related guarantees and derivatives:

	Notional /		External Credit Rating
	Maximum
	Payout		A		Unrated
	(Dollars in Millions)
Bank credit	$	36.0		—	$	36.0
Loan commitments	$	174.1		—	$	174.1
Derivative contracts- credit related:
Single name credit default swaps	$	5.0	$	5.0		—

     Bank Credit. As of December 31, 2008, we had outstanding guarantees of $36.0 million relating to bank credit obligations ($8.7 million of which is undrawn) of associated investment vehicles in which we have an interest.

     Equity Commitments. On October 7, 2004, we entered into an agreement with Babson Capital and MassMutual to form Jefferies Finance LLC, a joint venture entity created for the purpose of offering senior loans to middle market and growth companies. The total committed equity capitalization by the partners to Jefferies Finance LLC is $500 million as of December 31, 2008. Loans are originated primarily through the investment banking efforts of Jefferies & Company, Inc., with Babson Capital providing primary credit analytics and portfolio management services. As of December 31, 2008, we have funded $107.5 million of our aggregate $250.0 million commitment leaving $142.5 million unfunded.

     As of December 31, 2008, we have an aggregate commitment to invest equity of approximately $21.4 million in Jefferies Capital Partners IV L.P. and its related parallel fund, a private equity fund managed by a team led by Brian P. Friedman (one of our directors and Chairman, Executive Committee).

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

     We have an aggregate commitment to fund JHYH of $600.0 million and have funded approximately $350.0 million as of December 31, 2008, leaving $250.0 million unfunded.

     As of December 31, 2008, we had other equity commitments to invest up to $10.6 million in various other investments.

     Loan Commitments. From time to time we make commitments to extend credit to investment-banking and other clients in loan syndication, acquisition-finance and securities transactions. These commitments and any related drawdowns of these facilities typically have fixed maturity dates and are contingent on certain representations, warranties and contractual conditions applicable to the borrower. As of December 31, 2008, we had $155.4 million of loan commitments outstanding to clients.

     On August 11, 2008, we entered into a Credit Agreement with JCP Fund V Bridge Partners, LLC (“the Borrower or JCP V”), pursuant to which we may make loans to the Borrower in an aggregate principal amount of up to $50.0 million. As of December 31, 2008, we have funded approximately $31.3 million of the aggregate principal balance leaving approximately $18.7 million unfunded. (See Note 23 for additional discussion of the credit agreement with JCP V.)

     Derivative Contracts. In accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”), we disclose certain derivative contracts meeting the FIN 45 definition of a guarantee. Such derivative contracts include credit default swaps (whereby a default or significant change in the credit quality of the underlying financial instrument may obligate us to make a payment) and written equity put options. At December 31, 2008, the maximum payout value of derivative contracts deemed to meet the FIN 45 definition of a guarantee was approximately $961.3 million. For purposes of determining maximum payout, notional values are used; however, we believe the fair value of these contracts is a more relevant measure of these obligations because we believe the notional amounts overstate our expected payout. At December 31, 2008, the fair value of such derivative contracts approximated $116.5 million. In addition, the derivative contracts deemed to meet the FIN 45 definition of a guarantee are before consideration of hedging transactions. We substantially mitigate our risk on these contracts through hedges, such as other derivative contracts and/or cash instruments. We manage risk associated with derivative contracts meeting the FIN 45 definition of a guarantee consistent with our risk management policies.

     Jefferies Financial Products, LLC. JFP maintains credit intermediation facilities with highly rated European banks (the “Banks”), which allow JFP customers that require a counterparty with a high credit rating for commodity index transactions to transact with the Banks. The Banks simultaneously enter into offsetting transactions with JFP and receive a fee from JFP for providing credit support. In certain cases, JFP is responsible to the Banks for the performance of JFP’s customers.

     Other Guarantees. In the normal course of business we provide guarantees to securities clearinghouses and exchanges. These guarantees generally are required under the standard membership agreements, such that members are required to guarantee the performance of other members. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral. Our obligations under such guarantees could exceed the collateral amounts posted; however, the potential for us to be required to make payments under such guarantees is deemed remote.

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

(17) Segment Reporting

     Beginning in the second quarter of 2007, our international convertible bond funds are included within the results of the Asset Management segment. Previously, operations from our international convertible bond funds were included in the Capital Markets segment. Prior period disclosures have been adjusted to conform to the current quarter’s presentation. The above change was made in order to reflect the manner in which these segments are currently managed.

     The Capital Markets reportable segment includes our securities execution activities, including sales, trading and research in equities, equity derivatives, convertible securities, and fixed income securities, including corporate bonds, US government and agency securities, repo finance, mortgage- and asset-backed securities, municipal bonds, loans and emerging markets debt, and prime brokerage, and our investment banking activities, which include capital markets transactions, mergers and acquisitions and other advisory transactions. In addition, our Capital Markets activities include securities lending and our proprietary trading activities, as well as commodity-related trading. We are primarily focused on serving corporations and institutional investors. In addition, we choose to voluntarily disclose the Asset Management segment even though it is currently an “immaterial non-reportable” segment as defined by FASB 131, Disclosures about Segments of an Enterprise and Related Information.

     Our reportable business segment information is prepared using the following methodologies:

• Net revenues and expenses directly associated with each reportable business segment are included in determining earnings before taxes.

• Net revenues and expenses not directly associated with specific reportable business segments are allocated based on the most relevant measures applicable, including each reportable business segment’s net revenues, headcount and other factors.

• Reportable business segment assets include an allocation of indirect corporate assets that have been fully allocated to our reportable business segments, generally based on each reportable business segment’s capital utilization.

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

     Our net revenues, expenses, income before income taxes and total assets by segment are summarized below (amounts in millions):

	Capital			Asset			Eliminating
	Markets			Management			Items			Total
Twelve months ended December 31, 2008
Net revenues (loss)	$	1,060.0		$	(38.2	)	$	—		$	1,021.8
Expenses		1,926.1			45.0			—			1,971.1
(Loss) before taxes and minority interest	$	(866.1	)	$	(83.2	)	$	—		$	(949.3	)
Segment assets	$	19,843.7		$	135.0		$	—		$	19,978.7
Twelve months ended December 31, 2007
Net revenues	$	1,547.5		$	20.6		$	—		$	1,568.1
Expenses		1,301.7	(1)		46.7			(26.0	)(1)		1,322.4
Income (loss) before taxes and minority interest	$	245.8		$	(26.1	)	$	26.0		$	245.7
Segment assets	$	29,417.2		$	350.6		$	26.0	(1)	$	29,793.8
Twelve months ended December 31, 2006
Net revenues	$	1,389.5		$	68.1		$	—		$	1,457.6
Expenses		1,059.6			49.3			—			1,108.9
Income before taxes and minority interest	$	329.9		$	18.8		$	—		$	348.7
Segment assets	$	17,676.9		$	148.6		$	—		$	17,825.5

(1)

Our Jefferies Execution subsidiary recorded a goodwill impairment charge of $26 million during the fourth quarter of 2007. Jefferies Execution is a registered broker-dealer. Therefore, goodwill relating to the acquisition of Jefferies Execution in 2001, formerly Helfant Group, Inc., was “pushed down” from us to Jefferies Execution in accordance with Emerging Issues Task Force Issue No. D-97, Push Down Accounting.

Jefferies Execution is not one of our “reporting units” as defined by FASB 142, Goodwill and Other Intangible Assets and therefore we have not recorded this $26 million goodwill impairment charge in our Consolidated Financial Statements.

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

     Net Revenues by Geographic Region

     Net revenues are recorded in the geographic region in which the senior coverage banker is located in the case of investment banking, or where the position was risk-managed within Capital Markets or the location of the investment advisor in the case of Asset Management. In addition, certain revenues associated with U.S. financial instruments and services that result from relationships with non-U.S. clients have been classified as non-U.S. revenues using an allocation consistent with our internal reporting. The following table presents net revenues by geographic region for the years ended December 31, 2008, 2007 and 2006 (amounts in thousands):

	2008		2007		2006
Americas (1)	$	812,567	$	1,357,991	$	1,333,745
Europe		191,850		194,034		117,524
Asia (including Middle East)		17,358		16,065		6,333
Net Revenues	$	1,021,775	$	1,568,090	$	1,457,602

(1) Substantially all relates to U.S. results.

(18) Goodwill

     The following is a summary of goodwill activity for the year ended December 31, 2008 (in thousands of dollars):

	Year ended December 31,
	2008			2007
Balance, at beginning of year	$	344,063		$	257,321
Add: Contingent consideration		16,498			42,507
Add: Acquisition		—			44,235
Less: Acquisition adjustment		(1,724	)		—
Balance, at end of year	$	358,837		$	344,063

     We acquired LongAcre Partners Limited in May 2007.

     We acquired Putnam Lovell Investment banking business in July 2007. The purchase price was $14.7 million in cash and the acquisition did not contain any contingencies related to additional consideration.

     The acquisitions of LongAcre Partners Limited, Helix Associates, and Randall & Dewey all contained a five-year contingency for additional consideration to the selling owners, based on future revenues. This additional consideration is paid in cash annually. There is no contractual dollar limit to the potential of additional consideration. During the quarter ended June 30, 2007, the Broadview International LLC contingency for additional consideration was modified and all remaining contingencies have been accrued as of June 30, 2007. During the year ended December 31, 2008, we paid approximately $37.7 million in cash related to contingent consideration that had been earned during the current year or prior periods.

     None of the acquisitions listed above were considered material based on the small percentage each represented at the time of acquisition of our total assets, equity, revenues and net earnings.

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

(19) Quarterly Dividends

     The only restrictions on our present ability to pay dividends on our common stock are the dividend preference terms of our Series A convertible preferred stock and the governing provisions of the Delaware General Corporation Law.

     Dividends per Common Share (declared and paid):

	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter
2008	$	0.125	$	0.125		—		—
2007	$	0.125	$	0.125	$	0.125	$	0.125

     No dividends have been declared or paid in the first quarter of 2009.

     During the year ended December 31, 2008, we recognized dividend equivalents of $34.4 million distributed on restricted stock units that were granted in prior periods, but which had not previously been charged against retained earnings.

(20) Securitization Activities and Variable Interest Entities (“VIEs”)

     Securitization Activities

     We engage in securitization activities related to residual mortgage-backed and other asset-backed securities. In our securitization activities, we use special purpose entities (“SPEs”). We do not consolidate certain securitization vehicles, commonly known as qualifying special purpose entities (“QSPEs”), if they meet certain criteria regarding the types of assets and derivatives they may hold, the types of sales they may engage in and the range of discretion they may exercise in connection with the assets they hold. The determination of whether a SPE meets the criteria to be a QSPE requires considerable judgment, particularly in evaluating whether the permitted activities of the SPE are significantly limited and in determining whether derivatives held by the SPE are passive and non-excessive.

     We derecognize financial assets transferred in securitizations, provided we have relinquished control over such assets. Transferred assets are carried at fair value prior to securitization, with unrealized gains and losses reflected in principal transactions in the Consolidated Statements of Earnings. We act as underwriter of the beneficial interests issued by securitization vehicles. Net revenues are recognized in connection with these underwriting activities.

     During the year ended December 31, 2008 we transferred assets of $177.1 million as part of our securitization activities, received proceeds of $178.2 million and recognized net revenues of $10.0 million. At December 31, 2008, we did not retain any interest in these securitizations.

     Variable Interest Entities

     Variable interest entities (“VIEs”) are defined in FIN 46(R) as entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. VIEs are consolidated by the primary beneficiary. 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, direct or implied.

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

VIEs Where We Are The Primary Beneficiary

     Prior to April 2, 2007, our High Yield division trading and investment strategies were conducted through Jefferies Partners Opportunity Fund and Jefferies Partners Opportunity Fund, II, which were principally capitalized with equity contributions from third parties and Jefferies Employees Opportunity Fund, which was principally capitalized with equity investments from our employees and was therefore consolidated in our financial statements. Gains and losses on trading and investments activities of the High Yield division were included in our results of operations on the basis of a pre-established sharing arrangement related to the amount of committed capital of each fund.

     On April 2, 2007, we organized Jefferies High Yield Trading, LLC (“JHYT”) to conduct the secondary market trading activities previously performed by the High Yield division of Jefferies and the High Yield Funds. The activities of JHYT are overseen directly by our Chief Executive Officer. JHYT is a registered broker-dealer engaged in the secondary sales and trading of high yield securities and special situation securities, including bank debt, post-reorganization equity, public and private equity, equity derivatives, credit default swaps and other financial instruments. JHYT makes markets in high yield and distressed securities and provides research coverage on these types of securities. JHYT is a wholly-owned subsidiary of Jefferies High Yield Holdings, LLC (“JHYH”).

     We own voting and non-voting interests in JHYH and have entered into management, clearing, and other services agreements with JHYH. We and Leucadia National Corporation (“Leucadia”) each have the right to nominate two of a total of four directors to JHYH’s board of directors. JHYH is also capitalized two funds managed by us, Jefferies Special Opportunities Fund (“JSOP”) and Jefferies Employees Special Opportunities Fund (“JESOP”). The term of the arrangement is for six years, with an option to extend. We and Leucadia expected to increase our respective investments in JHYH to $600 million each over time. As a result of agreements entered into with Leucadia in April 2008, any request to Leucadia for additional capital investment in JHYH requires the unanimous consent of our Board of Directors, including the consent of any Leucadia designees to our board. (See Note 1, Organization and Summary of Significant Accounting Policies, herein for additional discussion of agreements entered into with Leucadia.)

     Under the provisions of FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, we determined that JHYH and JESOP meet the definition of a variable interest entity. We are the primary beneficiary of JHYH and JESOP and accordingly consolidate JHYH (and the assets, liabilities and results of operations of its wholly owned subsidiary JHYT) and JESOP.

     The following tables present information about the assets and liabilities of our consolidated VIEs which are presented within our Consolidated Statement of Financial Condition in the respective asset and liability categories, as of December 31, 2008 and December 31, 2007 (in millions):

	VIE Consolidated Assets
	December 31, 2008		December 31, 2007
Cash	$	277.1	$	287.3
Financial instruments owned		546.9		676.4
Securities borrowed		242.7		170.1
Other		49.3		54.1
	$	1,116.0	$	1,187.9

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

	VIE Consolidated Liabilities
	December 31, 2008		December 31, 2007
Financial instruments sold, not yet purchased	$	230.8	$	201.8
Mandatorily redeemable interests (1)		854.0		964.6
Other		31.4		21.7
	$	1,116.2	$	1,188.1

(1) After consolidation, which eliminates our interests and the interests of our consolidated subsidiaries JSOP and JESOP, the carrying amount of the mandatorily redeemable minority interests pertaining to the above VIEs including within minority interest in the Consolidated Statements of Financial Condition was approximately $280.9 million and $354.3 million at December 31, 2008 and 2007, respectively.

     The assets of these VIE’s are available for the benefit of the mandatorily redeemable interest holders.

     Our maximum exposure to loss at December 31, 2008 and December 31, 2007 was $291.2 million and $367.6 million, respectively, which consist of our debt, equity and partnership interests in JHYH and JESOP which are eliminated in consolidation.

     JHYH’s net revenue and formula-determined non-interest expenses for the year ended December 31, 2008 amounted to $(145.2) million and $48.7 million, respectively. JHYH’s net revenue and formula-determined non-interest expenses for the year ended December 31, 2007 (April 2, 2007, date of commencement) amounted to $52.8 million and $49.5 million, respectively. These revenues and expenses are included in commissions and principal transactions and in our non-interest expenses. These formula-determined non-interest expenses do not necessarily reflect the actual expenses of operating JHYH. Based on the terms of our interests in JHYH and JESOP, percentages oh JHYH and JESOP’s net revenue and non-interest expenses are allocated to us and to third party minority interest in holders.

     There have been no changes in our conclusion to consolidate JHYH and JESOP since formation.

VIEs Where We Have a Significant Variable Interest

     We also hold significant variable interests in VIEs in which we are not the primary beneficiary and accordingly do not consolidate. Determining whether an interest in a VIE is significant is a matter of judgment and is based on an assessment of our exposure to the overall assets and liabilities of a VIE. We do not consolidate these VIEs as we do not absorb a majority of the entity’s expected losses or receives a majority of its expected residual returns as a result of holding these variable interests. We have not provided financial or other support to these VIEs during the year ended December 31, 2008. We have no explicit or implicit arrangements to provide additional financial support to these VIEs and have no liabilities related to these VIEs at December 31, 2008.

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

     The following table presents total assets in these nonconsolidated VIEs and our maximum exposure to loss associated with these non-consolidated VIEs in which we hold significant variable interests at December 31, 2008 and December 31, 2007 (in millions):

	December 31, 2008
			Maximum exposure
			to loss in non-
			consolidated VIEs
	VIE Assets		(2)		Carrying Amount
Managed CLOs	$	925.0	$	4.1	$	4.1
Third Party Managed CLO		390.2		3.3		3.3
Mortgage and Asset-Backed Vehicles (1)		19,274.9		86.8		86.8
Total	$	20,590.1	$	94.2	$	94.2

(1)	VIE assets represent the unpaid principal balance of the assets in these vehicles at December 31, 2008.
(2)	Our maximum exposure to loss in non-consolidated VIEs is limited to our investment.

	December 31, 2007
			Maximum exposure
			to loss in non-
			consolidated VIEs
	VIE Assets		(1)		Carrying Amount
Managed CLOs	$	1,380.0	$	16.7	$	16.7
Third Party Managed CLO		453.5		49.2		49.2
Total	$	1,833.5	$	65.9	$	65.9

(1) Our maximum exposure to loss in non-consolidated VIEs is limited to our investment.

     Managed CLOs. We own significant variable interests in various managed collateralized loan obligations (“CLOs”) for which we are not the primary beneficiary, and therefore, do not consolidate these entities. We receive management fees for our interest in these CLOs. Our exposure to loss is limited to our capital contributions. Our investments in these VIEs consists of securities and are accounted for at fair value and are included in investments in managed funds on our Consolidated Statements of Financial Condition.

     Third Party Managed CLO. We have significant variable interests in Babson Loan Opportunity CLO, Ltd., a third party managed CLO. This VIE has assets consisting primarily of senior secured loans, unsecured loans and high yield bonds. Our variable interests in this VIE consists of debt securities. The fair value of our interests in this VIE consist of a direct interest and an indirect interest via Jefferies Finance, LLC. The direct investment is accounted for at fair value and included in financial instruments owned in our Consolidated Statements of Financial Condition.

     Mortgage and Asset-Backed Vehicles. We purchase and sell variable interests in VIEs, which primarily issue mortgage-backed and other asset-backed securities, in connection with our trading and market-making activities. Our variable interests in these VIEs consist of mortgage and asset-backed securities and are accounted for at fair value and included in financial instruments owned on our Consolidated Statements of Financial Condition.

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

(21) Jefferies Finance LLC

     On October 7, 2004, we entered into an agreement with Babson Capital and MassMutual to form Jefferies Finance LLC (“JFIN”), a joint venture entity created for the purpose of offering senior loans to middle market and growth companies. JFIN is a commercial finance company that provides a broad array of financial products to small and medium-sized businesses. JFIN’s primary focus is the origination and syndication of senior secured debt in the form of term and revolving loans. JFIN can also originate various other debt products such as second lien term, bridge and mezzanine loans as well as related equity co-investments. JFIN also purchases syndicated loans in the secondary market, including loans that are performing, stressed and distressed loan obligations.

     In February 2006, we and MassMutual reached an agreement to double our equity commitments to JFIN. With an incremental $125 million from each partner, the new total committed equity capitalization of JFIN is $500 million. Loans are originated primarily through the investment banking efforts of Jefferies & Company, Inc. with Babson Capital providing primary credit analytics and portfolio management services. As of December 31, 2008, we have funded $107.5 million of our aggregate $250.0 million commitment leaving $142.5 million unfunded. Our investment in JFIN is accounted for under the equity method of accounting and is included in other investments in the Consolidated Statements of Financial Condition. Equity method gains and losses on JFIN are included in principal transactions in the Consolidated Statements of Earnings.

     The following is a summary of selected financial information for JFIN as of and for each of the years in the three-year period ended December 31, 2008 (in millions):

	2008		2007		2006
Balance Sheet
Total assets	$	1,075.4	$	1,007.5	$	309.9
Total liabilities		890.5		884.1		253.4
Total equity		184.9		123.4		56.5
Our share of total equity		92.4		61.7		28.2

(22) Compensation Plans

     We sponsor the following share-based compensation plans: incentive compensation plan, director plan, employee stock purchase plan and the deferred compensation plan. The fair value of share based awards is estimated on the date of grant based on the market price of our common stock less the impact of selling restrictions subsequent to vesting, if any, and is amortized as compensation expense on a straight-line basis over the related requisite service periods.

     The total compensation cost of all share-based awards was $562.9 million, $145.8 million and $86.2 million for the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008, we had no unrecognized compensation cost related to nonvested share based awards. FASB 123R requires cash flows resulting from tax deductions in excess of the grant-date fair value of share-based awards to be included in cash flows from financing activities. Accordingly, we reflected the excess tax benefit of $6.2 million and $41.7 million related to share-based compensation in cash flows from financing activities for the years ended December 31, 2008 and 2007, respectively.

     We have historically and generally expect to issue new shares of common stock when satisfying our issuance obligations pursuant to share based awards, as opposed to reissuing shares from our treasury stock.

     In addition, we sponsor non-share based compensation plans. Non-share based compensation plans sponsored by us include an employee stock ownership plan and a profit sharing plan.

     The following are descriptions of the compensation plans sponsored by us and the activity of such plans for the

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

years ended December 31, 2008, 2007 and 2006:

     Incentive Compensation Plan. We have an Incentive Compensation Plan (“Incentive Plan”) which allows awards in the form of incentive stock options (within the meaning of Section 422 of the Internal Revenue Code), nonqualified stock options, stock appreciation rights, restricted stock, unrestricted stock, performance awards, restricted stock units, dividend equivalents or other share-based awards. The plan imposes a limit on the number of shares of our common stock that may be subject to awards. An award relating to shares may be granted if the aggregate number of shares subject to then-outstanding awards (as defined in the Incentive Plan) plus the number of shares subject to the award being granted do not exceed 30% of the number of shares issued and outstanding immediately prior to the grant.

Restricted Stock and Restricted Stock Units

     The Incentive Plan allows for grants of restricted stock awards, whereby employees are granted restricted shares of common stock subject to forfeiture. The Incentive Plan also allows for grants of restricted stock units. Restricted stock units give a participant the right to receive fully vested shares at the end of a specified deferral period. One advantage of restricted stock units, as compared to restricted stock, is that the period during which the award is deferred as to settlement can be extended past the date the award becomes non-forfeitable, allowing a participant to hold an interest tied to common stock on a tax deferred basis. Prior to settlement, restricted stock units carry no voting or dividend rights associated with the stock ownership, but dividend equivalents are paid or accrued to the extent there are dividends declared on our common stock.

     On December 2, 2008, we approved an overall compensation strategy that modified the terms of all outstanding restricted stock and restricted stock units of active employees and addressed the terms of future restricted stock and restricted stock units granted as part of year-end compensation. We modified these awards by removing the service requirement employees must fulfill in exchange for the right to those awards. As such, employees who terminate their employment or are terminated without cause may continue to vest, so long as the awards are not forfeited as a result of the other forfeitures provisions of those awards (i.e. competition). Prior to the modifications, these awards were generally subject to annual ratable vesting upon a five year service requirement, with provisions related to retirement eligibility. As a result of the removal of the service requirements, we accelerated the remaining compensation cost of the outstanding awards to be recognized on the modification date. The total compensation cost recognized in the year ended December 31, 2008 associated with the removal of the service requirements on these outstanding awards was $302.6 million.

     In addition, we granted restricted stock and restricted stock units as part of our year-end compensation on December 30, 2008. As these awards were in compliance with the overall compensation strategy approved on December 2, 2008, and thus did not contain future service requirements, we recognized the compensation expense associated with these awards immediately on the date of grant. The compensation cost associated with the December 30, 2008 grant of restricted stock and restricted stock units was $74.0 million.

     We also modified the terms of certain restricted stock units to allow for active employees to elect under Section 409A of the Internal Revenue Code to accelerate the distribution of the underlying shares of vested restricted stock units. The accelerated distribution of these shares resulted in incremental compensation expense of $2.5 million recognized during the fourth quarter of 2008.

     The total compensation cost associated with restricted stock and restricted stock units amounted to $561.7 million, $144.4 million and $83.1 million in 2008, 2007 and 2006, respectively.

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Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

     The following table details the activity of restricted stock:

				Weighted
	Year Ended			Average Grant
	December 31, 2008			Date Fair Value
	(Shares in 000s)
Restricted stock
Balance, beginning of year		7,317		$	25.34
Grants		16,260		$	15.54
Forfeited		(2,594	)	$	20.27
Fulfillment of service requirement		(20,983	)	$	18.37
Balance, end of period		—		$	—

     The following table details the activity of restricted stock units:

							Weighted
	Year Ended						Average Grant
	December 31, 2008						Date Fair Value
	(Shares in 000s)
	Future			No Future			Future		No Future
	Service			Service			Service		Service
	Required			Required (2)			Required		Required
Restricted stock units
Balance, beginning of year		14,879			17,246		$	21.18	$	10.18
Grants, includes dividends		5,155			1,596	(1)	$	14.12	$	15.22	(1)
Distribution of underlying shares		—			(3,366	)	$	—	$	12.92
Forfeited		(1,196	)		(55	)	$	20.34	$	20.76
Fulfillment of service requirement		(18,838	)		18,838		$	19.32	$	19.32
Grants related to stock option exercises		—			2		$	—	$	9.67
Balance, end of period		—			34,261		$	—	$	15.17

(1)	Includes dividend equivalents on restricted stock units declared during the year ended December 31, 2008.
(2)	Represents restricted stock units with no future service requirement, which are still subject to transferability restrictions and may be subject to other forfeiture provisions (i.e., competition).

     The aggregate fair value of restricted stock and restricted stock units vested during 2008, 2007 and 2006 was $563.1 million, $182.9 million and $207.6 million, respectively.

98

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

     Stock Options

     The fair value of all option grants are estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for all fixed option grants in 2004: dividend yield of 0.9%; expected volatility of 32.6%; risk-free interest rates of 3.0%; and expected lives of 4.8 years. There are no option grants subsequent to 2004. A summary of our stock option activity for the years ended December 31, 2008, 2007 and 2006 is presented below (amounts in thousands):

Shares in thousands

	2008					2007					2006
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year		204		$	9.87		1,688		$	11.02		4,533		$	9.75
Exercised		(104	)		9.24		(1,484	)		11.18		(2,826	)		8.98
Canceled		(40	)		15.37		—			—		(19	)		11.53
Outstanding at end of year		60			7.24		204			9.87		1,688			11.02
Options exercisable at year-end		60			7.24		204			9.87		1,688			11.02

     The total intrinsic value of stock options exercised during 2008, 2007 and 2006 was $0.8 million, $8.2 million and $51.9 million, respectively. Cash received from the exercise of stock options during 2008, 2007 and 2006 totaled $0.8 million, $5.2 million and $17.5 million, respectively, and the tax benefit realized from stock options exercised during 2008, 2007 and 2006 was $0.3 million, $3.3 million and $18.1 million, respectively.

     The table below provides additional information related to stock options outstanding at December 31, 2008:

     Dollars and shares in thousands, except per share data

	Outstanding,
	Net of Expected		Options
December 31, 2008	Forfeitures		Exercisable
Number of options		60		60
Weighted-average exercise price	$	7.24	$	7.24
Aggregate intrinsic value	$	409	$	409
Weighted-average remaining contractual term, in years		3.93		3.93

     At December 31, 2008, the intrinsic value of vested options was approximately $0.4 million for which tax benefits expected to be recognized in equity upon exercise are approximately $0.2 million.

     Directors’ Plan. We have a Directors’ Stock Compensation Plan (“Directors’ Plan”) which provides for an annual grant to each non-employee director of $100,000 of restricted stock or deferred shares (which are similar to restricted stock units). These grants are made automatically on the date directors are elected or reelected at our annual shareholders’ meeting. These grants vest three years after the date of grant and are expensed over the requisite service period.

     Additionally, the Directors’ Plan permits each non-employee director to elect to be paid annual retainer fees, meeting fees and fees for service as chairman of a Board committee in the form of cash, deferred cash or deferred shares. If deferred cash is elected, interest is credited to such deferred cash at the prime interest rate in effect at the date of each annual meeting of stockholders. If deferred shares are elected, dividend equivalents equal to dividends declared and paid on our common stock are credited to a Director’s account and reinvested as additional deferred shares.

     Employee Stock Purchase Plan. We also have an Employee Stock Purchase Plan (“ESPP”) which we consider non-compensatory effective January 1, 2007. All regular full-time employees and employees who work part-time

99

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

over 20 hours per week are eligible for the ESPP. Annual employee contributions are limited to $21,250, are voluntary and are made via payroll deduction. The employee contributions are used to purchase our common stock. The stock price used is 95% of the closing price of our common stock on the last day of the applicable session (monthly).

     Deferred Compensation Plan. We also have a Deferred Compensation Plan, which was established in 2001. In 2008, 2007 and 2006, employees with annual compensation of $200,000 or more were eligible to defer compensation on a pre-tax basis by investing it in our common stock at a discount (“DCP shares”) and/or stock options (prior to 2004) or by specifying the return in other alternative investments. We often invest directly, as a principal, in such investment alternatives related to our obligations to perform under the Deferred Compensation Plan. The compensation deferred by our employees is expensed in the period earned. As of the third quarter of 2008, the change in fair value of the specified other alternative investments are recognized in investment income and changes in the corresponding deferral compensation liability are reflected as compensation and benefits expense in our Consolidated Statements of Earnings. Prior financial statement periods have not been adjusted for this change in presentation as the impact of such change does not have a material impact on the related line items within the Consolidated Statements of Earnings for each of the periods presented.

Additionally, we recognize compensation cost related to the discount provided to employees in electing to defer compensation in DCP shares. This compensation cost was $0.9 million, $1.5 million and $1.4 million in 2008, 2007 and 2006, respectively. As of December 31, 2008, there were 5,388,000 DCP shares outstanding under the Plan.

     Employee Stock Ownership Plan. We have an Employee Stock Ownership Plan (“ESOP”) which was established in 1988. We had no contributions and no compensation cost related to the ESOP in 2008, 2007 and 2006.

     Profit Sharing Plan. We have a profit sharing plan, covering substantially all employees, which includes a salary reduction feature designed to qualify under Section 401(k) of the Internal Revenue Code. The compensation cost related to this plan was $9.1 million, $8.9 million and $3.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.

(23) Related Party Transactions

     On August 11, 2008, we entered into a Credit Agreement (the “Credit Facility”) with JCP Fund V Bridge Partners, LLC, a Delaware limited liability company ( “the Borrower”), pursuant to which we may make loans to the Borrower in an aggregate principal amount of up to $50.0 million at any time until August 10, 2009. The Borrower is owned by its two managing members, including Brian P. Friedman, one of our directors and executive officers. The loan proceeds may be used by the Borrower to make investments that are expected to be sold to Jefferies Capital Partners V, L.P. (“Fund V”) upon its capitalization by third party investors. Fund V will be managed by a team led by Mr. Friedman.

     The final maturity date of the Credit Facility is August 12, 2009, subject to a six-month extension at the option of the Borrower to February 11, 2010. The interest rate on any loans made under the Credit Facility is the Prime Rate (as defined in the Credit Facility) plus 200 basis points, payable at the final maturity date, or upon repayment of any principal amounts, as applicable. The obligations of the Borrower under the Credit Facility are secured by its interests in each investment. As of December 31, 2008, loans in the aggregate principal amount of approximately $31.3 million were outstanding under the Credit Facility and recorded in other investments on the consolidated statements of financial condition.

100

JEFFERIES GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

(24) Selected Quarterly Financial Data (Unaudited)

     The following is a summary of unaudited quarterly statements of earnings for the years ended December 31, 2008 and December 31, 2007 (in thousands of dollars, except per share amounts):

	March			June			September			December			Year
2008
Revenues	$	396,487		$	584,025		$	453,251		$	248,976		$	1,682,739
(Loss)/earnings before income taxes, minority interest, and cumulative effect of change in accounting principle		(153,257	)		14,471			(77,761	)		(732,791	)		(949,338	)
Net (loss)		(60,537	)		(4,385	)		(31,304	)		(439,902	)		(536,128	)
Net (loss) per share:
Basic	$	(0.43	)	$	(0.03	)	$	(0.18	)	$	(2.39	)	$	(3.23	)
Diluted	$	(0.43	)	$	(0.03	)	$	(0.18	)	$	(2.39	)	$	(3.23	)
2007
Revenues	$	623,284		$	766,345		$	666,964		$	662,302		$	2,718,895
Earnings/(loss) before income taxes, minority interest, and cumulative effect of change in accounting principle		103,493			128,391			55,321			(41,471	)		245,734
Net earnings/ (loss)		62,259			67,835			38,773			(24,202	)		144,665
Net earnings/ (loss) per share:
Basic	$	0.44		$	0.48		$	0.27		$	(0.17	)	$	1.02
Diluted	$	0.42		$	0.45		$	0.26		$	(0.17	)	$	0.97

During the fourth quarter of 2008, we recognized compensation expense of $302.6 million associated with the removal of service requirements on outstanding restricted stock and restricted stock units. For further discussion, refer to Note 22, “Compensation Plans,” in the Notes to the Consolidated Financial Statements.

(25) Subsequent Event

     On February 12, 2009, we entered into a definitive agreement with Depfa Bank, plc to acquire all of the membership interests of Depfa First Albany Securities, LLC, a New York City-based municipal securities firm and broker-dealer that provides integrated investment banking, advisory and sales and trading services. The acquisition is subject to regulatory approvals and other closing conditions with the acquisition expected to close during the first quarter of 2009. Approximately 70 employees are expected to join Jefferies as a result of the acquisition.

101

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

     None

Item 9A. Controls and Procedures.

     Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2008. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2008 are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

     No change in our internal control over financial reporting occurred during the fourth quarter of 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

     Management’s annual report on internal control over financial reporting is contained in Part II, Item 8 of this report.

     Our Chief Executive Officer and Chief Financial Officer filed with the SEC as exhibits to our Form 10-K for the year ended December 31, 2008 and are filing as exhibits to this report, the certifications required by Rules 13a-14(a)/15d-14(a) and 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934.

Item 9B. Other Information.

     None

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

     Information with respect to this item will be contained in the Proxy Statement for the 2009 Annual Meeting of Stockholders, which is incorporated herein by reference.

Item 11. Executive Compensation.

     Information with respect to this item will be contained in the Proxy Statement for the 2009 Annual Meeting of Stockholders, which is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

     Information with respect to this item will be contained in the Proxy Statement for the 2009 Annual Meeting of Stockholders, which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

     Information with respect to this item will be contained in the Proxy Statement for the 2009 Annual Meeting of Stockholders, which is incorporated herein by reference.

102

Item 14. Principal Accountant Fees and Services.

     Information with respect to this item will be contained in the Proxy Statement for the 2009 Annual Meeting of Stockholders, which is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

	Pages
(a)1. Financial Statements
Included in Part II of this report:
Report of Independent Registered Public Accounting Firm	51
Consolidated Statements of Financial Condition	53
Consolidated Statements of Earnings	55
Consolidated Statements of Changes in Stockholders’ Equity	56
Consolidated Statements of Cash Flows	57
Consolidated Statements of Comprehensive (Loss)/ Income	60
Notes to Consolidated Financial Statements	61
(a)2. Financial Statement Schedules

     All Schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statements or notes thereto.

(a)3. Exhibits

3.1	Registrant’s Amended and Restated Certificate of Incorporation is incorporated by reference to Exhibit 3 of Registrant’s Form 8-K filed on May 26, 2004.
3.2	Registrant’s Certificate of Designations of 3.25% Series A Cumulative Convertible Preferred Stock is incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K filed on February 21, 2006.
3.3	Registrant’s By-Laws as amended and restated on December 3, 2007 are incorporated by reference to Exhibit 3 of Registrant’s Form 8-K filed on December 4, 2007.
4	Instruments defining the rights of holders of long-term debt securities of the Registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. Registrant hereby agrees to furnish copies of these instruments to the Commission upon request.
10.1	Jefferies Group, Inc. 2003 Incentive Compensation Plan, as Amended and Restated as of May 19, 2008 is incorporated herein by reference to Appendix 1 of Registrant’s proxy statement filed on April 16, 2008.
10.2*	Form of Restricted Stock Agreement pursuant to the Jefferies Group, Inc. 2003 Incentive Compensation Plan.
10.3*	Form of Restricted Stock Units Agreement pursuant to the Jefferies Group, Inc. 2003 Incentive Compensation Plan.
10.4*	Jefferies Group, Inc. Deferred Compensation Plan, as Amended and Restated as of January 1, 2009.
10.5*	Jefferies Group, Inc. 1999 Directors’ Stock Compensation Plan, as Amended and Restated as of January 1, 2009.
10.6	Credit Agreement dated as of August 11, 2008, among JCP Fund V Bridge Partners LLC and Jefferies Group, Inc. is incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 10-Q filed on November 10, 2008.
10.7	Investment Agreement by and between Leucadia National Corporation and Jefferies Group, Inc. dated as of April 20, 2008 is incorporated herein by reference to Exhibit 10.1 of Registrant’s Form 8-K filed on April 21, 2008.
10.8	Standstill Agreement by and between Leucadia National Corporation and Jefferies Group, Inc. dated as of April 20, 2008 is incorporated herein by reference to Exhibit 10.2 of Registrant’s Form 8-K filed on April 21, 2008.
10.9	Stock Purchase Agreement dated as of June 4, 2008 by and between Ian M. Cumming and

103

	Jefferies Group, Inc. is incorporated herein by reference to Exhibit 10.5 of the Registrant’s Form 10-Q filed on August 11, 2008.
10.10	Stock Purchase Agreement dated as of June 4, 2008 by and between STH Company, Inc.-A and Jefferies Group, Inc. is incorporated herein by reference to Exhibit 10.6 of the Registrant’s Form 10-Q filed on August 11, 2008.
10.11	Stock Purchase Agreement dated as of June 4, 2008 by and between The Joseph S. and Diane H. Steinberg 1992 Charitable Trust and Jefferies Group, Inc. is incorporated herein by reference to Exhibit 10.7 of the Registrant’s Form 10-Q filed on August 11, 2008.
21*	List of Subsidiaries.
23*	Consent of KPMG LLP.
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 10.1 through 10.5 are management contracts or compensatory plans or arrangements.

104

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.
 

/s/ RICHARD B. HANDLER  

Richard B. Handler 

Chairman of the Board of Directors,
Chief Executive Officer 

Dated: February 27, 2009

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/ RICHARD B. HANDLER Richard B. Handler	Chairman of the Board of Directors, Chief Executive Officer	February 27, 2009
/s/ PEREGRINE C. BROADBENT Peregrine C. Broadbent	Executive Vice President and Chief Financial Officer	February 27, 2009
/s/ BRIAN P. FRIEDMAN Brian P. Friedman	Director and Chairman, Executive Committee	February 27, 2009
/s/ W. PATRICK CAMPBELL W. Patrick Campbell	Director	February 21, 2009
/s/ IAN M. CUMMING Ian M. Cumming	Director	February 23, 2009
/s/ RICHARD G. DOOLEY Richard G. Dooley	Director	February 24, 2009
/s/ ROBERT E. JOYAL Robert E. Joyal	Director	February 26, 2009
/s/ MICHAEL T. O’KANE Michael T. O’Kane	Director	February 23, 2009
/s/ JOSEPH S. STEINBERG Joseph S. Steinberg	Director	February 26, 2009

105

EX-10.2

Exhibit 10.2

JEFFERIES GROUP, INC.
2003 INCENTIVE COMPENSATION PLAN
AS AMENDED AND RESTATED

RESTRICTED STOCK AGREEMENT

     AGREEMENT dated as of [insert grant date] (the “Grant Date”), between JEFFERIES GROUP, INC., a Delaware corporation (the “Company”), and [insert employee 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, as amended and restated (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 [insert number 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, each tranche of shares of Common Stock will remain Restricted Stock until the expiration of the Restrictions (as defined in Section 3) 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.jefferies.com (go to Benefits & Policies, then to Retirement/Fidelity/401k, then to Plan Documents and Related Items). 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, 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. Except as otherwise specifically set forth herein, the Restrictions shall expire as to [insert percentage to vest]% of the shares of Restricted Stock (and any related property) on each of [insert vesting dates] (each being a “Vesting Date,” at which date such Restricted Stock is deemed “vested”).

(i)

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

(ii)

Termination of Employment other than for Cause (and not subject to Section 3(b)(iii)). In the event of Employee’s Termination of Employment (other than a Termination not for Cause following a Change in Control or a Termination by the Company for Cause), provided that the Employee executes a separation agreement and release in such form as may be requested by the Company within 21 days (or such longer period as may be required by law) (and provided further that any period of revocation required by law has expired without Employee exercising his right to revoke his agreement to the separation agreement and release), Restricted Stock not then or previously vested shall not then be forfeited, but thereafter shall be forfeited

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if there occurs a Forfeiture Event prior to the earlier of the Vesting Date for such Restricted Stock or Employee’s death. A “Forfeiture Event” shall be deemed to occur if, following Employee’s Termination of Employment other than a Termination by the Company for Cause, Employee renders services for any organization or engages (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, or otherwise engaged in conduct violating Section 7.4(a), 7.4(b) or 7.4(c) of the Plan. However, following Employee’s Termination of Employment other than a Termination by the Company for Cause, it shall not constitute a Forfeiture Event if Employee purchases stock or other securities of an organization or business so long as the stock or other securities are 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. If Employee does not sign a separation agreement and release within the time period requested by the Company (or signs and then timely revokes his agreement to the separation agreement and release), all Restricted Stock which is not vested at the date of Termination will be forfeited.

(iii)	Termination not for Cause Following a Change in Control. If, following a Change in Control, Employee’s employment is terminated not for Cause by the Company or its successor, Restrictions on all of the then-outstanding Restricted Stock not vested at the date of Termination will immediately expire and such Restricted Stock will immediately vest. If a Change in Control occurs followed by Termination of Employment by the Company not for Cause and a determination is made by the Company pursuant to Sections 280G and 4999 of the Code that a “golden parachute” excise tax will be payable in connection with compensation to Employee hereunder, Employee’s right to accelerated vesting of the shares upon the Change in Control, to the extent such right results in “parachute payments” (as such term is defined in Code Section 280G), shall be limited to the extent just necessary to avoid the excise tax. This limitation shall be applied in a manner that maximizes the number of shares as to which accelerated vesting can apply (or, stated conversely, any limitation on acceleration of vesting shall apply first to those shares with the lengthiest remaining vesting period, which shares would result in the highest “parachute payments”).
(iv)	Termination by the Company for Cause. In the event of Employee’s Termination of Employment by the Company for Cause, the portion of the then-outstanding Restricted Stock not vested at the date of termination will be forfeited.
(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;

-3-

	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, 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;
	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; or
	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.
(ii)	A “Change in Control” shall be deemed to have occurred if any of the following conditions shall have been satisfied after the Grant Date:
	Any person (as defined in section 3(a)(9) of the Securities Exchange Act of 1934, as such term is modified in Section 13(d)), other than (i) an employee plan established by the Company or any of its subsidiaries or (ii) any group of Company employees holding shares subject to agreements relating to the voting of such shares, becomes a beneficial owner, directly or indirectly, of more than 51% of the voting stock of the Company;
	The consummation of a merger or consolidation of the Company with any other corporation or any other entity, or the issuance of voting securities in connection with a merger or consolidation of the Company, if the holders of the Company’s voting securities immediately prior to such transaction hold in the aggregate less than a majority of the then outstanding voting securities of the Company (or any successor

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company or entity) entitled to vote generally in the election of the directors of the Company (or such other company or entity) after such transaction;

	The sale or disposition by the Company of all or substantially all of its assets in which one person or more than one person acting as a group acquires assets from the Company that have a total gross fair market value equal to more than 50% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition; or
	A change in the composition of the Board of Directors of the Company such that individuals who, as of the date of this agreement, constitute the Board of Directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors of the Company; provided, however, that any individual becoming a member of the Board of Directors of the Company subsequent to the date of this agreement whose election, or nomination for election by the shareholders of the Company, was approved by a vote of at least a majority of the directors then constituting the Incumbent Board shall be considered as if that individual were a member of the Incumbent Board.
(iii)	“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.
(iv)	“Termination” or “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 Group, Inc. (the “Company”) as Restricted Stock under the Company’s 2003 Incentive Compensation Plan, as amended and restated (the “2003 Plan”) and the Restricted Stock Agreement (the “Agreement”), dated as of [insert date of agreement] 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 [insert last vesting date] (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.

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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 Restrictions on such Restricted Stock 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) (unless the Committee determines to make equitable adjustments under Section 5.3 of the 2003 Plan in lieu of the procedure specified in this Section 3(e)(iii)), 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

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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 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 understands and acknowledges that certain amounts must be withheld to satisfy federal, state, local, or foreign tax obligations associated with 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)) (“Withholdings”). Employee shall make arrangements satisfactory to the Company, in advance of any event triggering a Withholding obligation on the part of the Company or any affiliate of the Company that employs Employee, to provide for payment of all applicable Withholdings. If Employee has failed to make such arrangements or for any reason full payment of Withholdings is not made by Employee under such arrangements, Employee expressly authorizes the Company (and any such affiliated employer) to (1) withhold the applicable amount of Withholdings from any payment to Employee, including any payment relating to an Award or any payroll or other payment, and/or (2) withhold shares deliverable upon lapse of the Restrictions on the Restricted Stock having a fair market value (as determined by the Committee) equal to the amount of such tax liability required to be withheld as Withholdings in connection with the event triggering Withholding. If the Company (or such affiliated employer) elects to withhold shares to satisfy any Withholding obligation, the value of shares withheld shall not exceed the minimum applicable withholding tax rate for federal (including FICA), state and local tax liabilities (interpreted in a manner consistent with applicable accounting rules). This provision does not obligate the Company or any affiliate to withhold shares to satisfy Withholding obligations. The Company may specify a reasonable deadline (for example, 90 days before lapse of Restrictions) by which Employee must make separate arrangements for the payment of Withholdings. In the event that Employee files, under Section 83(b) of the Code, an election to be taxed as having received 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, and shall meet the other obligations under this Section 4 with respect to Withholding.

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     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 Financial Industry Regulatory Authority, or any other stock exchange or self-regulatory organization, 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. Restricted Stock Agreement — Grantee’s Acceptance. The Employee hereby accepts the Restricted Stock described in this Agreement, and agrees to be bound by the terms and administrative provisions as set forth in the Plan and this Agreement. The Employee hereby further agrees that all the decisions and determinations of the Committee shall be final and binding.

     8. 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, if Employee’s rights are being materially impaired, 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

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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:
[Insert employee name]		Judith O. Kester
		Assistant Secretary
Social Sec. No.
Address:
[Insert employee address]

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EXHIBIT A

STOCK POWER

     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto Jefferies Group, Inc. [insert number of shares] 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 

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EX-10.3

Exhibit 10.3

JEFFERIES GROUP, INC.

2003 Incentive Compensation Plan, as Amended and Restated
Restricted Stock Units Agreement

This Restricted Stock Units Agreement (the “Agreement”) confirms the grant on ___(the “Grant Date”) by Jefferies Group, Inc., a Delaware corporation (the “Company”), to ___ (“Employee”) of Restricted Stock Units (the “Units”), including rights to Dividend Equivalents as specified herein, as follows:

Number granted:	___ Units
How Units Vest:	___% of the Units, if not previously forfeited, will vest on each of ___, provided that Employee continues to be employed by the Company or a subsidiary on each vesting date (each, a “Stated Vesting Date”). In addition, if not previously forfeited, the Units will become vested earlier upon the occurrence of certain events relating to Termination of Employment to the extent provided in Section 4 of the Terms and Conditions of Restricted Stock Units attached hereto (the “Terms and Conditions”). The terms “vest” and “vesting” mean that the Units have become non-forfeitable, except for forfeitures specified under Section 7.4 of the Plan. If Employee has a Termination of Employment prior to the Stated Vesting Date and the Units are not otherwise deemed vested by that date, the Units will be immediately forfeited except as otherwise provided in Section 4 of the Terms and Conditions.
Settlement:	Settlement of vested Units will occur on ___, or as promptly as possible upon the death or Termination of Employment due to the Disability of Employee or Termination of Employment by the Company not for Cause following a Change in Control, except settlement shall be deferred in certain cases in accordance with Section 8(a) of the Terms and Conditions (the “Settlement Date”). Units granted hereunder will be settled by delivery of one Share for each Unit being settled (together with any cash or Shares resulting from Dividend Equivalents). Any settlement required to be made “promptly” under this Agreement shall in all cases be made not later than 60 days after the event that triggers such settlement.

     The Units are subject to the terms and conditions of the 2003 Incentive Compensation Plan, as amended and restated (the “Plan”), and this Agreement, including the Terms and Conditions attached hereto. The number of Units, the kind of shares deliverable in settlement of Units, and other terms relating to the Units are subject to adjustment in accordance with Section 5 of the Terms and Conditions and Section 5.3 of the Plan.

     Employee acknowledges and agrees that (i) Units are nontransferable, except as provided in Section 3 of the Terms and Conditions and Section 9.2 of the Plan, (ii) Units, and certain amounts of gain realized upon settlement of Units, are subject to forfeiture, whether during employment or following a Termination of Employment, in the event Employee fails to meet applicable requirements relating to non-solicitation, confidentiality, and related matters with respect to the Company and its subsidiaries and affiliates (together, “Group,” and each entity included in Group being a “Group Entity”), as set forth in Section 7.4 of the Plan and (iii) sales of shares delivered in settlement of Units will be subject to the Company’s policies regulating trading by employees if the recipient is then an employee of the Company.

     Employee hereby accepts the Units described in this Agreement, and agrees to be bound by the terms and administrative provisions set forth in the Plan and this Agreement. Employee hereby further agrees that all the decisions and determinations of the Committee shall be final and binding.

     IN WITNESS WHEREOF, JEFFERIES GROUP, INC. has caused this Agreement to be executed by its officer thereunto duly authorized, and Employee has duly executed this Agreement, by which each has agreed to the terms of this Agreement.

Employee	JEFFERIES GROUP, INC.
	By:
[Employee Name]

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TERMS AND CONDITIONS OF RESTRICTED STOCK UNITS

     The following Terms and Conditions apply to the Units granted to Employee by JEFFERIES GROUP, INC. (the “Company”), and Units (if any) resulting from Dividend Equivalents, as specified in the Restricted Stock Units Agreement to which these Terms and Conditions are attached (and of which these Terms and Conditions form a part). Certain terms of the Units, including the number of Units granted, vesting date(s) and Settlement Date, are set forth on the preceding pages, referred to as the Cover Page in these Terms and Conditions. The Cover Page and these Terms and Conditions are collectively referred to as the “Agreement.”

     1. General. The Units are granted to Employee under the Company’s 2003 Incentive Compensation Plan, as amended and restated (the “Plan”). A copy of the Plan and information regarding the Plan, including documents that constitute the “Prospectus” for the Plan under the Securities Act of 1933, can be viewed and printed out from the Company’s secure Intranet website, www.corp.jefferies.com (go to Benefits & Policies, then to Retirement/Fidelity/401k, then to Plan Documents and Related Items). All of the applicable terms, conditions and other provisions of the Plan are incorporated by reference herein. Capitalized terms used in this Agreement but not defined herein shall have the same meanings as in the Plan. If there is any conflict between the provisions of this document and mandatory provisions of the Plan, the provisions of the Plan govern, otherwise, the terms of this document shall prevail. By accepting the grant of the Units, Employee agrees to be bound by all of the terms and provisions of the Plan (as presently in effect or later amended), the rules and regulations under the Plan adopted from time to time, and the decisions and determinations of the Company’s Compensation Committee (the “Committee”) made from time to time, provided that no such Plan amendment, rule or regulation or Committee decision or determination shall materially and adversely affect the rights of the Employee with respect to the Units.

     2. Account for Employee. The Company shall maintain a bookkeeping account for Employee (the “Account”) reflecting the number of Units then credited to Employee hereunder as a result of such grant of Units and any crediting of additional Units to Employee pursuant to payments equivalent to dividends paid on Common Stock under Section 5 hereof (“Dividend Equivalents”).

     3. Nontransferability. Until Units are settled in accordance with the terms of this Agreement, Employee may not sell, transfer, assign, pledge, margin or otherwise encumber or dispose of Units or any rights hereunder to any third party other than by will or the laws of descent and distribution, except for transfers to a Beneficiary or as otherwise permitted and subject to the conditions under Section 9.2 of the Plan.

     4. Termination Provisions. The following provisions will govern the vesting and forfeiture of the Units in the event of Employee’s Termination of Employment and/or occurrence of a post-termination Forfeiture Event (as defined below), unless otherwise determined by the Committee (subject to Section 9(a) hereof):

     (a) Death or Disability. In the event of Employee’s death or Termination of Employment due to Disability (as defined below), all Units then outstanding, if not previously vested, will immediately vest, and all Units (if not previously settled) will be settled in accordance with the settlement terms set out on the Cover Page, giving effect to any valid deferral election of Employee then in effect. The foregoing notwithstanding, any distribution resulting from a Disability will be subject to the six-month delay rule in Section 8(a)(i), if applicable. With respect to any RSUs which do not constitute a deferral of compensation for purposes of Section 409A of the Internal Revenue Code (the “Code”), only a termination elected by the Company will be deemed a Termination of Employment due to Disability.

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     (b) Termination of Employment other than for Cause (and not subject to Section 4(c)). In the event of Employee’s Termination of Employment (other than a Termination not for Cause following a Change in Control or a Termination by the Company for Cause), Units not previously vested shall not then be forfeited provided that Employee executes a separation agreement and release in such form as may be requested by the Company within 21 days (or such longer period as may be required by law) (and provided further that any period of revocation required by law has expired without Employee exercising his right to revoke his agreement to the separation agreement and release), but thereafter all unvested Units shall be forfeited if there occurs a Forfeiture Event prior to the Settlement Date which would have applied in the absence of such Termination of Employment. Upon such a Termination of Employment, the then-outstanding Units that are vested at the date of Termination (if not already settled) and that become vested thereafter will be settled in accordance with the settlement terms set out on the Cover Page, giving effect to any valid deferral election of Employee then in effect. A “Forfeiture Event” shall be deemed to occur if, following Employee’s Termination of Employment other than a Termination by the Company for Cause, Employee renders services for any organization or engages (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, or otherwise engaged in conduct violating Section 7.4(a), 7.4(b) or 7.4(c) of the Plan. However, following Employee’s Termination of Employment other than a Termination by the Company for Cause, Employee shall be free to purchase stock or other securities of an organization or business so long as 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. If Employee does not sign a separation agreement and release within the time period requested by the Company (or signs and then timely revokes his agreement to the separation agreement and release), all Units which are not vested at the date of Termination will be forfeited.

     (c) Termination Following a Change in Control. If, following a Change in Control, Employee’s employment is terminated not for Cause by the Company or its successor, all of the then-outstanding Units not vested at the date of Termination will immediately vest and will be settled promptly thereafter, subject to the six-month delay rule in Section 8(a)(i), if applicable. If a Change in Control occurs followed by Termination of Employment by the Company not for Cause and a determination is made by the Company pursuant to Sections 280G and 4999 of the Code that a “golden parachute” excise tax will be payable in connection with compensation to Employee hereunder, Employee’s right to accelerated vesting of the Units upon the Change in Control, to the extent such right results in “parachute payments” (as such term is defined in Code Section 280G), shall be limited to the extent just necessary to avoid the excise tax. This limitation shall be applied in a manner that maximizes the number of Units as to which accelerated vesting can apply (or, stated conversely, any limitation on acceleration of vesting shall apply first to those Units with the lengthiest remaining vesting period, which Units would result in the highest “parachute payments”).

     (d) Termination by the Company for Cause. In the event of a Termination of Employment by the Company for Cause, the portion of the then-outstanding Units not vested at the date of Termination will be forfeited, and the portion of the then-outstanding Units that is vested at the date of Termination (if not already settled) will be settled on the Settlement Date specified on the Cover Page unless forfeited pursuant to the provisions of Section 7.4 of the Plan, except that any valid deferral election of Employee shall be given effect.

     (e) Certain Definitions. The following definitions apply for purposes of this Agreement, whether or not Employee has an employment agreement or other agreement with the Company, or any of its subsidiaries or affiliates (the Company and any subsidiary or affiliate each being a “Group Entity”) containing the same or similar defined terms:

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(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, 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;

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; or

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.

     (ii) A “Change in Control” shall be deemed to have occurred if any of the following conditions shall have been satisfied after the Grant Date:

Any person (as defined in section 3(a)(9) of the Securities Exchange Act of 1934, as such term is modified in Section 13(d)), other than (i) an employee plan established by the Company or any of its subsidiaries or (ii) any group of Company employees holding shares subject to agreements relating to the voting of such shares, becomes a beneficial

5

owner, directly or indirectly, of more than 51% of the voting stock of the Company;

The consummation of a merger or consolidation of the Company with any other corporation or any other entity, or the issuance of voting securities in connection with a merger or consolidation of the Company, if the holders of the Company’s voting securities immediately prior to such transaction hold in the aggregate less than a majority of the then outstanding voting securities of the Company (or any successor company or entity) entitled to vote generally in the election of the directors of the Company (or such other company or entity) after such transaction;

The sale or disposition by the Company of all or substantially all of its assets in which one person or more than one person acting as a group acquires assets from the Company that have a total gross fair market value equal to more than 50% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition; or

A change in the composition of the Board of Directors of the Company such that individuals who, as of the date of this agreement, constitute the Board of Directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors of the Company; provided, however, that any individual becoming a member of the Board of Directors of the Company subsequent to the date of this agreement whose election, or nomination for election by the shareholders of the Company, was approved by a vote of at least a majority of the directors then constituting the Incumbent Board shall be considered as if that individual were a member of the Incumbent Board.

     (iii) “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.

     (iv) “Termination” or “Termination of Employment” means the event by which Employee ceases to be employed by a Group Entity and immediately thereafter is not employed by any other Group Entity.

5. Dividend Equivalents and Adjustments.

     (a) Dividend Equivalents. Subject to Section 5(d), Dividend Equivalents will be credited on Units (other than Units that, at the relevant record date, previously have been settled or forfeited) and deemed reinvested in additional Units, to the extent and in the manner as follows:

     (i) Cash Dividends. If the Company declares and pays a dividend or distribution on Shares in the form of cash, then a number of additional Units shall be credited to Employee’s Account as of the last day of the calendar quarter in which such dividend or distribution was paid equal to the number of Units credited to the Account as of the record date for such dividend or distribution multiplied by cash amount of the dividend or distribution paid on each outstanding share of Common Stock at such payment date, divided by the Fair Market Value of a share of Common Stock at the date of such crediting; provided, however, that in the case of an extraordinary cash dividend or

6

distribution the Company may provide for such crediting at the dividend or distribution payment date instead of the last day of the calendar quarter.

     (ii) Non-Common Stock Dividends. If the Company declares and pays a dividend or distribution on Common Stock in the form of property other than shares of Common Stock, then a number of additional Units shall be credited to Employee’s Account as of the payment date for such dividend or distribution equal to the number of Units credited to the Account as of the record date for such dividend or distribution multiplied by the Fair Market Value of such property actually paid as a dividend or distribution on each outstanding share of Common Stock at such payment date, divided by the Fair Market Value of a share of Common Stock at such payment date.

     (iii) Common Stock Dividends and Splits. If the Company declares and pays a dividend or distribution on Common Stock in the form of additional shares of Common Stock, or there occurs a forward split of Common Stock, then a number of additional Units shall be credited to Employee’s Account as of the payment date for such dividend or distribution or forward split equal to the number of Units credited to the Account as of the record date for such dividend or distribution or split multiplied by the number of additional shares of Common Stock actually paid as a dividend or distribution or issued in such split in respect of each outstanding share of Common Stock.

     (b) Adjustments. The number of Units credited to Employee’s Account shall be appropriately adjusted, in order to prevent dilution or enlargement of Employee’s rights with respect to Units or to reflect any changes in the number of outstanding shares of Common Stock resulting from any event referred to in Section 5.3 of the Plan, taking into account any Units credited to Employee in connection with such event under Section 5(a) hereof, and any performance conditions relating to the Units may be likewise adjusted in the discretion of the Committee.

     (c) Risk of Forfeiture and Settlement of Units Resulting from Dividend Equivalents and Adjustments. Units which directly or indirectly result from Dividend Equivalents on or adjustments to a Unit granted hereunder and which do not result from a dividend or distribution on Shares in the form of cash shall be subject to the same risk of forfeiture (including Section 7.4 of the Plan) as applies to the granted Unit and, if not forfeited, will be settled at the same time as the granted Unit. Units which directly or indirectly result from Dividend Equivalents on or adjustments to a Unit granted hereunder and which result from an ordinary dividend or distribution on Shares in the form of cash shall not be subject to forfeiture and will be settled at the same time as the granted Unit (or if the granted Unit is forfeited, then at the time the granted Unit would have been settled if it were not forfeited). Units which directly or indirectly result from Dividend Equivalents on or adjustments to a Unit granted hereunder and which result from an extraordinary dividend or distribution on Shares in the form of cash shall, unless otherwise determined by the Company at the time of such extraordinary dividend or distribution, be subject to the same risk of forfeiture (including additional forfeiture terms of Section 7.4 of the Plan) as applies to the granted Unit and, if not forfeited, will be settled at the same time as the granted Unit.

     (d) Changes to Manner of Crediting Dividend Equivalents. The provisions of Section 5(a) notwithstanding, the Company may vary the manner and timing of crediting dividend equivalents for administrative convenience, including, for example, by crediting cash dividend equivalents rather than additional Units.

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     6. Additional Forfeiture Provisions. Employee agrees that, by signing this Agreement and accepting the grant of the Units, the forfeiture conditions set forth in Section 7.4 of the Plan shall apply to all Units hereunder and to gains realized upon the settlement of the Units.

     7. Employee Representations and Warranties and Release. As a condition to any non-forfeiture of the Units at or after Termination of Employment and to any settlement of the Units, the Company may require Employee (i) to make any representation or warranty to the Company as may be required under any applicable law or regulation, to make a representation and warranty that no Forfeiture Event has occurred or is contemplated, and that otherwise the requirements of Section 7.4(d) of the Plan and Section 7 above have been met, and (ii) to execute a release of claims against the Company arising before the date of such release, in such form as may be specified by the Company.

8. Other Terms Relating to Units.

(a) Deferral of Settlement; Compliance with Code Section 409A. Settlement of any Unit, which otherwise would occur at the Settlement Date, will be deferred in certain cases if and to the extent Employee is permitted to participate in the Stock Option Gain and Stock Award Deferral Program or otherwise permitted to defer the Units and Employee makes a valid deferral election relating to the Units. Deferrals, whether elective or mandatory under the terms of this Agreement, shall comply with requirements under Code Section 409A. Deferrals will be subject to such other restrictions and terms as may be specified by the Company prior to deferral. It is understood that Code Section 409A and regulations thereunder may require any elective deferral to comply with Section 409A(a)(4)(C). Other provisions of this Agreement notwithstanding, under U.S. federal income tax laws and Treasury Regulations (including proposed regulations) as presently in effect or hereafter implemented, with respect to Units other than those which are excluded from being deemed deferrals of compensation under 409A (i) a distribution in settlement of Units to Employee triggered by a Termination of Employment will occur only if the Termination constitutes a “separation from service” within the meaning of Code Section 409A(a)(2)(A)(i) and, if at the time of such separation from service Employee is a “specified employee” under Code Section 409A(a)(2)(B)(i) and a delay in distribution is required in order that Employee will not be subject to a tax penalty under Code Section 409A, such distribution in settlement of Units will occur at the date six months after Termination of Employment; and (ii) any rights of Employee or retained authority of the Company with respect to Units hereunder shall be automatically modified and limited to the extent necessary so that Employee will not be deemed to be in constructive receipt of income relating to the Units prior to the distribution and so that Employee shall not be subject to any penalty under Code Section 409A. Other provisions of this Agreement notwithstanding, if a separation from service occurs within less than six months before the fixed date specified as the Settlement Date and the six-month delay rule would apply to a settlement triggered by such separation from service, the settlement will not be made based on the separation from service, but instead the settlement shall be made based on the fixed date specified as the Settlement Date.

(b) Fractional Units and Shares. The number of Units credited to Employee’s Account shall include fractional Units calculated to at least three decimal places, unless otherwise determined by the Committee. Unless settlement is effected through a broker or agent that can accommodate fractional shares (without requiring issuance of a fractional share by the Company), upon settlement of the Units Employee shall be paid, in cash, an amount equal to the value of any fractional share that would have otherwise been deliverable in settlement of such Units.

(c) Tax Withholding. Employee understands and acknowledges that certain amounts must be withheld to satisfy federal, state, local, or foreign tax obligations associated with the lapse of the risk of forfeiture and/or settlement of the Units (“Withholdings”). Employee shall make arrangements satisfactory to the Company, in advance of any event triggering a

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Withholding obligation on the part of the Company or a Group Entity that employs Employee, to provide for payment of all applicable Withholdings. If Employee has failed to make such arrangements or for any reason full payment of Withholdings is not made by Employee under such arrangements, Employee expressly authorizes the Company and any such Group Entity to (1) withhold the applicable amount of Withholdings from any payment to Employee, including any payment relating to an Award or any payroll or other payment, and/or (2) withhold shares deliverable in settlement of the Units having a fair market value (as determined by the Committee) equal to the amount of such tax liability required to be withheld as Withholdings in connection with the event triggering Withholding. If the Company or such Group Entity elects to withhold shares to satisfy any Withholding obligation, the value of shares withheld shall not exceed the minimum applicable withholding tax rate for federal (including FICA), state and local tax liabilities (interpreted in a manner consistent with applicable accounting rules). This provision does not obligate the Company or any Group Entity to withhold shares to satisfy Withholding obligations. The Company may specify a reasonable deadline (for example, 90 days before lapse of Restrictions) by which Employee must make separate arrangements for the payment of Withholdings.

     (d) Statements. An individual statement of Employee’s Account will be issued to Employee at such times as may be determined by the Company. Such a statement shall reflect the number of Units credited to Employee’s Account, transactions therein during the period covered by the statement, and other information deemed relevant by the Committee. Such a statement may be combined with or include information regarding other plans and compensatory arrangements for employees. Employee’s statements shall be deemed a part of this Agreement, and shall evidence the Company’s obligations in respect of Units, including the number of Units credited as a result of Dividend Equivalents (if any). Any statement containing an error shall not, however, represent a binding obligation to the extent of such error, notwithstanding the inclusion of such statement as part of this Agreement.

9. Miscellaneous.

     (a) Binding Agreement; Written Amendments. This Agreement shall be binding upon the heirs, executors, administrators, and successors of the parties. This Agreement and the Plan, and any deferral election separately filed with the Company relating to this Award, constitute the entire agreement between the parties with respect to the Units, 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 Units 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, if Employee’s rights are being materially impaired, by Employee.

     (b) No Promise of Employment. The Units and the granting thereof shall not 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 for any period of time, or at any particular rate of compensation.

     (c) Unfunded Plan. Any provision for distribution in settlement of Employee’s Account hereunder shall be by means of bookkeeping entries on the books of the Company and shall not create in Employee or any Beneficiary any right to, or claim against any, specific assets of the Company, nor result in the creation of any trust or escrow account for Employee. With respect to any entitlement of Employee or any Beneficiary to any distribution hereunder, Employee or such Beneficiary shall be a general creditor of the Company.

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     (d) 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.

     (e) 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 New York Stock Exchange, the Financial Industry Regulatory Authority, or any other stock exchange or self-regulatory organization, or any other obligation of the Company or Employee relating to the Units or this Agreement.

     (f) Notices. Any notice to be given the Company under this Agreement shall be addressed to the Company at 520 Madison Avenue, 12th Floor, New York, NY 10022, attention: Corporate Secretary, and any notice to the Employee shall be addressed to the Employee at Employee’s address as then appearing in the records of the Company.

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EX-10.4

Exhibit 10.4

JEFFERIES GROUP, INC.

DEFERRED COMPENSATION PLAN
As Amended and Restated as of January 1, 2009

     WHEREAS, in recognition of the success provided to the Company by certain Employees, the Company desires to establish a deferred compensation plan to enable those Employees to defer the payment of all or a portion of the compensation otherwise payable in cash by the Company;

     WHEREAS, the Company adopted the Plan effective January 1, 2001 and amended and restated the Plan effective January 1, 2003.

     NOW, THEREFORE, the Company hereby adopts this amendment and restatement of the Plan effective January 1, 2009, as follows:

ARTICLE I
DEFINITIONS

     1.1 Definitions: Whenever used in this Plan:

          (a) “Accounts” shall mean the separate bookkeeping accounts established under the Plan for each Participant. The Account includes two sub-accounts for purposes of complying with Code Section 409A: The “Grandfathered Account” is that portion of the Account resulting from deferrals of compensation that was vested before 2005, except for any designated deferred compensation which the Committee has caused to be not grandfathered for purposes of Code Section 409A. The “2005-and-Later Account” is the remaining portion of the Account which is not “grandfathered” for purposes of Code Section 409A. Note: In some cases compensation deferred in a given Plan Year may by in the Grandfathered Account for some Participants but in the 2005-and-Later Account for others, or for a single Participant compensation relating to a single Plan Year may be partly in the Grandfathered Account and partly in the 2005-and-Later Account.

          (b) “Administrator” shall mean a committee of officers authorized to administer the Plan. Unless otherwise determined by the Committee, the Administrator shall be a committee consisting of the Chief Executive Officer, the Chairman of the Executive Committee, the Chief Financial Officer and the Treasurer.

          (c) “Board” shall mean the Board of Directors of the Company.

          (d) “Change of Control” shall mean the first to occur of any of the following events after the effective date of the Plan:

     (i) Any “person,” as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding

securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), acquires voting securities of the Company and immediately thereafter is a “50% Beneficial Owner.” For purposes of this provision, a “50% Beneficial Owner” shall mean a person who is the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then-outstanding voting securities; provided, however, that the term “50% Beneficial Owner” shall not include any person who shall become the beneficial owner of 50% or more of the combined voting power of the Company’s then-outstanding voting securities solely as a result of an acquisition by the Company of its voting securities, until such time thereafter as such person shall become the beneficial owner (other than by means of a stock dividend or stock split) of any additional voting securities and becomes a 50% Beneficial Owner in accordance with this subsection;

     (ii) During any period of two consecutive years commencing on or after the effective date of this Plan, individuals who at the beginning of such period constitute the Board, and any new director whose election by the Board or nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (the “Continuing Directors”), cease for any reason to constitute at least a majority thereof;

     (iii) The shareholders of the Company have approved a merger, consolidation, recapitalization, or reorganization of the Company, or a reverse stock split of any class of voting securities of the Company, or the consummation of any such transaction if shareholder approval is not obtained, other than any such transaction which would result in at least 50% of the combined voting power of the voting securities of the Company or the surviving entity outstanding immediately after such transaction being beneficially owned by persons who together beneficially owned at least 80% of the combined voting power of the voting securities of the Company outstanding immediately prior to such transaction, with the relative voting power of each such continuing holder compared to the voting power of each other continuing holder not substantially altered as a result of the transaction; provided that, for purposes of this subsection, such continuity of ownership (and preservation of relative voting power) shall be deemed to be satisfied if the failure to meet such 50% threshold (or to substantially preserve such relative voting power) is due solely to the acquisition of voting securities by an employee benefit plan of the Company or of such surviving entity or a subsidiary thereof; and provided further, that, if consummation of the corporate transaction referred to in this subsection is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency or approval of the shareholders of another entity or other material contingency, no Change of Control shall occur until such time as such

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consent and approval has been obtained and any other material contingency has been satisfied;

     (iv) The shareholders of the Company have approved a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets (or any transaction having a similar effect); provided that, if consummation of the transaction referred to in this subsection is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency or approval of the shareholders of another entity or other material contingency, no Change of Control shall occur until such time as such consent and approval has been obtained and any other material contingency has been satisfied; and

     (v) Any other event which the Board determines shall constitute a Change of Control for purposes of this Plan.

          (e) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations and other authority issued thereunder by the appropriate governmental authority. References to the Code shall include references to any successor section or provision of the Code.

          (f) “Committee” shall mean the Compensation Committee of the Board.

          (g) “Company” shall mean Jefferies Group, Inc., a corporation organized under the laws of the State of Delaware, or any successor corporation.

          (h) “Compensation” shall mean those elements of cash remuneration payable to an Employee by the Company designated by the Committee (or Administrator) as eligible for deferral with respect to a given Plan Year. Such designation must be made before any applicable deadline for the Participant to elect deferral for such Plan Year (to the extent required to comply with Code Section 409A). The Committee (or Administrator) may, in its discretion, designate salary, bonus awards, commissions, or sign-on bonus awards as eligible for deferral. Payments to any Employee for a period during which the Employee is determined to have a 409A Disability shall not be deferred, however.

          (i) “Date of Grant” shall mean the date on which an Option is credited to a Participant’s Equity Subaccount pursuant to Section 3.4.

          (j) “Deferral Period” shall mean, with respect to each Account of a Participant, the five-year period beginning on the first day of the Plan Year with respect to which the Account was established; provided, however, that (i) this period will be subject to any extension in accordance with Section 3.6, and (ii), for Plan Years after 2002, the Committee may establish a duration for the Deferral Period of other than five years, but any such change shall be announced to Employees invited to participate prior to the enrollment deadline for that Plan Year.

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          (k) “Deferred Shares” shall mean Shares or Restricted Shares during the applicable Deferral Period.

          (l) “Disability” shall mean a physical or mental impairment that would entitle the Participant to receive benefits under the Company’s long term disability program, as determined by the Committee in its sole discretion. The Committee may, in its sole discretion, require a medical examination performed by a physician at the expense of the Company, as a condition to any determination of Disability. The term “409A Disability” shall have the meaning as defined in Section 9.6(a)(v)(C) of the 2003 Incentive Compensation Plan

          (m) “Employee” shall mean any individual employed by the Company, Jefferies & Company, Inc., or any other subsidiary designated by the Committee.

          (n) “Equity Subaccount” shall mean the portion of a Participant’s Account deemed to comprise Options, Restricted Shares and/or Deferred Shares.

          (o) “Equity Unit” shall mean three Restricted Shares and an Option for one Share; provided, however, that, for any Plan Year after 2002, the Committee may vary the number of Restricted Shares and number of Options which constitute an Equity Unit, but any such change shall be announced to Employees invited to participate prior to the enrollment deadline for that Plan Year.

          (p) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time, and as now or hereafter construed, interpreted and applied by regulations, rulings and cases.

          (q) “Fair Market Value” shall mean the closing sale price of a Share on the composite tape of the New York Stock Exchange on the relevant valuation date or Date of Grant, or if Shares are not traded on such date, on the last date on which Shares are traded preceding such valuation date or Date of Grant.

          (r) “Investment Subaccount” shall mean the portion of the Participant’s Account that is not his or her Equity Subaccount.

          (s) “Option” shall mean an option to purchase Shares pursuant to Article V.

          (t) “Option Discount Percentage” means the percentage of the full value of an Option, determined under such option valuation methodology as may be reasonably selected by the Committee, represented by the price of an Option specified by the Committee for each Plan Year, which is used under Section 3.4 to calculate the number of Equity Units or Options credited to a Participant’s Account. In no event will the Option Discount Percentage be less than 50%.

          (u) “Participant” shall mean an Employee who has satisfied the requirements of Section 2.1.

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          (v) “Plan” shall mean the Jefferies Group, Inc. Deferred Compensation Plan, as amended and restated, as set forth herein and as amended from time to time. The Plan is implemented as a sub-plan under the 2003 Incentive Compensation Plan.

          (w) “Plan Quarter” shall mean a calendar quarter ending on March 31, June 30, September 30, or December 31.

          (x) “Plan Year” shall mean the calendar year.

          (y) “Restricted Period” shall mean the period ending on the last day of the third consecutive Plan Year for which a Participant defers Compensation pursuant to Section 3.1; provided, however, that if a Participant ceases to defer Compensation by reason of Disability or 409A Disability, the Participant shall be treated as if such deferrals have not ceased for the duration of such Disability or 409A Disability for purposes of determining the end of the Restricted Period. The foregoing notwithstanding, for any Plan Year after 2002, the Committee may vary the length of the Restricted Period, but any such change shall be announced to Employees invited to participate prior to the enrollment deadline for that Plan Year and shall not operate to extend the Restricted Period applicable to any Account relating to a Participant’s deferrals in a previous Plan Year.

          (z) “Restricted Share” shall mean a contingent right, credited pursuant to Section 3.4, to receive delivery of a Share at the end of the Deferral Period. A Participant credited with a Restricted Share has no rights of a shareholder until delivery of a Share has been effected.

          (aa) “Restricted Share Discount Percentage” means the percentage of the Fair Market Value of a Share specified for the Committee for each Plan Year, which is used under Section 3.4 to calculate the number of Equity Units or Restricted Shares credited to a Participant’s Account. In no event will the Restricted Share Discount Percentage be less than 85%.

          (bb) “Retirement Age” shall mean the age at which an Employee’s age plus his years of service equals 65. For this purpose, years of service shall be credited for each twelve month period beginning on the date of the Participant’s commencement of employment with the Company and on each anniversary thereof during which the Employee was in active employment with the Company.

          (cc) “Shares” shall mean the common stock of the Company, $.0001 par value.

ARTICLE II
PARTICIPATION

     2.1 Eligibility to Participate. An Employee who is a full-time employee of the Company or a participating subsidiary shall become a Participant upon his designation by the Committee as eligible to participate in the Plan and his election to defer Compensation in accordance with Article III. A Participant is not automatically eligible to defer compensation in a given Plan Year, but must be designated as eligible to defer in such Plan Year by the Committee.

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     2.2 Termination of Participation. Once an Employee becomes a Participant, the Employee shall remain a Participant (subject to Section 2.1) until termination of employment with the Company and thereafter until all benefits to which the Participant or the Participant’s beneficiary is entitled under the Plan have been paid.

ARTICLE III
DEFERRAL OF COMPENSATION

     3.1 Deferral Election. With respect to each Plan Year, a Participant may elect to defer the receipt of Compensation otherwise payable to him. A Participant’s deferral election shall designate an annual dollar amount or percentage for deferral separately with respect to each component of Compensation (e.g., base salary, bonus, commissions, to the extent such component is deferrable). In the event that a designated dollar deferral amount for any component of Compensation exceeds the actual annual amount of such component of Compensation, 100% of such component of Compensation shall be deferred in lieu of this designated dollar amount. The Committee may establish a maximum limit on the aggregate amount of deferrals by any Participant during any Plan Year. Such election must be made before the beginning of the Plan Year to which the deferral relates, or by such other deadline as may be specified by the Committee, in the form and manner prescribed by the Committee; provided, however, that the election deadline for any deferral of compensation credited or to be credited to the 2005-and-Later Account shall comply with Exhibit A to the 2003 Incentive Compensation Plan (and to the extent applicable Section 9.6(a)(ii) of that Plan). Notwithstanding the foregoing, with respect to the Plan Year beginning January 1, 2001, deferral elections must be made before February 16, 2001, and such elections will relate only to amounts not yet earned or not yet payable as of that date, as specified by the Committee. Elections to defer (including the related election as to the time of distribution) become irrevocable at the applicable deadline for the filing of such elections, or at such earlier time as may be specified by the Committee.

     3.2 Establishment of Account. With respect to each Plan Year, an Account will be established for each Participant and the Compensation that the Participant elects to defer under the Plan with respect to that Plan Year will be credited to that Account. Unless otherwise determined by the Committee, each such credit will be made to the Account as of the last day of the Plan Quarter during which such Compensation would have otherwise been payable to the Participant in cash. Prior to the deadline for deferral elections for a given Plan Year, the Committee will establish the proportions in which amounts deferred will be allocated to the Participant’s Investment Subaccount in accordance with Section 3.3 and to the Equity Subaccount in accordance with Section 3.4; provided, however, that Committee may permit the Participant to elect from among two or more choices as to the allocations of the Participant’s deferrals for the Plan Year to the Subaccounts, and may permit the Participant to elect among investment alternatives within each Subaccount.

     3.3 Investment Subaccount. Amounts allocated to the Investment Subaccount portion of a Participant’s Account shall be treated as if invested in the investment vehicles selected by the Participant from among the investment vehicles made available by the Committee, as follows:

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          (a) The Participant shall select, in the form and manner prescribed by the Committee, the investment vehicles in which the Investment Subaccount portion of each Account shall be deemed to be invested. If one of the available investment vehicles is a money market fund, the Participant shall be permitted to elect at least once during each Plan Year, in the form and manner prescribed by the Committee, to treat any amounts deemed invested in the money market fund as if they were thereafter invested in such other available investment vehicles (if any are made available by the Committee) as the Participant shall designate.

          (b) The investment vehicles deemed to be made available to the Participant, and any limitation on the maximum or minimum percentages of the Participant’s Investment Subaccount that may be invested in any particular investment vehicle and the times and terms upon which Participants will be permitted to reallocate balances between different investment vehicles, shall be determined by the Committee from time to time, and the Committee may add, change, or delete investment vehicles at any time.

          (c) As of the last day of each Plan Quarter, each of a Participant’s Investment Subaccounts shall be credited or debited with earnings and losses (net of investment management fees and expenses) as if invested for such Plan Quarter (or portion thereof from the date any deferred amount would otherwise have been payable to the Participant in cash until the last day of the Plan Quarter) in the investment vehicles selected by the Participant. The Committee may cause such crediting or debiting of earnings and losses as of other dates, in its discretion.

          (d) If a Participant does not furnish complete and clear investment designation instructions, the undesignated portion of the Participant’s Investment Subaccount shall be deemed to be invested in the money market fund made available under the Plan, until such time as complete and clear investment designation instructions are provided by the Participant.

3.4 Equity Subaccount.

          (a) As of the last day of each Plan Quarter, the Equity Subaccount portion of a Participant’s Account shall be credited with Equity Units, or separately with Restricted Shares or Options, in accordance with the terms established by the Committee and any Participant elections, if permitted by the Committee, under Section 3.2. The number of Equity Units to be so credited shall equal the greatest number obtained by dividing (i) the amount of Compensation deferred and allocated to the Participant’s Equity Subaccount for the Plan Quarter, by (ii) the sum of (A) the Restricted Share Discount Percentage times the Volume Weighted Average Price of one Share as of the last day of the Plan Quarter times the number of Restricted Shares included in the Equity Unit, and (B) the price of an Option specified by the Committee for the Plan Year, which shall be based on the Option Discount Percentage, times the number of Options included in the Equity Unit. If Restricted Shares or Options are to be credited to the Equity Subaccount separately from Equity Units, the number of each shall be calculated in a manner consistent with the manner used for Equity Units. Restricted Shares and Options shall be credited and relate to whole shares, with any fractional remainder for the Plan Quarter allocated to the Participant’s Investment Subaccount, unless the Committee specifies another reasonable method of dealing with fractional Equity Units and fractional Shares or cash amounts that relate

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thereto. The Committee may cause the crediting of Equity Units, Restricted Shares and Options at dates other than the last day of Plan Quarters, in its discretion.

          (b) Restricted Shares and Options, and Equity Units comprising them, shall be subject to the provisions of Article IV and V, as applicable.

          (c) Shares which will be reserved for Restricted Shares and Options under the Plan shall be authorized and unissued shares or treasury shares (including shares reacquired by the Company for purposes of the Plan). From and after the time the 2003 Incentive Compensation Plan was adopted by the Board and approved by the Company’s shareholders (May 5, 2003), the shares to be used under the Plan for delivery upon exercise of outstanding Options and in connection with outstanding Restricted Shares and Deferred Shares, and for such awards thereafter, shall be drawn from the 2003 Incentive Compensation Plan, and the shares theretofore reserved under this Plan shall be released.

          (d) If any Restricted Shares or Deferred Shares under the Plan are forfeited, or if any Options terminate or expire unexercised, the Shares forfeited or subject to the terminated or expired Options shall (unless the Plan shall have been terminated) again become available for delivery under the Plan (or 2003 Incentive Compensation Plan to the extent the Shares at issue originated under such Plan).

     3.5 Account Statements. Each Participant will receive a statement of the balance in the Participant’s Accounts as promptly as practicable after the end of each Plan Quarter.

     3.6 Redeferral of Account. At least thirteen months prior to the end of the Deferral Period with respect to each Grandfathered Account, and at the time(s) specified in Section 2 of Exhibit A to the 2003 Incentive Compensation Plan (and as otherwise permitted under Section 9.6(a)(ii) of that Plan) with respect to each 2005-and-Later Account, a Participant who is an Employee may elect to defer the amounts credited to that Account for an additional period of five years (or such other period as may be permitted by the Committee, subject to the applicable requirements of such Exhibit A), beginning on the first day of the Plan Year immediately following the last day of the Deferral Period. An election to extend the Deferral Period shall be made in the form and manner prescribed by the Committee. With respect to Grandfathered Accounts, (i) only one election to extend the Deferral Period may be made with respect to any Grandfathered Account, and if a Participant is determined to have incurred a Disability, the election to extend the Deferral Period for a Grandfathered Account otherwise permitted under this Section 3.6 shall not become effective if the Participant remains subject to the Disability at the time it otherwise would become effective.

ARTICLE IV
RESTRICTED SHARES

     4.1 Terms of Restricted Shares. If a Participant’s employment with the Company terminates prior to the earliest of (i) the end of the Restricted Period, (ii) the Participant’s retirement after attainment of Retirement Age, (iii) the Participant’s death, (iv) the occurrence of a Change of Control, or (v) the fifth anniversary of the first day of the Plan Year that includes the Date of Grant, a portion of the Restricted Shares credited to his or her Equity Subaccount for

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each Plan Year shall be forfeited. The number of Restricted Shares to be forfeited shall be (A) the total number of Restricted Shares credited for that Plan Year minus (B) that total number of Restricted Shares times the Restricted Shares Discount Percentage for that Plan Year. Any Deferred Shares credited under Section 4.2 that are attributable, directly or indirectly, to such forfeited Restricted Shares will also be forfeited. Any fractional shares resulting from this calculation will be disregarded and not forfeited, unless the Equity Subaccount is then being maintained in a manner that credits and accounts for fractional shares.

     4.2 Dividend Equivalents. As of the last day of each Plan Quarter, each Participant’s Equity Subaccounts shall be credited with a number of whole and fractional Deferred Shares equal to (i) the product of (A) the aggregate number of Restricted Shares and Deferred Shares credited to the Participant’s Equity Subaccounts, multiplied by (B) the cash value or Fair Market Value of any dividend paid with respect to a Share during such Plan Quarter, determined as of the payment date for such dividend, divided by (ii) the Volume Weighted Average Price of a Share as of the last day of such Plan Quarter; provided, however, that, in the case of a non-cash dividend, the Committee may determine to make an equitable adjustment under Article VII in lieu of crediting the Participant’s Equity Subaccounts under this Section 4.2. The foregoing notwithstanding, the Committee may specify an alternative method for crediting dividend amounts, including by cash crediting to the Participant’s Investment Subaccount, for administrative convenience; such alternative methods need not apply uniformly to all Participants.

ARTICLE V
OPTIONS

     5.1 Nonqualified Stock Options. Each Option credited to a Participant pursuant to Section 3.4 shall be a non-qualified stock option and shall be evidenced by a Share Option Certificate in such form as the Committee shall approve. A Certificate evidencing Options not forfeited pursuant to Section 5.3(b) shall be issued following the earliest of (i) the third anniversary of the first day of the Plan Year that includes the Date of Grant, or (ii) the Participant’s termination of employment for any reason, including death; provided, however, that the Committee may provide for issuance of such Certificate at earlier dates than those specified or, if announced to a Participant prior to the effectiveness of his or her deferral election which results in acquisition of the Option, at later dates later than those specified. References in this Plan to distributions of Accounts do not include distributions of Options, which are governed by the certification procedure and vesting described in this Article V.

     5.2 Option Price. The option exercise price of each Option granted under the Plan shall be such exercise price as may be specified by the Committee in accordance with the 2003 Incentive Compensation Plan.

     5.3 Option Term; Vesting.

          (a) An Option may not be exercised prior to the issuance of a Share Option Certificate with respect to such Option in accordance with Section 5.1, and may not be exercised after the earlier of (i) the last day of the Plan Year that includes the fifth anniversary of the Date of Grant, or (ii) in the case of a Participant who ceases to be an Employee other than by reason

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of the Participant’s death, the sixtieth day following termination of the Participant’s employment. Any Option not exercised within the foregoing Option term shall automatically terminate at the expiration of such Option term.

          (b) If a Participant’s employment with the Company terminates before the earliest of (i) the end of the Restricted Period, (ii) the Participant’s retirement after attainment of Retirement Age, (iii) the Participant’s death, (iv) the occurrence of a Change of Control, or (v) the third anniversary of the first day of the Plan Year that includes the Date of Grant, a portion of the Options credited to his or her Equity Subaccount for that Plan Year shall terminate and be forfeited, which portion shall be (A) the total number of Options credited for that Plan Year minus (B) that total number of Options times the Option Discount Percentage for that Plan Year. Any Option relating to a fractional share resulting from this calculation will be disregarded and not terminated and forfeited.

     5.4 Exercise and Payment.

          (a) An exercisable Option may be exercised by notice (in the form prescribed by the Committee) to the Company specifying the number of Shares to be purchased. Payment for the number of Shares purchased upon the exercise of an Option shall be made in full at the price provided for in the applicable Share Option Agreement. Such purchase price shall be paid by the delivery to the Company of cash (including check or similar draft) in United States dollars or whole Shares (subject to any restrictions the Committee may impose), or a combination thereof. Shares used in payment of the purchase price shall be valued at their Fair Market Value as of the date the notice of exercise is received by the Company. Any Shares delivered to the Company shall be in such form as is acceptable to the Company.

          (b) The Company may defer making delivery of Shares under the Plan until satisfactory arrangements have been made for the payment of any tax attributable to exercise of the Option. The Committee may, in its sole discretion, permit a Participant to elect, in such form and at such time as the Committee may prescribe, to pay all or a portion of any taxes arising in connection with the exercise of an Option by electing to (i) have the Company withhold whole Shares, or (ii) deliver other whole Shares previously owned by the Participant, except that the number of shares withheld or surrendered shall be limited to that number having a Fair Market Value not greater than the minimum applicable withholding tax rate for federal (including FICA), state and local tax withholding obligations associated with the transaction if such restriction is then necessary in order that the Company not recognize additional accounting expense in connection with the transaction.

          (c) If an Option is exercised, Shares shall be delivered at the time of exercise, subject to subsection 5.4(b).

     5.5 Nontransferability. Except as otherwise determined by the Committee, no Option or any rights with respect thereto shall be subject to any debts or liabilities of a Participant, nor shall they be assignable or transferable except by will or the laws of descent and distribution.

     5.6 Rights as a Shareholder. A Participant shall have no rights as a record holder with respect to Shares covered by his or her Option until the exercise of such Option and

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payment in full of the purchase price. No adjustment will be made for cash dividends for which the record date is prior to the date of such exercise.

ARTICLE VI
DISTRIBUTION OF DEFERRED COMPENSATION

     6.1 Election of Distribution Form. At the time of filing of each deferral election described in Section 3.1 (by the applicable deadline thereunder in the case of 2005-and-Later Account), the Participant shall elect to receive the balance of the Account with respect to which such deferral election is made, in the form of a single sum, periodic distributions over a period of five years, or periodic distributions over a period of ten years. At the time prescribed in Section 3.6 with respect to each of the Participant’s Accounts, the Participant may make a new election as to the timing of distribution of that Account. The election timing rules specified herein are intended to comply with Code Section 409A; the provisions of Section 9.6(a)(ii) of the 2003 Incentive Compensation Plan shall apply for this purpose. Elections made pursuant to this Section 6.1 shall be made in the form and manner prescribed by the Committee. If a Participant fails to make an election pursuant to this Section 6.1 with respect to any Account, that Account will be distributed in a single sum.

     6.2 Form of Distribution. Distribution shall be made in accordance with the election made pursuant to Section 6.1, as in effect at the time of distribution. Notwithstanding the preceding sentence, if the balance of a Participant’s Grandfathered Account at the time distribution is made in accordance with this Article VI has a value of less than $50,000, the Committee may direct that such distribution shall be made in a single sum. Distributions from the Investment Subaccount portion of a Participant’s Account shall be made in cash, unless in-kind distribution of assets that match the Participant’s notional investments is authorized by the Committee. Distributions from the Equity Subaccount portion of a Participant’s Account shall be made in the form of Shares, with any fractional Shares distributed in cash unless other means of settlement of fractional shares is authorized by the Committee. If a Participant’s Investment Subaccount is distributed in annual installments, the undistributed portion of such Investment Subaccount shall continue to be credited with earnings and losses in accordance with Section 3.3(c). As of the last day of each Plan Year, the amount of each remaining installment shall be redetermined by dividing the undistributed balance of the Investment Subaccount, as adjusted in accordance with the preceding sentence, by the number of remaining installments. The Committee may, in its sole discretion, accelerate distributions from a Participant’s Grandfathered Account in the event of the Participant’s Disability.

     6.3 Distribution Upon Expiration of Deferral Period. Unless distribution is made at an earlier time pursuant to this Article VI, the balance of each Account shall be distributed to the Participant in the manner prescribed under Section 6.2 in, or beginning in, the January following the end of the Deferral Period applicable to that Account (including any extension in accordance with Section 3.6). All installments shall be distributed in January of the applicable year.

     6.4 Hardship Distribution. Notwithstanding any other provisions of this Plan, if the Committee determines, after consideration of a Participant’s application, that the Participant has sustained a severe financial hardship resulting from a sudden and unexpected illness or accident

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of the Participant or the Participant’s dependent (as defined in Section 152(a) of the Code), loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances resulting from events beyond the Participant’s control, the Committee may, in its sole discretion, (i) direct that all or a portion of the balance of the Participant’s Grandfathered Accounts be paid to the Participant and, (ii) if the applicable conditions of Section 9.6(a)(iv) and (v) of the 2003 Incentive Compensation Plan relating to an “Unforeseeable Emergency” have been met, direct that all or a portion of the 2005-and-Later Account be paid to the Participant; provided, however, that during the Restricted Period applicable to any Restricted Shares, no such Restricted Shares in excess of the number of such Restricted Shares that would remain after forfeiture under Section 4.1 shall be distributed under this Section 6.4. The payment will be made in the manner and at the time specified by the Committee, subject to compliance with such applicable requirements of Code Section 409A in the case of 2005-and-Later Accounts. No Participant who is also a member of the Committee may in any way take part in any decision pertaining to a request for payment made by that Participant under this Section 6.4. In the event of a withdrawal from a 2005-and-Later Account under this Section 6.4, the Participant’s deferral election shall be cancelled for the Plan Year in which the withdrawal occurs, and in the event of any withdrawal under this Section 6.4 no deferral election will be permitted for the next following Plan Year.

     6.5 Penalty Withdrawals. Except as otherwise provided under Section 6.4, prior to the end of the Deferral Period applicable to any Grandfathered Account, a Participant may withdraw all or a portion of the balance of that Grandfathered Account; provided, however, that if such withdrawal is made before the end of the Restricted Period applicable to any Restricted Shares, no such Restricted Shares in excess of the number of such Restricted Shares remaining after forfeiture under Section 4.1 may be withdrawn under this Section 6.5. If any such withdrawal is made, the Participant shall receive from his Grandfathered Account an amount equal to:

          (a) If the withdrawal is made before a Change of Control or more than twenty-four months following a Change of Control, 90% of the amount requested, and the remaining 10% of the amount requested shall be forfeited; or

          (b) If the withdrawal is made within the twenty-four month period beginning on the date following a Change of Control, 95% of the amount requested, and the remaining 5% of the amount requested shall be forfeited.

No request to withdraw less than 10% of the balance of any Grandfathered Account shall be permitted under this Section 6.5. Any request to withdraw 75% or more of the balance of any Grandfathered Account shall result in the withdrawal or forfeiture of the entire balance of such Account. In the event of a withdrawal under this Section 6.5, the Participant’s deferral election for the then-current Plan Year shall be unaffected, but no deferral election will be permitted for the next following Plan Year.

     6.6 Death Benefit. In the event of a Participant’s death before the balance in the Participant’s Account is fully paid out:

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          (a) If the Participant’s death occurs prior to the commencement of payments from an Account as otherwise provided under this Article VI, payment of the balance of the Account will be made to the beneficiary or beneficiaries designated by the Participant or, if the Participant has made no such designation or no beneficiary survives, to the Participant’s estate. In either case, such payment will be made in a single sum in January following the date of the Participant’s death.

          (b) If a Participant’s death occurs after periodic payments have begun to be made from an Account but before all payments have been made, the remaining payments shall be made to the beneficiary or beneficiaries designated by the Participant or if there is no such designation or no beneficiary survives, to the Participant’s estate. Notwithstanding the foregoing, however, if the remainder of the payments from an Account are to be paid to the estate of the Participant, the Committee may, in its sole and absolute discretion and upon receipt of an application therefor from the duly appointed administrator or executor of such estate, direct that the sum of the remaining payments from any Grandfathered Account be paid to the estate in a single payment in January following the date of the Participant’s death (this alternative will not apply to a 2005-and-Later Account, however).

     6.7 Acceleration of Periodic Distributions. If a Participant’s Grandfathered Account is being paid to the Participant or a beneficiary of the Participant in the form of periodic payments, such Participant or beneficiary may make an election to have the remainder of the balance of such Grandfathered Account distributable to him or her distributed in a single sum. In the event a Participant or beneficiary makes an election under this Section 6.7, the remaining balance of the Participant’s Grandfathered Account at the time of such election shall be subject to the forfeiture provisions of Section 6.5. Elections pursuant to this Section 6.7 shall be made in the form and manner prescribed by the Committee.

     6.8 Tax Withholding; FICA. The Company may defer making delivery of cash or Shares under this Article VI until satisfactory arrangements have been made for the payment of any withholding taxes attributable to the distribution or withdrawal, provided that no deferral is permitted hereunder to the extent not in compliance with Code Section 409A. The Committee may require that a Participant pay, or permit a Participant to elect, in such form and at such time as the Committee may prescribe, to pay, all or a portion of any taxes arising in connection with the distribution of Shares in settlement of a Participant’s Equity Subaccounts by electing to (i) have the Company withhold whole Shares, or (ii) deliver other whole Shares previously owned by the Participant, except that the number of shares withheld or surrendered shall be limited to that number having a Fair Market Value not greater than the minimum applicable withholding tax rate for federal (including FICA), state and local tax withholding obligations associated with the transaction if and to the extent such restriction is then necessary in order that the Company not recognize additional accounting expense in connection with the transaction. By electing to defer compensation under the Plan, each Participant will have agreed to pay any FICA/HI or other taxes that may be applicable to the amounts deferred or upon the vesting of Restricted Shares hereunder.

ARTICLE VII
EFFECT OF CERTAIN CHANGES

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In the event of any extraordinary dividend, share dividend, recapitalization, merger, consolidation, share split, warrant or rights issuance, or combination or exchange of such shares, or other similar transactions, the number and type of outstanding Restricted Shares, Deferred Shares, and Options, the price of Options for the Plan Year, the exercise price of outstanding Options, and other affected Plan terms, shall be equitably adjusted by the Committee to reflect such event and preserve the value of such Restricted Shares, Deferred Shares, and Options; and the Committee may make such other adjustments to the terms of outstanding Restricted Shares, Deferred Shares, and Options as it may deem equitable under the circumstances; provided, however, that any Options for fractional Shares resulting from such adjustment shall be eliminated. A Participant’s right to an adjustment to outstanding Restricted Shares, Deferred Shares and Options is subject to Section 5.3 of the 2003 Incentive Compensation Plan, and this Article VII shall not be deemed to limit or expand the rights so conferred under the 2003 Incentive Compensation Plan.

ARTICLE VIII
GENERAL

     8.1 Unsecured Claims. The right of any Participant, beneficiary or estate to receive payment of any unpaid balance in the Participant’s Account will be an unsecured claim against the general assets of the Company.

     8.2 Anti-alienation and Assignment. During a Participant’s lifetime, any payment under the Plan will be made only to the Participant. No Account balance, Restricted Shares, Deferred Shares, sum or other interest under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt by a Participant or any beneficiary under the Plan to do so shall be void. No interest under the Plan shall in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of a Participant or beneficiary entitled thereto. 2005-and-Later Accounts shall also be subject to Section 9.6(a)(vii) of the 2003 Incentive Compensation Plan.

     8.3 No Rights to Continued Employment. Nothing in the Plan shall confer upon any Participant the right to continue employment with the Company or to be entitled to any remuneration or benefits not set forth in the Plan.

     8.4 Administration.

          (a) The Plan shall be administered by the Committee, except as otherwise specifically provided in the Plan. The Committee shall have the full authority and discretion to make such interpretations and constructions of the Plan as are necessary to administer the Plan in accordance with, and subject to, the Plan’s provisions. Unless otherwise determined by the Committee, the Administrator shall have delegated authority to take all ministerial actions the Committee is authorized to take under the Plan, and any other actions the Committee is authorized to take with respect to the Plan that do not result in more than an immaterial cost to the Company. This delegated authority includes authority to determine the terms of participation in the Plan, including the compensation eligible for deferral hereunder. In any case in which such person or persons are acting on behalf of the Committee pursuant to such delegated authority, references in the Plan to the Committee shall be deemed to include such person or persons.

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          (b) All decisions, determinations and interpretations of the Committee (or its delegee) shall be final and binding on all persons, including the Company, the Participant (or any person claiming any rights under the Plan from or through any Participant) and any shareholder. No member of the Committee (or its delegee) shall be liable for any action taken or determination made in good faith with respect to the Plan or any grant hereunder.

          (c) All determinations of the Committee with respect to the terms and timing of elections by Participants hereunder shall be implemented in a manner that reasonably assures that a Participant making the election will not be deemed to be in constructive receipt of the compensation or have the economic benefit of the compensation such that federal income taxation of such compensation would be triggered prior to the end of the applicable Deferral Period, and to ensure that no Participant is subject to taxation (including penalties) under Code Section 409A.

     8.5 Amendment and Termination of the Plan. The Board at any time and from time to time may suspend, terminate, modify or amend the Plan; provided, however, that the Plan may not be suspended, terminated, modified, or amended for a period of twenty-four months following a Change of Control, unless approved by Participants whose Accounts represent not less than 50% of the aggregate value of all Accounts under the Plan. The Committee may act on behalf of the Board under this Section 8.5 to the extent the Committee is acting within the scope of its authority under any Committee chartering document or other delegation of authority by the Board. Except as provided in Article VII hereof, no suspension, termination, modification or amendment of the Plan may materially and adversely affect any amount, Restricted Shares, Deferred Shares, or Options previously credited to a Participant, unless the written consent of the Participant is obtained. No amendment shall be adopted or effective to cause a Participant to be subject to taxation (including penalties) under Code Section 409A.

     8.6 Governing Law. The Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the Delaware General Corporation Law and, in other respects, the laws of the State of New York without giving effect to the choice of law principles thereof, except to the extent that any such law is preempted by federal law.

     8.7 Implementing Plan in Foreign Jurisdictions. The Committee is authorized to amend or vary the terms of the Plan in implementing deferrals in foreign jurisdictions in which eligible Employees are employed, in order to conform with local laws and customs, and to permit participation by such Employees on terms deemed by the Committee to be reasonably comparable to the terms of participation of U.S. resident Employees and consistent with the purposes of the Plan. Unless otherwise determined by the Committee in advance of the deadline for an election to participate by a non-U.S. resident, restrictions required to comply with Code Section 409A shall apply to any such non-U.S. resident.

     8.8 Terms of Deferrals Prior to 2003. The terms of participation and deferrals prior to 2003 are governed by the terms of the Plan, and terms set thereunder by the Committee, in effect prior to the amendment and restatement at January 1, 2003, except that revised definitions under Article I and the discretion of the Committee with respect to existing Accounts, as provided in the amended and restated Plan, shall apply to Account balances and awards resulting from deferrals prior to 2003.

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     8.9 Certain Restrictions to Promote Compliance with Code Section 409A. The provisions of Section 9.6 of the 2003 Incentive Compensation Plan shall be further restrictions under this Plan. For this purpose, deferrals of compensation hereunder, other than Options and Grandfathered Accounts, constitute 409A Awards for purposes of the 2003 Incentive Compensation Plan. Distributions relating to each Plan Year, distributions in respect of a Plan year resulting from annual incentives, forfeitable Restricted Stock, and non-forfeitable Restricted Stock each shall constitute a separate payment for purposes of Code Section 409A; distributions relating to a Plan Year in the form of installments shall constitute a single payment with respect to such Plan Year for purposes of Code Section 409A.

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EX-10.5

Exhibit 10.5

JEFFERIES GROUP, INC.

1999 Directors’ Stock Compensation Plan As Amended and Restated January 1, 2009

     1. PURPOSE. The purpose of this 1999 Directors’ Stock Compensation Plan (the “Plan”) is to advance the interests of the Company and its stockholders by providing a means to attract, retain and compensate non-employee directors and to enable such persons to increase their proprietary interest in the Company. In furtherance of this purpose, the Plan provides for periodic grants of options, Deferred Shares or Restricted Stock (as defined below), the opportunity for a director to elect deferred and alternative forms of compensation in lieu of cash fees for service as a director, including Options, Deferred Shares, and deferred cash, and the opportunity to defer delivery of shares deliverable upon exercise of options or in settlement of other awards.

     2. DEFINITIONS. In addition to the terms defined in Section 1, the following terms shall be defined as set forth below:

     2.1 “Administrator” means the administrative committee specified in Section 3(b) to whom the Board has delegated the authority to take action under the Plan.

     2.2 “Beneficiary” means the person(s) or trust(s) which have been designated by a Participant in his or her most recent written beneficiary designation filed with the Administrator to receive the benefits specified under the Plan upon such Participant’s death. If, upon a Participant’s death, there is no designated Beneficiary or surviving designated Beneficiary, then the term Beneficiary means the person(s) or trust(s) entitled by will or the laws of descent and distribution to receive such benefits.

     2.3 “Board” means the Board of Directors of the Company.

     2.4 “Code” means the Internal Revenue Code of 1986, as amended, including regulations thereunder and successor provisions and regulations thereto.

     2.5 “Company” means Jefferies Group, Inc., a Delaware corporation, formerly named JEF Holding Company, Inc., the common stock of which was distributed in the Spin-off.

     2.6 “DDCP” means Predecessor’s Non-Employee Directors’ Deferred Compensation Plan.

     2.7 “Deferral Account” means the account established and maintained by the Company for Deferred Shares credited under Sections 7 and 8 and deferred cash credited under Section 8. A Deferral Account shall include one or more subaccounts, including a Deferred Share Account for forfeitable Deferred Shares under Section 7, a Deferred Share Account for Deferred Shares that have become nonforfeitable under Section 7 or that are at all times nonforfeitable under Section 8(c), a Deferred Share Account for Deferred Shares resulting from Option exercises under Section 9(a), and a Deferred Cash Account described in Section 8(d). The Deferral Account also includes two subaccounts for purposes of complying with Code Section 409A: The “Grandfathered Account” is that portion of the Deferral Account (and subaccouns) resulting from deferrals of compensation that was vested before 2005, except for any designated deferred compensation which the Committee has caused to be not grandfathered for purposes of Code Section 409A. The “2005-and-Later Account” is the remaining portion of the Deferral Account (and subaccounts) which is not “grandfathered” for purposes of Code Section 409A. The Deferral Account and subaccounts, and Deferred Shares and deferred cash credited thereto, will be maintained solely as bookkeeping entries by the Company to evidence unfunded obligations of the Company.

     2.8 “Deferred Share” means a credit to a Participant’s Deferred Share Account under Sections 7 or 8 which represents the right to receive one Share upon settlement of such Account. Deferred Shares granted under Section 7 may be designated as “Restricted Stock Units.”

     2.9 “Disability” means a Participant’s termination of service as a director of the Company due to a physical or mental incapacity of long duration which renders the Participant unable to perform the duties of a director of the

Company.

     2.10 “Eligible Holder” means each person who, at the Spin-off Date, holds an option or deferred share granted by Predecessor under a plan or program for Predecessor’s non-employee directors with respect to which the Company has agreed to grant, or offer to grant, an Option or Deferred Share award in substitution for such Predecessor award or to offset any lost value due to the early termination of such option or deferred share.

     2.11 “Exchange Act” means the Securities Exchange Act of 1934, as amended, including rules thereunder and successor provisions and rules thereto.

     2.12 “Fair Market Value,” means, with respect to Shares, the fair market value of such Shares determined by such methods or procedures as shall be established from time to time by the Board. Unless otherwise determined by the Board, the Fair Market Value of a Share as of any given date means the average of the closing sales prices of a Share as reported in the table entitled “New York Stock Exchange Composite Transactions” contained in The Wall Street Journal (or an equivalent successor table) for the day as of which the valuation is to be made or, if that day is not a trading day, the nearest preceding trading day, and the four trading days immediately prior thereto; PROVIDED, HOWEVER, that Fair Market Value at the date of the Spin-off shall be determined based on the first five trading days for which a closing price is reported following the Spin-off.

     2.13 “Option” means the right, granted to a Participant under Section 6 or 8, to purchase a specified number of Shares at the specified exercise price for a specified period of time under the Plan. All Options will be non-qualified stock options.

     2.14 “Option Valuation Methodology” means the method for determining the number of shares to be subject to Options, and the exercise price thereof, granted in payment of Retainer Fees under Section 8(b).

     2.15 “Other Director Compensation” means fees payable to a director in his or her capacity as such, other than Retainer Fees, for attending meetings and other service on the Board and Board committees.

     2.16 “Participant” means any person who has been granted an Option which remains outstanding, has Deferred Shares or cash credited to his or her Deferral Account, or has elected to be granted Options in payment of Retainer Fees or to defer payment of Retainer Fees and Other Director Compensation in the form of Deferred Shares or cash under the Plan.

     2.17 “Plan Year” means, with respect to a Participant, the period commencing at the time of election of the director at an annual meeting of stockholders (or the election of a class of directors if the Company then has a classified Board of Directors), or the director’s initial appointment to the Board if not at an annual meeting of stockholders, and continuing until the close of business of the day preceding the next annual meeting of stockholders; PROVIDED, HOWEVER, that the initial Plan Year shall be deemed to be a continuation of the plan year in effect under the DDCP at the Spin-Off Date. “409A Plan Year” means the calendar year.

     2.18 “Predecessor” means Jefferies Group, Inc., a Delaware corporation, as it existed immediately prior to the Spin-off.

     2.19 “Restricted Stock” means Shares granted under Section 7, subject to a risk of forfeiture and restrictions on transfer for a specified period.

     2.20 “Retainer Fees” means annual retainer fees payable to a director in his or her capacity as such for service on the Board and service as chairman of any Board committee.

     2.21 “Retirement” means a Participant’s termination of service as a director of the Company at or after age 65.

     2.22 “Shares” means shares of common stock, par value $.01 per share, of the Company and such other securities as may be substituted or resubstituted for Shares pursuant to Section 5.3.

     2.23 “Spin-off” means the distribution of the Common Stock of the Company by the Predecessor to the Predecessor’s stockholders, which was approved by the Predecessor’s stockholders on April 20, 1999.

     2.24 “Spin-off Date” means the record date for Predecessor’s distribution of Shares in the Spin- off.

     2.25 “Valuation Date” shall mean the close of business on the last business day of each calendar quarter and, in the case of any final distribution from a Participant’s Deferred Cash Account, the day preceding such distribution.

     3. ADMINISTRATION.

     3.1 AUTHORITY. Both the Board and the Administrator (subject to the ability of the Board to restrict the Administrator) shall administer the Plan in accordance with its terms, and shall have all powers necessary to accomplish such purpose, including the power and authority to construe and interpret the Plan, to define the terms used herein, to prescribe, amend and rescind rules and regulations, agreements, forms, and notices relating to the administration of the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. The Administrator may perform any function of the Board under the Plan, except for grants of awards under Sections 6 and 7, adoption of material amendments to the Plan under Section 11.5, or other functions from time to time specifically reserved by the Board to itself. Any actions of the Board or the Administrator with respect to the Plan shall be final, conclusive, and binding upon all persons interested in the Plan, except that any action of the Administrator will not be binding on the Board. The Board and Administrator may each appoint agents and delegate thereto powers and duties under the Plan, except as otherwise limited by the Plan.

     3.2 ADMINISTRATOR. The Administrator shall be the Director of Human Resources and the Secretary or such other committee as may designated by the Board. In any case in which a director is a member of the Administrator, such director shall be not act on or decide any matter relating solely to himself or herself or any of his or her rights or benefits under the Plan. No bond or other security need be required of the Administrator or any member thereof in any jurisdiction.

     3.3 LIMITATION OF LIABILITY. Each member of the Board and the Administrator shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any officer or other employee of the Company or any subsidiary, the Company’s independent certified public accountants, or any executive compensation consultant, legal counsel, or other professional retained by the Company to assist in the administration of the Plan. No member of the Board or the Administrator, nor any person to whom ministerial duties under the Plan have been delegated, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and any such person shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination, or interpretation.

     4. SHARES AVAILABLE UNDER THE PLAN. The total number of Shares reserved and available for delivery under the Plan is 2,000,000, subject to adjustment as provided in Section 11.2 (this reflects stock splits from the effective date of the Plan through January 1, 2009). Shares that may be delivered under the Plan may consist, in whole or in part, of authorized and unissued Shares, treasury Shares or Shares acquired in the market for the account of a Participant. For purposes of the Plan, shares that may be purchased upon exercise of an Option or distributed in settlement of Deferred Shares will not be considered to be available after such Option has been granted or Deferred Share credited, except for purposes of delivery in connection with such Option or Deferred Share; provided, however, that, if an Option expires for any reason without having been exercised in full or Deferred Shares or shares of Restricted Stock are forfeited or cancelled, the shares subject to the unexercised portion of such Option or to the forfeited or cancelled Deferred Shares or Restricted Stock will again be available for delivery under the Plan.

     5. ELIGIBILITY. Each non-employee director of the Company who is paid fees for service on the Board or a Board committee, and each Eligible Holder, may participate in the Plan, subject to the terms hereof. No person other than those specified in this Section 5 will be eligible to participate in the Plan. The Administrator will notify each person of his or her eligibility to participate in the Plan on an elective basis not later than 15 days (or such other period as may be determined by the Administrator) prior to any deadline for filing an election form.

     6. INITIAL AND ANNUAL GRANTS OF OPTIONS. Options shall be granted to non-employee directors in accordance with policies established from time to time by the Board specifying the classes of directors to be granted Options, the number of Shares to be subject to each Option, and the time or times at which such Options shall be granted; provided, however, that the maximum number of Shares that may be subject to Options granted to a director in a given year under this Section 6 (i.e., without a corresponding reduction in fees) shall be 40,000, subject to adjustment as provided in Section 11.2. Options granted to an Eligible Holder under Section 9.6 shall not be counted against the limitation set forth in the preceding sentence.

     6.1 GRANT POLICY — OPTION GRANTS. The policy with respect to grants of Options under this Section 6 shall be established, modified and/or revoked from time to time by the Board.

     6.2 TERMS OF OPTIONS GRANTED UNDER SECTION 6. Each Option granted under this Section 6 shall be subject to the following terms and conditions:

     (a) EXERCISE PRICE. The exercise price per Share purchasable under an Option will be equal to 100% of the Fair Market Value of a Share on the date of grant of the Option.

     (b) OPTION TERM. Each Option shall expire at the end of a term fixed by the Board, not longer than ten years after the date of grant, or at such earlier date as the Option may no longer be exercised and cannot, by its terms, thereafter become exercisable. Options granted under the initial policy set out in Section 6.1 shall expire at the earlier of (i) a fixed term of five years after the date of grant, (ii) 12 months after the Participant ceases to serve as a Director of the Company due to death, Disability, or Retirement, or (iii) 60 days after the Participant ceases to serve as a Director of the Company for any reason other than death, Disability, or Retirement.

     (c) VESTING AND EXERCISABILITY. The Board may establish terms regarding the times at which Options shall become vested and exercisable. Options granted under the initial policy set out in Section 6.1 and not previously forfeited shall vest and become exercisable by a Participant on the date three months after the date of grant, and, unless otherwise provided in the Participant’s Option agreement, any portion of a Participant’s Option that has not vested and become exercisable at the time of termination of the Participant’s service as a director shall be forfeited.

     (d) PAYMENT. The exercise price of an Option shall be paid to the Company either in cash or by the surrender of Shares, or any combination thereof, or in such other form or manner as may be established by the Administrator; PROVIDED, HOWEVER, that, unless otherwise determined by the Administrator, shares shall not be surrendered in payment of the exercise price if such surrender would result in additional accounting expense to the Company.

     7. GRANTS OF DEFERRED SHARES AND RESTRICTED STOCK. Deferred Shares and/or Restricted Stock shall be granted to non-employee directors in accordance with policies established from time to time by the Board specifying the classes of directors to be granted such awards, the number of Deferred Shares or shares of Restricted Stock to be granted, and the time or times at which such awards shall be granted; provided, however, that the maximum number of Deferred Shares and shares of Restricted Stock that may be granted to a director in a given year under this Section 7, without a corresponding reduction in fees, shall be 50% of the number of Deferred Shares that could be granted under Section 8.3 in that year with such a corresponding reduction in fees. A grant of a specified dollar amount of Deferred Shares or Restricted Stock shall be deemed a reduction in fees for purposes of this Section 7. Deferred Shares and Restricted Stock granted to an Eligible Holder under Section 9.6 shall not be counted against the limitation set forth in the preceding sentence.

     7.1 GRANT POLICY. The policy with respect to grants of awards under this Section 7 shall be established, modified and/or revoked from time to time by the Board.

     7.2 TERMS OF DEFERRED SHARES AND RESTRICTED STOCK GRANTED UNDER SECTION 7. Deferred Shares granted under this Section 7 shall be subject to the terms and conditions of Deferred Shares specified in Sections 9.2, 9.3, and 9.4 (including the requirement that any Deferred Shares granted or vested in 2005 or thereafter comply with Code Section 409A), unless otherwise determined by the Board. Deferred Shares and Restricted Stock granted under this Section 7 shall also be subject to the following additional terms and conditions:

     (a) VESTING AND FORFEITURE. The Board may establish terms regarding the times at which Deferred Shares and Restricted Stock shall become vested and non-forfeitable. Unless otherwise determined by the Board, an award granted under this Section 7 shall be subject to the following terms: Such award, if not previously forfeited, shall become vested and non-forfeitable as to one-third of the number of Deferred Shares or shares of Restricted Stock at the close of business on the day preceding each of the three annual meetings of stockholders following the date of grant of such award, rounded to the nearest number of whole shares; provided, however, that if such award was not previously vested or forfeited, it shall vest and become non-forfeitable on an accelerated basis upon the termination of the Participant’s service as a director due to death, Disability or Retirement (settlement shall remain subject to Section 9.4, however). Unless otherwise determined by the Board, an award of Deferred Shares or Restricted Stock not previously vested or forfeited will cease to vest and will be forfeited upon the termination of the Participant’s service as a director for any reason other than death, Disability or Retirement.

     (b) DEFERRED SHARES CREDITED AS A RESULT OF DIVIDEND EQUIVALENTS. Unless otherwise determined by the Board, Deferred Shares credited as a result of dividend equivalents under Section 9.2 shall be subject to the same terms, including risk of forfeiture, as the Deferred Shares with respect to which the dividend equivalents were credited.

     (c) DIVIDENDS ON RESTRICTED STOCK. Unless otherwise determined by the Board, dividends on Restricted Stock declared and paid prior to the lapse of the risk of forfeiture on such Restricted Stock shall be automatically reinvested in additional shares of Restricted Stock, which shall be subject to the same terms, including risk of forfeiture, as the Restricted Stock on which the dividend was paid.

     (d) AWARDS NONTRANSFERABLE. Deferred Shares and Restricted Stock shall be nontransferable by the Participant at any time that the award remains subject to a risk of forfeiture.

     (e) CONSIDERATION FOR RESTRICTED STOCK. If shares to be granted as Restricted Stock are not treasury shares, the Board or Administrator may impose additional conditions upon the grant of the Restricted Stock, possibly including a requirement that cash consideration be paid by the Participant, if and to the extent necessary to ensure that the Company will receive lawful consideration equal to the aggregate par value of the Shares being granted as Restricted Stock.

     8. OPTIONS GRANTED IN PAYMENT OF FEES AND DEFERRAL OF FEES IN DEFERRED SHARES AND DEFERRED CASH. Each director of the Company who is eligible under Section 5 may elect, in accordance with Section 8.1, to be paid Retainer Fees in the form of Options under Section 8.2 or to defer receipt of Retainer Fees and Other Director Compensation in the form of Deferred Shares under Section 8.3 or deferred cash under Section 8.4.

     8.1 ELECTIONS. A director shall elect to participate and the terms of such participation by filing an election with the Company prior to the beginning of a 409A Plan Year or, in the case of a director commencing service with the Company, prior to his or her commencement of service, or at such other date compliant with Exhibit A to the 2003 Incentive Compensation Plan and/or compliant with Section 9.6(a)(ii) of the 2003 Incentive Compensation Plan as may be specified by the Administrator, provided that any date so specified shall ensure effective deferral of taxation (including under Code Section 409A) and otherwise comply with applicable laws.

     (a) EFFECT AND IRREVOCABILITY OF ELECTIONS. Elections shall be deemed continuing, and therefore applicable to Plan Years or 409A Plan Years after the initial Plan Year or 409A Plan Year

covered by the election, until the election is modified or superseded by the Participant. Elections to participate (including the amount of any deferrals), other than those elections subject to Section 9.4, shall become irrevocable with respect to a given Plan Year or 409A Plan Year at the commencement of the Plan Year/409A Plan Year to which an election relates, unless the Administrator specifies a different time (which in no event may be later than the permitted deadline for filing an election to defer). Elections relating to the time of settlement of a Deferral Account shall become irrevocable at the time specified in Section 9.4. Elections may be modified or revoked by filing a new election prior to the time the election to be modified or revoked has become irrevocable. The latest election filed with the Administrator shall be deemed to revoke all prior inconsistent elections that remain revocable at the time of filing of the latest election.

     (b) MATTERS TO BE ELECTED. The Administrator will provide a form of election which will permit a director to make appropriate elections with respect to all relevant matters under this Section 8.

     (c) TIME OF FILING ELECTIONS. An election must be received by the Administrator prior to the applicable deferral election deadline. Under no circumstances may a Participant defer compensation to which the Participant has attained, at the time of deferral, a legally enforceable right to current receipt of such compensation.

     8.2 OPTIONS GRANTED IN PAYMENT OF RETAINER FEES. A Participant who has validly elected to be paid a specified amount of Retainer Fees in the form of Options shall be granted, at the close of business on the day the Participant’s Plan Year commences, an Option to purchase the number of whole Shares determined in accordance with the Option Valuation Methodology specified by the Board. Each Option granted under this Section 8.2 shall be subject to the following terms and conditions:

     (a) OPTION VALUATION METHODOLOGY. The Board shall determine the Option Valuation Methodology which will be used to determine the number of Options granted and the Option exercise price. The Option Valuation Methodology may be based upon a valuation of the Option (for example, using the Black-Scholes option valuation model), a discounting of the aggregate exercise price of the Options by the amount of Retainer Fees to be paid in the form of Options, or such other methodology as may be deemed reasonable for purposes of this Section 8.2.

     (b) OPTION TERM. Each Option will expire ten years after the date of grant; PROVIDED, HOWEVER, that, unless otherwise determined by the Board, any portion of an Option that is not yet exercisable at the date a Participant ceases to serve as a director for any reason will expire at the date such service ceases; and, PROVIDED FURTHER, that, unless otherwise determined by the Board, any portion of an Option that is not yet exercisable at the date a Participant ceases to serve as chair or a member of a Board committee will, to the extent specified in Section 8.2(e), expire at the date such service ceases.

     (c) VESTING AND EXERCISABILITY. Each Option will vest and become exercisable as to 25% of the underlying shares on the June 30, September 30, December 31, and March 31 following the date of grant; PROVIDED, HOWEVER, that, in the case of a Plan Year which begins on or after June 30 and before September 30, the vesting percentage shall be 33%, and in the case of a Plan Year which begins on or after September 30 and before December 31, the vesting percentage shall be 50%; and PROVIDED FURTHER, that an Option will become fully vested and exercisable at the close of business on the last day of the Plan Year in which it was granted. The number of Shares as to which the Option becomes vested and exercisable will be rounded to the nearest whole number. The foregoing notwithstanding, upon termination of the Participant’s service as a director due to death, Disability, or Retirement, that portion of the Option which would become vested and exercisable on the last day of the calendar quarter in which such death, Disability, or Retirement occurred will become immediately vested and exercisable. Unless otherwise determined by the Board, an Option will cease to further vest and become exercisable upon the termination of the Participant’s service as a director for any reason, and the portion that has not vested and become exercisable at the time of such termination shall be forfeited.

     (d) EXERCISE PRICE. The exercise price per Share purchasable under an Option will be

determined in accordance with the Option Valuation Methodology. The exercise price of an Option shall be paid to the Company either in cash or by the surrender of Shares, or any combination thereof, or in such other form or manner as may be established by the Administrator; PROVIDED, HOWEVER, that, unless otherwise determined by the Administrator, shares shall not be surrendered in payment of the exercise price if such surrender would result in additional accounting expense to the Company.

     (e) CHANGES IN FEES; CHANGES IN SERVICE AS A COMMITTEE CHAIR. If the amount of Retainer Fees is increased during a Plan Year, or if a Director is appointed chair of a Board committee such that an additional Retainer Fee is payable during a Plan Year, such increased or additional fees will not be paid in the form of Options. Unless otherwise determined by the Board, if a Director has been granted an Option in respect of a Plan Year in payment of Retainer Fees which included committee-related fees for service as chair or a member of any Board committee, and during such Plan Year he or she ceases such service but remains on the Board, the Option will expire in part at the time such service ceases, to the extent of that portion of the Option which is not yet exercisable multiplied by a fraction the numerator of which is the amount of committee-related fees included in such Retainer Fees and the denominator of which is the total amount of such Retainer Fees.

     (f) SERVICE DURING PART OF A QUARTER. If a Participant ceases to serve as a director or on committee at a date other than a vesting date for the Option and if the Board does not exercise its discretion to permit vesting of the Participant’s Option in consideration for the Participant’s service in that final quarterly period, the Participant shall be entitled to payment in cash for his or her service in that final quarterly period if and to the extent then provided in the Company’s regular non-employee director compensation policies.

     8.3 DEFERRAL OF RETAINER FEES AND OTHER DIRECTOR COMPENSATION IN THE FORM OF DEFERRED SHARES. If a Participant has validly elected to defer receipt of a specified amount of Retainer Fees or Other Director Compensation in the form of Deferred Shares, a number of Deferred Shares shall be credited to the Participant’s Deferred Share Account, as of the date such Retainer Fees or Other Director Compensation otherwise would have been payable to the Participant but for such election to defer, equal to (i) such amount otherwise payable divided by (ii) the Fair Market Value of a Share at that date. Deferred Shares credited under this Section 8.3 shall be subject to the terms and conditions of Deferred Shares specified in Sections 9.2, 9.3, and 9.4. The right and interest of each Participant in Deferred Shares credited to the Participant’s Deferred Share Account under this Section 8.3 at all times will be nonforfeitable.

     8.4 DEFERRAL OF RETAINER FEES AND OTHER DIRECTOR COMPENSATION IN THE FORM OF DEFERRED CASH. If a Participant has validly elected to defer receipt of a specified amount of Retainer Fees or Other Director Compensation in the form of deferred cash, an amount equal to such specified amount shall be credited to the Participant’s Deferred Cash Account as of the date such Retainer Fees or Other Director Compensation otherwise would have been payable to the Participant but for such election to defer. As of the close of business on each Valuation Date, interest shall be credited to such Deferred Cash Account in an amount equal to the average daily balance in such Deferred Cash Account since the last Valuation Date multiplied by the interest rate as specified by the Board and applicable to the period since the last Valuation Date. The initial policy with respect to the interest rate under this Section 8.4, effective as of the Spin-off Date and continuing until modified or revoked by the Board, shall be to credit interest at the prime interest rate of a single large bank as published in The Wall Street Journal and effective on the date of the latest annual meeting of stockholders of the Company or the date on which Predecessor’s stockholders approved the Plan. The right and interest of each Participant relating to his or her Deferred Cash Account at all times will be nonforfeitable.

     9. OTHER DEFERRALS AND TERMS OF DEFERRAL ACCOUNTS.

     9.1 [Reserved.]

     9.2 DIVIDEND EQUIVALENTS ON DEFERRED SHARES. Dividend equivalents will be credited on Deferred Shares credited to a Participant’s Deferred Share Account as follows, unless the Administrator determines

to credit dividend equivalents in an alternative form deemed to be equitable by the Administrator

     (a) CASH AND NON-SHARE DIVIDENDS. If the Company declares and pays a dividend on Shares in the form of cash or property other than Shares, then a number of additional Deferred Shares shall be credited to a Participant’s Deferred Share Account as of the payment date for such dividend equal to (i) the number of Deferred Shares credited to the Account as of the record date for such dividend, multiplied by (ii) the amount of cash plus the Fair Market Value of any property other than shares actually paid as a dividend on each share at such payment date, divided by (iii) the Fair Market Value of a Share at such payment date.

     (b) SHARE DIVIDENDS AND SPLITS. If the Company declares and pays a dividend on Shares in the form of additional Shares, or there occurs a forward split of Share, then a number of additional Deferred Shares shall be credited to the Participant’s Deferred Share Account as of the payment date for such dividend or forward Share split equal to (i) the number of Deferred Shares credited to the Account as of the record date for such dividend or split multiplied by (ii) the number of additional Shares actually paid as a dividend or issued in such split in respect of each Share.

     9.3 REALLOCATION OF ACCOUNTS. A Participant shall have no right to have amounts credited as cash to the Participant’s Deferred Cash Account reallocated or switched to his or her Deferred Share Account or amounts credited to the Participant’s Deferred Share Account reallocated or switched to his or her Deferred Cash Account, unless otherwise determined by the Board.

     9.4 ELECTIONS AS TO SETTLEMENT. Each Participant, while still a director of the Company, shall file an election with the Administrator specifying the time or times at which the Participant’s Deferral Account will be settled, following the Participant’s termination of service as a director of the Company, and whether distribution will be in a single lump sum or in a number of annual installments not exceeding ten; PROVIDED, HOWEVER, that, if no valid election has been filed as to the time of settlement of a Participant’s Deferral Account or any portion thereof, such Deferral Account or portion thereof shall be distributed in a single lump sum on the first business day of the year following the year in which the Participant ceases to serve as a director. If installments are elected, such installments must be annual installments commencing not later than the first year following the year in which the Participant ceases to serve as a director (on such annual installment date as may be specified by the Administrator) and extending over a period not to exceed ten years.

     (a) MATTERS COVERED BY ELECTION. Subject to the terms of the Plan, the Administrator shall determine whether all deferrals under the Plan must be subject to a single election as to the time or times of settlement, or whether settlement elections may relate to a specified sub-account (I.E., the Deferred Share Account or the Deferred Cash Account) and/or a specified Plan Year or 409A Plan Year. If the Administrator permits elections to relate to a specified Plan Year or 409A Plan Year, such election shall apply to the amounts originally credited to the specified subaccount in respect of such Plan Year or 409A Plan Year and to any additional amounts credited as dividend equivalents or interest in respect of such originally credited amounts and previously credited additional amounts.

     (b) MODIFYING ELECTIONS. A Participant may modify a prior election as to the time at which a Participant’s Deferral Account (including a specified subaccount) will be settled at any time prior to the time the Participant ceases to serve as a director of the Company, subject to such requirements as may be specified by the Administrator. Such modification shall be made by filing a new election with the Administrator. The foregoing notwithstanding, elections under this Section 9.4 shall not be permitted, including elections which would have the effect of advancing the time of settlement of any portion of the Deferral Account, if permitting such an election would result in constructive receipt by the Participant of compensation in respect of the Participant’s Deferral Account prior to the actual settlement of such Deferral Account.

     (c) COMPLIANCE RULES FOR CODE SECTION 409A. 2005 and Later Accounts, including any award granted under Section 7 and credited thereto but only to the extent that such award constitutes a deferral of compensation under Code Section 409A, shall be subject to the terms of Section 9.6 of the 2003

Incentive Compensation Plan (treating such a 2005-and-Later Account as a “409A Award”), including the following:

• If any distribution is triggered by a termination of service as a director, only a separation from service within the meaning of Treasury Regulation § 1.409A-1(h) shall qualify. For this purpose, continued service as an employee as described in Section 11.8 shall be taken into account in determining whether the Participant has had a separation from service.

• Settlement may only occur in accordance with Section 9.6(a)(iii) of the 2003 Incentive Compensation Plan, and the six-month delay rule of Section 9.6(a)(iii)(B) will apply in accordance with its terms;

• Acceleration of settlement will be limited as specified in Section 9.6(a)(iv) of the 2003 Incentive Compensation Plan;

• Each vesting tranche of Deferred Shares subject to a substantial risk of forfeiture (and any pro rata portion that would vest upon a termination or other event as of December 31 of a given year, and the remaining portion that would not so vest) will be deemed a separate payment for purposes of Code Section 409A.

• The provisions of Section 9.6 of the 2003 Incentive Compensation Plan shall be further restrictions under this Plan applicable to any right hereunder which constitutes a deferral of compensation under Code Section 409A (excluding a grandfathered deferral).

• Any restriction imposed on Deferred Shares solely to ensure compliance with Section 409A shall not be applied to a Deferred Share that is not a deferral of compensation under Code Section 409A except to the extent necessary to preserve the status of such Deferred Share as not a deferral under Code Section 409A.

• If any mandatory term required for a 2005-and-Later Account to avoid tax penalties under Section 409A is not otherwise explicitly provided under this Plan or other applicable documents, such term is hereby incorporated by reference and fully applicable as though set forth at length herein.

     9.5 ELECTION FORMS. Elections under the Plan shall be made in writing on such form or forms as may be specified from time to time by the Administrator.

     9.6 TREATMENT OF PREDECESSOR AWARDS AND DEFERRALS. Options may be granted under the Plan to Eligible Holders in substitution for options granted by Predecessor, including under the DDCP. The terms of such substitute Options shall be adjusted to the extent authorized under the applicable Predecessor plan or agreement, and otherwise as determined to be equitable by the Board. In addition, the Board may grant Options to Eligible Holders intended to offset any value lost by the Eligible Holder due to the early termination of a Predecessor option in connection with the Spin-off. In such case, the Board will determine such value lost and the replacement value of the Options granted under the Plan in accordance with Section 8.2(a). Deferred Shares and Deferred Cash shall be credited to an Eligible Holder in place of like credits under the DDCP, subject to adjustment to the terms of the Deferred Shares to the extent authorized under the DDCP and otherwise as determined to be equitable by the Board. The interest rate applicable to amounts of Deferred Cash so credited and deferrals of cash under Section 8.4 prior to the Company’s first annual meeting of stockholders shall be based on the applicable interest rate that would apply under the DDCP assuming the meeting of Predecessor’s stockholders at which the Plan was approved had been an annual meeting.

     9.7 STATEMENTS. The Administrator will furnish statements to each Participant reflecting the amount credited to a Participant’s Deferral Account, transactions therein, and other related information no less frequently than once each calendar year.

     9.8 FRACTIONAL SHARES. The amount of Deferred Shares credited to a Deferred Share Account shall include fractional shares calculated to at least three decimal places.

     10. SETTLEMENT OF DEFERRAL ACCOUNTS. The Company will settle a Participant’s Deferral Account by making one or more distributions to the Participant (or his or her Beneficiary, following Participant’s death) at the time or times, in a lump sum or installments, as specified in the Participant’s election(s) filed in accordance with Section 9.4; PROVIDED, HOWEVER, that a Deferral Account will be settled at times earlier than

those specified in such election in accordance with Sections 10.2 and 10.3.

     10.1 FORM OF DISTRIBUTION. Distributions in respect of a Participant’s Deferred Share Account shall be made only in Shares, together with cash in lieu of any fractional share remaining at a time that less than one whole Deferred Share is credited to such Deferred Share Account. Shares may be delivered in certificate form to a Participant (or his or her Beneficiary) or to a nominee for the account of the Participant (or his or her Beneficiary), or in such other manner as the Administrator may determine. Distributions in respect of a Participant’s Deferred Cash Account shall be made only in cash.

     10.2 DEATH. If a Participant ceases to serve as a director due to death or dies prior to distribution of all amounts from his or her Deferral Account, the Company shall make a single lump-sum distribution to the Participant’s Beneficiary. Any such distribution shall be made as soon as practicable following notification to the Company of the Participant’s death, provided that, in the case of a 2005-and-Later Account, such distribution shall be made on the 30^th day after death.

     10.3 FINANCIAL EMERGENCY AND OTHER PAYMENTS. Other provisions of the Plan notwithstanding, if, upon the written application of a Participant, the Board determines that the Participant has a financial emergency of such a substantial nature and beyond the Participant’s control that payment of amounts previously deferred under the Plan is warranted, the Board may direct the payment to the Participant of all or a portion of the balance of a Deferral Account and the time and manner of such payment; provided, however, that payments from the 2005-and-Later Account shall be made only in compliance with Section 9.6(a)(iv)(A) and (v)(D) of the 2003 Incentive Compensation Plan.

     11. GENERAL PROVISIONS.

     11.1 LIMITS ON TRANSFERABILITY. Options, Deferred Shares, Restricted Stock and all other rights under the Plan will not be transferable by a Participant except by will or the laws of descent and distribution, or to a Beneficiary in the event of a Participant’s death, and will not otherwise be subject to alienation, anticipation, encumbrance, garnishment, attachment, levy, execution or other legal or equitable process, nor subject to the debts, contracts, liabilities or engagements, or torts of any Participant or his or her Beneficiary. Any attempt to alienate, sell, transfer, assign, pledge, garnish, attach or take any other action subject to legal or equitable process or encumber or dispose of any interest in the Plan shall be void. The foregoing notwithstanding:

(i)

the Administrator may permit a Participant to transfer Options, Deferred Shares, and related rights to one or more trusts, partnerships, or family members during the lifetime of the Participant solely for estate planning purposes, but only if and to the extent then consistent with the registration of any offer and sale of shares related thereto on Form S-8, Form S-3, or such other registration form of the Securities and Exchange Commission as may then be permitted to be filed with respect to the Plan, and subject to clause (ii) below; and

(ii)

Any amount credited to the Participant’s 2005-and-Later Account(including any award) shall be subject to the limitation on transferability specified in Section 9.6(a)(vii) of the 2003 Incentive Compensation Plan.

The Company may rely upon the beneficiary designation last filed in accordance with this Section 11.1.

     11.2 ADJUSTMENTS. In the event that any large, special and non-recurring dividend or other distribution (whether in the form of cash, Shares, or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Board to be appropriate in order to prevent dilution or enlargement of a Participant’s rights under the Plan, then the Board shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of Shares reserved and available for delivery under the Plan and to be subject to Options, Deferred Shares, and Restricted Stock thereafter granted or credited, (ii) the number of Shares subject to Options automatically granted under any policy under Section 6.1, the number of Deferred Shares and/or Shares of Restricted Stock automatically granted under any policy

under Section 7.1, and the maximum number of Shares that may be subject to Options granted to a director in a single year under Section 6, (iii) the number and kind of Shares deliverable upon exercise of outstanding Options, and the exercise price per share thereof (provided that no fractional shares will be delivered upon exercise of any Option), (iv) the number and kind of Shares to be delivered upon settlement of outstanding Deferred Shares (taking into account any Deferred Shares credited as dividend equivalents under Section 9.2), and (v) the number and kind of shares outstanding as Restricted Stock. Upon the occurrence of an event constituting an “equity restructuring” as defined under Statement of Financial Accounting Standards No. 123R with respect to Shares, each Participant shall have a legal right to the equitable adjustment to Options, Deferred Shares and Restricted Stock (including Deferred Shares credited to his or her Deferral Account), with the manner of such adjustment to be determined by the Board.

     11.3 RECEIPT AND RELEASE. Payments (in any form) to any Participant or Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims for the compensation deferred and relating to the Deferral Account to which the payments relate against the Company, the Board, or the Administrator, and the Administrator may require such Participant or Beneficiary, as a condition to such payments, to execute a receipt and release to such effect. In the case of any payment under the Plan of less than all amounts then credited to a Deferral Account in the form of Deferred Shares, the amounts paid shall be deemed to relate to the Deferred Shares credited to the Account at the earliest time.

     11.4 COMPLIANCE. The Company shall have no obligation to settle any Deferral Account of a Participant (in any form) until all legal and contractual obligations of the Company relating to establishment of the Plan and such settlement shall have been complied with in full. In addition, the Company shall impose such restrictions on Shares delivered to a Participant hereunder and any other interest constituting a security as it may deem advisable in order to comply with the Securities Act of 1933, as amended, the requirements of the New York Stock Exchange or any other stock exchange or automated quotation system upon which the Shares are then listed or quoted, any state securities laws applicable to such a transfer, any provision of the Company’s Certificate of Incorporation or By-laws, or any other law, regulation, or binding contract to which the Company is a party.

     11.5 CHANGES TO THE PLAN AND AWARDS. The Board may amend, suspend, discontinue, or terminate the Plan or the authority to grant awards under the Plan without the consent of stockholders or Participants, except that any amendment shall be subject to the approval of the Company’s stockholders at or before the next annual meeting of stockholders for which the record date is after the date of such Board action if such stockholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Shares may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such amendments to stockholders for approval; PROVIDED, HOWEVER, that, without the consent of an affected Participant, no such action may materially impair the rights of such Participant under any award theretofore granted. The Committee may amend, suspend, discontinue, or terminate any award theretofore granted and any award agreement relating thereto; PROVIDED, HOWEVER, that no such amendment may reduce the exercise price of an outstanding Option (except as authorized under Section 11.2) or provide for award terms that the Plan would not then permit for a newly granted award; and PROVIDED FURTHER, that, without the consent of an affected Participant, no such action may materially impair the rights of such Participant under such award. The foregoing notwithstanding, the Board may, in its sole discretion, terminate the Plan (in whole or in part) and, and may distribute to any Participant (in whole or in part, and whether or not in connection with a termination of the Plan) the amounts credited to the Participant’s Deferral Account.

     11.6 UNFUNDED STATUS OF PLAN; CREATION OF TRUSTS. The Plan is intended to constitute an “unfunded” plan for deferred compensation and Participants shall rely solely on the unsecured promise of the Company for payment hereunder. With respect to any payment not yet made to a Participant under the Plan, nothing contained in the Plan shall give a Participant any rights that are greater than those of a general unsecured creditor of the Company; PROVIDED, HOWEVER, that the Board may authorize the creation of trusts or make other arrangements to meet the Company’s obligations under the Plan, which trusts or other arrangements shall be consistent with the “unfunded” status of the Plan unless the Board otherwise determines with the consent of each affected Participant. The establishment and maintenance of, or allocations and credits to, the Deferral Account of any Participant shall not vest in any Participant any right, title or interest in and to any Plan assets or benefits except at the time or times and upon the terms and conditions and to the extent expressly set forth in the Plan and in accordance with the terms of any trust.

     11.7 OTHER PARTICIPANT RIGHTS. No Participant shall have any of the rights or privileges of a stockholder of the Company under the Plan, including as a result of the grant of an Option or crediting of Deferred Shares or other amounts to a Deferral Account, or the creation of any Trust and deposit of Shares therein, except at such time as such Option may have been duly exercised or Shares may be actually delivered in settlement of a Deferral Account, except that a Participant granted Restricted Stock shall have rights of a stockholder except to the extent that those rights are limited by the terms of the Plan and the agreement relating to the Restricted Stock. No provision of the Plan, document relating to the Plan, or transaction hereunder shall confer upon any Participant any right to continue to serve as a director of the Company or in any other capacity with the Company or a subsidiary or to be nominated for reelection as a director, or interfere in any way with the right of the Company to increase or decrease the amount of any compensation payable to such Participant. Subject to the limitations set forth in Section 11.1, the Plan shall inure to the benefit of, and be binding upon, the parties hereto and their successors and assigns.

     11.8 CONTINUED SERVICE AS AN EMPLOYEE. If a Participant ceases to serve as a director and, immediately thereafter, is employed by the Company or any subsidiary, then such Participant will not be deemed to have ceased to serve as a director or as chair or as a member of a Board committee at that time, and his or her continued employment by the Company or any subsidiary will be deemed to be continued service as a director or chair or a member of a Board committee; PROVIDED, HOWEVER, that, for purposes of Section 5, such former director will not be deemed to be a non-employee director eligible for further grants of awards.

     11.9 GOVERNING LAW. The validity, construction, and effect of the Plan, any rules and regulations under the Plan, and any agreement under the Plan will be determined in accordance with the Delaware General Corporation Law and other laws (including those governing contracts) of the State of Delaware, without giving effect to principles of conflicts of laws, and applicable federal law.

     11.10 LIMITATION. A Participant and his or her Beneficiary shall assume all risk in connection with any decrease in value of Options or a Deferral Account and neither the Company, the Board nor the Administrator shall be liable or responsible therefor.

     11.11 CONSTRUCTION. The captions and numbers preceding the sections of the Plan are included solely as a matter of convenience of reference and are not to be taken as limiting or extending the meaning of any of the terms and provisions of the Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular.

     11.12 SEVERABILITY. In the event that any provision of the Plan shall be declared illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of the Plan but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provision had never been inserted herein.

     11.13 NONEXCLUSIVITY OF THE PLAN. The adoption of the Plan by the Board shall not be construed as creating any limitation on the power of the Board to adopt such other compensatory arrangements for directors as it may deem desirable.

     11.14 EFFECTIVE DATE, STOCKHOLDER APPROVAL, AND PLAN TERMINATION. The Plan shall become effective on April 20, 1999. Unless earlier terminated by action of the Board, the Plan will remain in effect until such time as no Shares remain available for delivery under the Plan and the Company has no further rights or obligations under the Plan with respect to outstanding Options or other awards under the Plan.

EX-21

Exhibit 21

Subsidiaries of Jefferies Group, Inc.

(excludes certain subsidiaries pursuant to Item 601 of Regulation S-K)

Name	Place of Formation / Incorporation
Jefferies & Company, Inc.	Delaware
Jefferies Asset Management, LLC	Delaware
Jefferies Execution Services, Inc.	California
Jefferies Finance, LLC	Delaware
Jefferies Financial Products, LLC	Delaware
Jefferies High Yield Holdings, LLC	Delaware
Jefferies High Yield Trading, LLC	Delaware
Jefferies International Limited	England & Wales
Jefferies International (Holdings) Limited	England & Wales
Jefferies Investment Management Limited	England & Wales

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
JEFFERIES GROUP, INC.:

We consent to the incorporation by reference in the Registration Statements No. 333-84079 dated July 29, 1999, and No. 333-107014 dated July 14, 2003, on Form S-8, No. 333-74723 on Form S-4, No. 333-81354 dated January 24, 2002, and No. 333-107032 dated July 15, 2003 and August 22, 2003, on Form S-3, No. 333-130325 dated December 14, 2005 on Form S-3ASR, and No. 001-14947 dated April 20, 1999 on Form 10 of Jefferies Group, Inc. of our reports dated February 27, 2009, with respect to the consolidated statements of financial condition of Jefferies Group, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of earnings, changes in stockholders’ equity, cash flows and comprehensive income for each of the years in the three-year period ended December 31, 2008, and the effectiveness of internal control over financial reporting as of December 31, 2008, which reports appear in the December 31, 2008 annual report on Form 10-K of Jefferies Group, Inc.

/s/ KPMG LLP

New York, New York
February 27, 2009

EX-31.1

Exhibit 31.1

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

I, Peregrine C. Broadbent, certify that:

1. I have reviewed this annual report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	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
d)	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: February 27, 2009	By:	/s/ Peregrine C. Broadbent
		Peregrine C. Broadbent
		Chief Financial Officer

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 annual report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	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
d)	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: February 27, 2009	By:	/s/ Richard B. Handler
		Richard B. Handler
		Chief Executive Officer

EX-32

Exhibit 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

     I, Richard B. Handler, Chief Executive Officer, and I, Peregrine C. Broadbent, 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-K for the year ended December 31, 2008 (the “Form 10-K”) 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-K 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/ Peregrine C. Broadbent
Richard B. Handler	Peregrine C. Broadbent
Date: February 27, 2009	Date: February 27, 2009

     A signed original of this written statement 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.