10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 27, 2003

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	95-4719745
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
520 Madison Avenue, 12th Floor, New York, New York	10022
(Address of principal executive offices)	(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x   No   o

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

Yes   x   No   o

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

Page 1 of 25

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
		CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
		CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATION
EXHIBIT 10.3
EXHIBIT 99.1

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

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

Page 2 of 25

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

					June 27,			December 31,
					2003			2002
					(unaudited)
ASSETS
Cash and cash equivalents					$	26,616		$	39,948
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations						245,791			288,576
Securities borrowed						6,954,632			5,119,352
Receivable from brokers, dealers and clearing organizations						194,610			102,371
Receivable from customers						349,651			206,329
Securities owned						715,669			452,375
Securities pledged to creditors						55,936			56,348
Investments						361,929			334,361
Premises and equipment						49,605			49,355
Goodwill						57,579			55,472
Other assets						255,111			194,204
					$	9,267,129		$	6,898,691
LIABILITIES AND STOCKHOLDERS’ EQUITY
Bank loans					$	164,000		$	12,000
Securities loaned						6,592,269			4,738,938
Payable to brokers, dealers and clearing organizations						201,390			109,077
Payable to customers						437,952			481,346
Securities sold, not yet purchased						450,121			239,285
Accrued expenses and other liabilities						277,314			236,922
						8,123,046			5,817,568
Long-term convertible debt						3,614			3,319
Long-term debt						456,031			449,287
Minority interest						1,123			—
						8,583,814			6,270,174
Stockholders’ equity:
	Preferred stock, $.0001 par value. Authorized 10,000,000 shares; none issued					—			—
	Common stock, $.0001 par value. Authorized 100,000,000 shares; issued 61,429,050 shares in 2003 and 58,282,296 shares in 2002					6			3
	Additional paid-in capital					263,088			226,787
	Retained earnings					526,605			496,418
	Less:
		Treasury stock, at cost, 6,287,464 shares in 2003 and 5,378,216 shares in 2002				(104,120	)		(90,817	)
		Accumulated other comprehensive loss:
			Currency translation adjustments			3,505			1,895
			Additional minimum pension liability			(5,769	)		(5,769	)
		Total accumulated other comprehensive loss				(2,264	)		(3,874	)
				Total stockholders’ equity		683,315			628,517
					$	9,267,129		$	6,898,691

See accompanying unaudited notes to consolidated financial statements.

Page 3 of 25

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

			Three Months Ended				Six Months Ended
			June 27,		June 28,		June 27,		June 28,
			2003		2002		2003		2002
Revenues:
	Commissions		$	69,770	$	63,063	$	126,427	$	127,636
	Principal transactions			80,437		67,288		139,126		133,955
	Investment banking			44,716		41,650		88,919		79,318
	Interest			30,701		24,447		52,200		46,076
	Asset management			3,010		2,724		5,687		6,211
	Other			1,575		1,705		3,149		3,023
		Total revenues		230,209		200,877		415,508		396,219
Interest expense				31,378		22,748		52,428		40,346
Revenues, net of interest expense				198,831		178,129		363,080		355,873
Non-interest expenses:
	Compensation and benefits			114,115		101,715		209,512		206,282
	Floor brokerage and clearing fees			12,483		13,442		23,295		27,590
	Technology and communications			14,153		13,998		28,624		25,393
	Occupancy and equipment rental			9,499		6,148		16,825		12,306
	Business development			5,519		5,686		11,569		11,990
	Other			10,760		7,243		17,696		12,451
		Total non-interest expenses		166,529		148,232		307,521		296,012
Earnings before income taxes and minority interest				32,302		29,897		55,559		59,861
Income taxes				11,640		12,282		20,712		24,574
Earnings before minority interest				20,662		17,615		34,847		35,287
Minority interest in earnings of consolidated subsidiaries, net				1,924		—		1,924		—
		Net earnings	$	18,738	$	17,615	$	32,923	$	35,287
Earnings per share:
	Basic		$	0.37	$	0.36	$	0.66	$	0.71
	Diluted		$	0.32	$	0.32	$	0.57	$	0.64
Weighted average shares:
	Basic			50,204		49,251		50,012		49,389
	Diluted			58,077		54,873		57,591		54,814
Fixed charge coverage ratio				4.8X		4.7X		4.4X		5.4X

See accompanying unaudited notes to consolidated financial statements.

Page 4 of 25

JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
SIX MONTHS ENDED JUNE 27, 2003
(Dollars in thousands, except per share amounts)

													Accumulated			Total
				Additional									Other			Stock-
		Common		Paid-in			Retained			Treasury			Comprehensive			holders'
		Stock		Capital			Earnings			Stock			Loss			Equity
Balance, December 31, 2002		$	3	$	226,787		$	496,418		$	(90,817	)	$	(3,874	)	$	628,517
Exercise of stock options, including tax benefits (224,744 shares)			—		3,062			—			—			—			3,062
Purchase of treasury stock (149,130 shares)			—		—			—			(2,904	)		—			(2,904	)
Issuance of ESPP / SSPP shares (108,272 shares)			—		1,902			—			—			—			1,902
Issuance of restricted / deferred stock (1,053,620 shares), net of forfeitures, and additional vesting, including tax benefits			—		31,690			—			(10,399	)		—			21,291
Employee stock ownership plan amortization and stock purchases, net			—		(350	)		—			—			—			(350	)
Quarterly dividends ($.025 per share per quarter)			—		—			(2,736	)		—			—			(2,736	)
Comprehensive income:
	Net earnings		—		—			32,923			—			—			32,923
	Other comprehensive loss, net of tax:
	Translation adjustment		—		—			—			—			1,610			1,610
Comprehensive income			—		—			—			—			—			34,533
Two-for-one stock split			3		(3	)		—			—			—			—
Balance, June 27, 2003		$	6	$	263,088		$	526,605		$	(104,120	)	$	(2,264	)	$	683,315

See accompanying unaudited notes to consolidated financial statements.

Page 5 of 25

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

					Six Months Ended
					June 27,			June 28,
					2003			2002
Cash flows from operating activities:
	Net earnings				$	32,923		$	35,287
	Adjustments to reconcile net earnings to net cash used in operation activities:
		Depreciation and amortization				6,674			10,552
		(Increase) decrease in cash and securities segregated and on deposit for regulatory purposes				42,785			(22,697	)
		(Increase) decrease in receivables:
			Securities borrowed			(1,835,280	)		649,095
			Brokers, dealers and clearing organizations			(92,239	)		(63,622	)
			Customers			(143,322	)		(58,407	)
		Increase in securities owned				(263,294	)		(173,180	)
		Decrease in securities pledged to creditors				412			16,345
		Increase in investments				(27,568	)		(243,876	)
		Increase in other assets				(54,444	)		(9,804	)
		Increase (decrease) in operating payables:
			Securities loaned			1,853,331			(791,649	)
			Brokers, dealers and clearing organizations			92,313			92,623
			Customers			(43,394	)		30,679
		Increase in securities sold, not yet purchased				210,836			47,673
		Increase (decrease) in accrued expenses and other liabilities				40,392			(12,401	)
				Total adjustments		(212,798	)		(528,669	)
				Net cash used in operating activities		(179,875	)		(493,382	)

Continued on next page.

See accompanying unaudited notes to consolidated financial statements.

Page 6 of 25

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

					Six Months Ended
					June 27,			June 28,
					2003			2002
Cash flows from investing activities:
			Quarterdeck Investment Partners, LLC acquisition			(2,085	)		—
			Lawrence Helfant, Inc. acquisition			(22	)		—
			Purchase of premises and equipment			(6,993	)		(6,921	)
				Net cash flows used in investing activities		(9,100	)		(6,921	)
Cash flows from financing activities:
			Net proceeds from (payments on):
			Bank loans			152,000			71,000
			Issuance of 7 3/4% Senior Notes			—			315,315
			Retirement of 8 7/8% Senior Notes			—			(49,861	)
			Increase in minority interest			1,123			—
			Repurchase of treasury stock			(2,904	)		(37,080	)
			Dividends paid			(2,736	)		(2,673	)
			Exercise of stock options			3,062			2,126
			Issuance of ESPP / SSPP shares			1,902			1,957
			Issuance of common shares			—			370
			Issuance of restricted / deferred stock, net of forfeitures			21,291			23,246
				Net cash provided by financing activities		173,738			324,400
Effect of foreign currency translation on cash						1,905			2,603
				Net decrease in cash and cash equivalents		(13,332	)		(173,300	)
Cash and cash equivalents — beginning of period						39,948			188,106
Cash and cash equivalents — end of period					$	26,616		$	14,806
Supplemental disclosures of cash flow information:
	Cash paid during the period for:
		Interest			$	47,601		$	33,631
		Income taxes			$	33,193		$	30,185

See accompanying unaudited notes to consolidated financial statements.

Page 7 of 25

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

Consolidated Financial Statements

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

     The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Certain reclassifications have been made to previously reported balances to conform to the current presentation. Operating results for the interim periods ended June 27, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to the audited consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Securities Transactions

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

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

Common Stock

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

Additional Paid in Capital

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

	June 27,			Dec. 31,
	2003			2002
Gross additional paid in capital	$	335,198		$	272,020
Deferred compensation		(72,110	)		(45,233	)
Additional paid in capital	$	263,088		$	226,787

Page 8 of 25

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

Stock-Based Compensation

     On January 1, 2003, the Company adopted, on a prospective basis, the fair value method of accounting for stock-based compensation under Financial Accounting Standard Board (FASB) No. 123, Accounting for Stock-Based Compensation as amended by FASB No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123. Therefore, employee stock options granted on and after January 1, 2003 will be expensed by the Company over the option vesting period, based on the estimated fair value of the award on the date of grant. In 2003, the Company recorded compensation cost of $76,000 related to new stock option grants and $200,000 related to the employee stock purchase plan, which was based on the discount from market. The fair value of the 88,306 options granted in 2003 under the Company’s plans was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0.5%; expected volatility of 33.4%; risk-free interest rates of 3.1%; and expected lives of 5.7 years.

     In 2002 and prior years, the Company measured the cost of its stock-based compensation plans using the intrinsic value approach under Accounting Principles Board (“APB”) Opinion No. 25 rather than applying the fair value method provisions of FASB No. 123. Accordingly, the Company has not recognized compensation expense related to stock options granted prior to January 1, 2003 and shares issued to participants in the Company’s employee stock purchase plan prior to January 1, 2003.

     Therefore, the cost related to stock-based compensation included in the determination of net income for 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of FASB No. 123.

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

	Three Months Ended						Six Months Ended
	June 27,			June 28,			June 27,			June 28,
	2003			2002			2003			2002
Net earnings, as reported	$	18,738		$	17,615		$	32,923		$	35,287
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		6,856			5,332			13,464			10,802
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(8,076	)		(6,648	)		(15,945	)		(13,029	)
Pro forma net earnings	$	17,518		$	16,299		$	30,442		$	33,060
Earnings per share:
Basic – as reported	$	0.37		$	0.36		$	0.66		$	0.71
Basic – pro forma	$	0.35		$	0.33		$	0.61		$	0.67
Diluted – as reported	$	0.32		$	0.32		$	0.57		$	0.64
Diluted – pro forma	$	0.30		$	0.30		$	0.53		$	0.60

Receivable from, and Payable to, Customers

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

Page 9 of 25

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

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

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

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

	June 27, 2003				December 31, 2002
			Securities				Securities
			Sold,				Sold,
	Securities		Not Yet		Securities		Not Yet
	Owned		Purchased		Owned		Purchased
Corporate equity securities	$	201,878	$	101,749	$	115,895	$	83,769
High-yield securities		167,936		16,693		144,388		2,858
Corporate debt securities		277,384		261,021		176,067		117,072
U.S. Government and agency obligations		62,758		68,275		10,939		32,791
Options		5,713		2,383		5,086		2,795
	$	715,669	$	450,121	$	452,375	$	239,285

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

	June 27, 2003		December 31, 2002
Corporate equity securities	$	22,441	$	35,774
High-yield securities		22,158		2,602
Corporate debt securities		11,337		17,972
	$	55,936	$	56,348

Investments

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

	June 27, 2003		December 31, 2002
Short-term bond funds	$	214,480	$	192,660
Debt and equity investments		21,064		36,246
Partnership interests		35,467		7,304
Equity and debt interests in affiliates		90,918		98,151
	$	361,929	$	334,361

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

Page 10 of 25

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

Long-Term Convertible Debt and Long-Term Debt

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

	June 27, 2003		December 31, 2002
Long-Term Convertible Debt
Zero coupon, unsecured Euro denominated Convertible Loan Notes	$	3,614	$	3,319
Long-Term Debt
7 1/2% Senior Notes, due 2007, less unamortized discount of $116 (2003)	$	99,884	$	99,870
7 3/4% Senior Notes, due 2012, less unamortized discount of $6,896 (2003)		354,847		348,117
10% Subordinated Loans, due 2003		1,000		1,000
10% Subordinated Loans, due 2004		300		300
	$	456,031	$	449,287

     The Company has entered into a fair value hedge with no ineffectiveness using interest rate swaps in order to convert $200 million aggregate principal amount of unsecured 7 3/4% senior notes due March 15, 2012 into floating rates based upon LIBOR. The effective interest rate on the $200 million aggregate principal amount of unsecured 7 3/4% senior notes, after giving effect to the swaps, is 3.28%. The fair value of the mark to market of the swaps was positive $36.7 million as of June 27, 2003, which was recorded as an increase in the book value of the debt and an increase in other assets.

Cash and Cash Equivalents

     Cash and cash equivalents include cash in banks and short term investments. Cash equivalents are part of the cash management activities of the Company and generally mature within 90 days. The following is a summary of cash and cash equivalents as of June 27, 2003 and December 31, 2002 (in thousands of dollars):

	June 27, 2003		December 31, 2002
Cash in banks	$	9,829	$	24,151
Short term investments		16,787		15,797
	$	26,616	$	39,948

Goodwill

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

Page 11 of 25

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

Earnings per Share

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

	Three Months Ended				Six Months Ended
	June 27,		June 28,		June 27,		June 28,
	2003		2002		2003		2002
Net earnings	$	18,738	$	17,615	$	32,923	$	35,287
Shares for basic and diluted calculations:
Average shares used in basic computation		50,204		49,251		50,012		49,389
Stock options		1,507		1,790		1,518		1,774
Restricted / deferred stock		6,366		3,832		6,061		3,651
Average shares used in diluted computation		58,077		54,873		57,591		54,814
Earnings per share:
Basic	$	0.37	$	0.36	$	0.66	$	0.71
Diluted	$	0.32	$	0.32	$	0.57	$	0.64

Asset Management

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

		Three Months Ended				Six Months Ended
		June 27,		June 28,		June 27,		June 28,
		2003		2002		2003		2002
High Yield (HY)
	Performance based	$	1,020	$	1,237	$	2,082	$	3,035
	Asset based		936		789		1,715		1,615
Non-HY Employee Funds			84		84		165		171
International			970		614		1,725		1,390
Total		$	3,010	$	2,724	$	5,687	$	6,211

Other Comprehensive Gain (Loss)

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

			Minimum			Accumulated
	Currency		Pension			Other
	Translation		Liability			Comprehensive
	Adjustments		Adjustment			Loss
Beginning at March 28, 2003	$	1,327	$	(5,769	)	$	(4,442	)
Change in second quarter of 2003		2,178		—			2,178
Ending at June 27, 2003	$	3,505	$	(5,769	)	$	(2,264	)

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

     The following summarizes other comprehensive gain and accumulated other comprehensive loss at June 28, 2002 and for the three-months then ended (in thousands of dollars):

				Minimum			Accumulated
	Currency			Pension			Other
	Translation			Liability			Comprehensive
	Adjustments			Adjustment			Loss
Beginning at March 29, 2002	$	(3,356	)	$	(2,301	)	$	(5,657	)
Change in second quarter of 2002		3,240			—			3,240
Ending at June 28, 2002	$	(116	)	$	(2,301	)	$	(2,417	)

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

	June 27,		June 28,
	2003		2002
Net earnings	$	18,738	$	17,615
Other comprehensive gain		2,178		3,240
Comprehensive income	$	20,916	$	20,855

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

			Minimum			Accumulated
	Currency		Pension			Other
	Translation		Liability			Comprehensive
	Adjustments		Adjustment			Loss
Beginning at December 31, 2002	$	1,895	$	(5,769	)	$	(3,874	)
Change in first half of 2003		1,610		—			1,610
Ending at June 27, 2003	$	3,505	$	(5,769	)	$	(2,264	)

     The following summarizes other comprehensive gain and accumulated other comprehensive loss at June 28, 2002 and for the six-months then ended (in thousands of dollars):

				Minimum			Accumulated
	Currency			Pension			Other
	Translation			Liability			Comprehensive
	Adjustments			Adjustment			Loss
Beginning at December 31, 2001	$	(2,403	)	$	(2,301	)	$	(4,704	)
Change in first half of 2002		2,287			—			2,287
Ending at June 28, 2002	$	(116	)	$	(2,301	)	$	(2,417	)

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

	June 27,		June 28,
	2003		2002
Net earnings	$	32,923	$	35,287
Other comprehensive gain		1,610		2,287
Comprehensive income	$	34,533	$	37,574

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

Minority Interest

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

Net Capital Requirements

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

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

Quarterly Dividends

     In 1988, the Company instituted a policy of paying regular quarterly dividends. There are no restrictions on the Company’s present ability to pay dividends on common stock, other than the governing provisions of the Delaware General Corporation Law.

     Dividends per Common Share (declared and paid):

	1st Qtr.		2nd Qtr.
2003	$	.025	$	.025
2002	$	.025	$	.025

     On July 14, 2003, the Company declared a 2-for-1 split of all outstanding shares of common stock, payable August 15, 2003 to stockholders of record as of July 31, 2003. The stock split will be effected as a stock dividend of one share for each one share outstanding on the record date.

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

Off-Balance Sheet Risk

     The Company has contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to sell, securities sold but not yet purchased, repurchase agreements, future purchases and sales of foreign currencies, securities transactions on a when-issued basis, options contracts, futures index contracts, and underwriting. Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the market values of the securities underlying the financial instruments may be in excess of, or less than, the contract amount. The settlement of these transactions is not expected to have a material effect upon the Company’s consolidated financial statements.

     The Company has derivative financial instrument positions in foreign exchange forward contracts, option contracts, and index futures contracts, all of which are measured at fair value with realized and unrealized gains and losses recognized in earnings. The foreign exchange forward contract positions are generally taken to lock in the dollar cost of proceeds of foreign currency commitments associated with unsettled foreign denominated securities purchases or sales. The average maturity of the forward contracts is generally less than two weeks. The option positions taken are generally

Page 14 of 25

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

part of a strategy in which offsetting equity positions are taken. The index futures positions are taken as a hedge against securities positions.

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

     In the normal course of business, the Company had letters of credit outstanding aggregating $20.9 million at June 27, 2003, mostly to satisfy various collateral requirements in lieu of depositing cash or securities. These letters of credit have a current carrying amount of aggregate liability of $0.

     As of June 27, 2003, the Company had outstanding guarantees of $33.1 million primarily relating to undrawn bank credit obligations of two associated investment funds in which the Company has an interest. Also, the Company has guaranteed collateralized obligations of Jefferies International Limited (“JIL”) to various banks which provide clearing and credit services to JIL and to counterparties of JIL in JIL’s securities borrowed business. In addition, as of June 27, 2003, the Company had commitments to invest up to $9.8 million in various investments.

Credit Risk

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

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

Concentration of Credit Risk

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

Segment Reporting

     The Company’s operations have been classified into a single business segment, a securities broker-dealer, which includes several types of financial services. This segment includes the traditional securities brokerage and investment banking activities of the Company. The Company’s business is predominantly in the United States with approximately 10% of revenues and approximately 2% of assets attributable to international operations.

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

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

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

Analysis of Financial Condition

     Total assets increased $2,368.4 million from $6,898.7 million at December 31, 2002 to $9,267.1 million at June 27, 2003. The increase in total assets mostly relates to net increases of $1,835.3 million in securities borrowed. Total liabilities increased $2,313.6 million from $6,270.2 million at December 31, 2002 to $8,583.8 million at June 27, 2003. The increase in total liabilities mostly relates to net increases of $1,853.3 million in securities loaned. The increase in securities borrowed and securities loaned is mostly related to the Company’s Matched Book business.

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

Revenues by Source

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

		Three Months Ended
		June 27, 2003					June 28, 2002
				% of					% of
				Total					Total
		Amount		Revenues			Amount		Revenues
				(Dollars in thousands)
Commissions and principal transactions:
	Equities	$	85,047		37	%	$	76,257		38	%
	International		25,618		11			19,563		10
	High Yield		9,434		4			9,826		5
	Convertibles		8,570		4			7,573		4
	Execution		5,946		3			8,262		4
	Bonds Direct		6,038		3			2,641		1
	Other proprietary trading		9,554		4			6,229		3
	Total		150,207		66			130,351		65
Investment banking			44,716		19			41,650		21
Interest			30,701		13			24,447		12
Asset management			3,010		1			2,724		1
Other			1,575		1			1,705		1
	Total revenues	$	230,209		100	%	$	200,877		100	%

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

		Six Months Ended
		June 27, 2003					June 28, 2002
				% of					% of
				Total					Total
		Amount		Revenues			Amount		Revenues
				(Dollars in thousands)
Commissions and principal transactions:
	Equities	$	155,040		37	%	$	159,420		40	%
	International		41,849		10			36,548		9
	High Yield		20,269		5			20,089		5
	Convertibles		16,754		4			15,036		4
	Execution		11,035		3			17,088		4
	Bonds Direct		10,576		3			4,500		1
	Other proprietary trading		10,030		2			8,910		2
	Total		265,553		64			261,591		65
Investment banking			88,919		21			79,318		20
Interest			52,200		13			46,076		12
Asset management			5,687		1			6,211		2
Other			3,149		1			3,023		1
	Total revenues	$	415,508		100	%	$	396,219		100	%

Second Quarter 2003 Versus Second Quarter 2002

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

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

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

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

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

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

First Half 2003 Versus First Half 2002

     Revenues, net of interest expense, were up $7.2 million, or 2%, to $363.1 million, compared to $355.9 million for the first half of 2002. The increase was due primarily to a $9.6 million, or 12%, increase in investment banking, and a $4.0 million, or 2%, increase in trading revenues (commissions and principal transactions), partially offset by a $6.0 million decrease in net interest income (interest revenues less interest expense), and a $524,000, or 8%, decrease in asset management. Trading revenues increased mostly due to Bonds Direct and International. Investment banking revenues increased partly due to various high yield and related financings and advisory fees, including mergers and acquisition and restructuring. The Company completed 31 public and private debt transactions during the period and the advisory and restructuring business was strong as it worked on over 110 different assignments during the period. Net interest income was down largely due to increased interest expense on long term debt. Asset management revenues decreased primarily as a result of the slowdown in the high yield market and the related decrease in performance fees for funds under management.

     Total non-interest expenses were up $11.5 million, or 4%, to $307.5 million, compared to $296.0 million for the first half of 2002. Compensation and benefits increased $3.2 million, or 2%, in line with the increase in revenues. The Company was able to maintain its compensation / net revenues ratio at approximately 58%. This was possible even with increased headcount, due to the variable nature of the Company’s compensation structure. Floor brokerage and clearing fees decreased $4.3 million, or 16%, primarily due to increased trade volumes internally executed by Helfant. Other expenses increased $5.2 million, or 42%, largely due to higher than normal legal expenses in conjunction with several cases that were settled during the period. With more employees, more transactions, and more businesses, the Company does not expect legal fees to go down. In addition, with increased regulation and new corporate governance initiatives, the securities industry has seen an increase in legal costs, as the business becomes more complicated. Technology and communications increased $3.2 million, or 13%, largely due to new services related to program trading, increased headcount and certain one time technology related reversals in the prior year. Occupancy and equipment rental increased $4.5 million, or 37%, mostly due to a one-time $1.9 million expense associated with the sublease of space in the San Francisco office and office expansion. Business development expenses remained relatively unchanged as compared to the prior year’s period.

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

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

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

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

Liquidity and Capital Resources

     A substantial portion of the Company’s assets is liquid, consisting of cash or assets readily convertible into cash. The majority of securities positions (both long and short) in the Company’s trading accounts are readily marketable and actively traded. Receivables from brokers and dealers are primarily current open transactions or securities borrowed transactions, which can be settled or closed out within a few days. Receivables from customers, officers and directors include margin balances and amounts due on uncompleted transactions. Most of the Company’s receivables are secured by marketable securities.

     The Company’s assets are funded by equity capital, senior debt, subordinated debt, securities loaned, customer free credit balances, bank loans and other payables. Bank loans represent temporary (usually overnight) secured and unsecured short-term borrowings, which are generally payable on demand. The Company has arrangements with banks for unsecured financing of $255.0 million. Secured bank loans are collateralized by a combination of customer, non-customer and firm securities. The Company has always been able to obtain necessary short-term borrowings in the past and believes that it will continue to be able to do so in the future. Additionally, the Company has $20.9 million in letters of credit outstanding, which are used in the normal course of business mostly to satisfy various collateral requirements in lieu of depositing cash or securities.

     Jefferies, Helfant and Bonds Direct are subject to the net capital requirements of the Commission and other regulators, which are designed to measure the general financial soundness and liquidity of broker-dealers. Jefferies, Helfant and Bonds Direct have consistently operated in excess of the minimum requirements. As of June 27, 2003, Jefferies’, Helfant’s and Bonds Direct’s net capital was $268.1 million, $7.5 million and $3.0 million, respectively, which exceeded minimum net capital requirements by $260.9 million, $7.3 million and $2.7 million, respectively. Jefferies, Helfant and Bonds Direct use the alternative method of calculation.

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

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

     As of June 27, 2003, the Company had outstanding guarantees of $33.1 million primarily relating to undrawn bank credit obligations of two associated investment funds in which the Company has an interest. Also, the Company has guaranteed collateralized obligations of Jefferies International Limited (“JIL”) to various banks which provide clearing and credit services to JIL and to counterparties of JIL in JIL’s securities borrowed business. In addition, as of June 27, 2003, the Company had commitments to invest up to $9.8 million in various investments.

Critical Accounting Policies

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

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

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

     Investments are stated at estimated fair value as determined in good faith by management. Generally, the Company

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

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

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

Factors Affecting the Company’s Business

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

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

     As an investment banking and securities firm, changes in the financial markets or economic conditions, in the United States and elsewhere in the world, could adversely affect the Company in many ways, including the following:

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

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

Proprietary Trading Activities Expose the Company to Risk of Loss.

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

Reduced Spreads in Securities Trading Activities Could Harm Our Business.

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

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

     All aspects of the Company’s business are intensely competitive. The Company competes directly with numerous

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JEFFERIES GROUP, INC. AND SUBSIDIARIES

other brokers and dealers, investment banking firms and banks. In addition to competition from firms currently in the securities business, there has been increasing competition from others offering financial services, including automated trading and other services based on technological innovations. Competition also extends to the hiring and retention of highly skilled employees. A competitor may be successful in hiring away an employee or group of employees, which may result in the Company losing business formerly serviced by such employee or employees. Competition can also raise the Company’s costs of hiring and retaining the key employees it needs to effectively execute its business plan.

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

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

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

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

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

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

Legal Liability May Harm the Company’s Business.

     Many aspects of the Company’s business involve substantial risks of liability, and in the normal course of business, the Company has been named as a defendant or co-defendant in lawsuits involving primarily claims for damages. Additionally, the Company’s expansion into private client services involves an aspect of the business that has historically had a heightened risk of more litigation than the Company’s institutional business. The risks associated with potential legal liabilities often may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. Substantial legal liability against the Company could have a material financial effect or cause significant reputational harm to the Company, which in turn could seriously harm its business prospects.

Page 21 of 25

JEFFERIES GROUP, INC. AND SUBSIDIARIES

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Changes in Securities and Use of Proceeds

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

Page 22 of 25

JEFFERIES GROUP, INC. AND SUBSIDIARIES

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

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

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

	For		Against		Abstain		Non-vote
Approval of Company’s 2003 Incentive Compensation Plan
Company’s 2003 Incentive Compensation Plan		11,605,967		8,011,791		292,647		3,011,769

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

3.1	Registrant’s Amended and Restated Certificate of Incorporation is incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on April 30, 1999.
3.2	Registrant’s By-Laws are incorporated by reference to Exhibit 3.2 of Registrant’s Form 10-K filed on March 28, 2003.
10.1	Jefferies Group, Inc. Deferred Compensation Plan, as Amended and Restated as of January 1, 2003 is incorporated by reference to Exhibit 4.1 of Registrant’s Form S-8 filed on July 12, 2003.
10.2	Jefferies Group, Inc. 2003 Incentive Compensation Plan is incorporated by reference to Appendix 4 of Registrant’s Proxy Statement filed on April 4, 2003.
10.3*	Jefferies Group, Inc. 1999 Incentive Compensation Plan as Amended and Restated as of October 22, 2002.
99.1*	Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

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

(b) Reports on 8-K

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

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

Page 23 of 25

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		JEFFERIES GROUP, INC.
		(Registrant)
Date:	August 8, 2003	By:	/s/ Joseph A. Schenk
			Joseph A. Schenk
			Chief Financial Officer

CERTIFICATION

I, Joseph A. Schenk, certify that:

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

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

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

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

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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

Date:	August 8, 2003	By:	/s/ Joseph A. Schenk
			Joseph A. Schenk Chief Financial Officer

Page 24 of 25

CERTIFICATION

I, Richard B. Handler, certify that:

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

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

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

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

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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

Date:	August 8, 2003	By:	/s/ Richard B. Handler
			Richard B. Handler
			Chief Executive Officer

Page 25 of 25 EX-10.3 3 v92092exv10w3.txt EXHIBIT 10.3 EXHIBIT 10.3 JEFFERIES GROUP, INC. 1999 INCENTIVE COMPENSATION PLAN AS AMENDED AND RESTATED AS OF OCTOBER 22, 2002 Page 1 JEFFERIES GROUP, INC. 1999 INCENTIVE COMPENSATION PLAN AS AMENDED AND RESTATED AS OF OCTOBER 22, 2002 1. PURPOSE OF THE PLAN The purpose of this 1999 Incentive Compensation Plan (the "Plan") is to advance the interests of the Company and its stockholders by providing a means to attract, retain, and reward officers, other employees, and persons who provide services to the Company and its subsidiaries, to link compensation to measures of the Company's performance in order to provide additional incentives, including stock-based incentives and cash-based annual incentives, to such persons for the creation of stockholder value, and to enable such persons to acquire or increase a proprietary interest in the Company in order to promote a closer identity of interests between such persons and the Company's stockholders. The Plan is intended to qualify certain compensation awarded under the Plan as "performance-based" compensation under Code Section 162(m) to the extent deemed appropriate by the Committee which administers the Plan. 2. DEFINITIONS The definitions of awards under the Plan, including Options, SARs, Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of other awards, and Other Stock-Based Awards, are set forth in Section 6, and the definition of Performance Awards, including Annual Incentive Awards, is set forth in Section 8. Such awards, together with any other right or interest granted to a Participant under the Plan, are termed "Awards." In addition to such terms and the terms defined in Section 1, the following terms shall be defined as set forth below: 2.1 "Annual Incentive Award" means a conditional right granted to a Participant under Section 8.3 to receive a cash payment, Shares or other Awards based on performance during all or part of a specified fiscal year. 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 Committee 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. Page 2 2.4 "Code" means the Internal Revenue Code of 1986, as amended, including regulations thereunder and successor provisions and regulations thereto. 2.5 "Committee" means the Compensation Committee of the Board or such other Board committee or committees, as may be designated by the Board to administer the Plan, and the term "Committee" shall refer to the full Board in any case in which it is performing any function of the Committee under the Plan. In appointing members of the Committee, the Board will consider whether each member will qualify as a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) and as an "outside director" within the meaning of Treasury Regulation 1.162-27(e)(3) under Code Section 162(m), but the members are not required to so qualify at the time of appointment or during their term of service on the Committee. 2.6 "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. 2.7 "Covered Employee" has the meaning as defined in Section 8.5 of the Plan. 2.8 "Effective Date" means the date on which the Plan takes effect, as set forth in Section 9.13 of the Plan. 2.9 "Eligible Holder" means each employee of the Company who, at the Spin-off Date, holds an option or other award relating to stock under a compensatory plan of Predecessor with respect to which the Company has agreed to grant, or offer to grant, an Award relating to Shares in substitution for such person's Predecessor award or to offset any lost value due to the early termination of such award. 2.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended, including rules thereunder and successor provisions and rules thereto. 2.11 "Fair Market Value," means, with respect to Shares, Awards, or other property, the fair market value of such Shares, Awards, or other property determined by such methods or procedures as shall be established from time to time by the Committee. Unless otherwise determined by the Committee, 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. 2.12 "Participant" means an individual who has been granted an Award under the Plan, for so long as the Company has any obligation under the Plan with respect to such Award or such Award remains subject to any restriction under the Plan. 2.13 "Predecessor" means Jefferies Group, Inc., a Delaware corporation, as it existed immediately prior to the Spin-off. 2.14 "Qualified Member" means a member of the Committee who is a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Exchange Act and an "outside director" within the meaning of Regulation 1.162-27 under Code Section 162(m). Page 3 2.15 "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. 2.16 "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. 2.17 "Spin-off Date" means the record date for Predecessor's distribution of Shares in the Spin-off. 3. ADMINISTRATION 3.1 Authority of the Committee. The Plan shall be administered by the Committee. The Committee shall have full and final authority to take the following actions, in each case subject to and consistent with the provisions of the Plan: (a) to select persons to whom Awards may be granted, including Eligible Holders to whom Awards may be granted in substitution for Predecessor awards; (b) to determine the type or types of Awards to be granted to each Participant; (c) to determine the number of Awards to be granted, the number of Shares to which an Award will relate, the cash amount payable in settlement of an Annual Incentive Award and the performance conditions applicable thereto, all other terms and conditions of any Award granted under the Plan (including, but not limited to, any exercise price, grant price, or purchase price, any restriction or condition, any schedule or performance conditions for the lapse of restrictions or conditions relating to transferability, forfeiture, exercisability, or settlement of an Award, and accelerations or modifications thereof, based in each case on such considerations as the Committee shall determine), and all other matters to be determined in connection with an Award; (d) to determine whether, to what extent, and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Shares, other Awards, or other property, or an Award may be cancelled, forfeited, or surrendered; (e) to determine whether, to what extent, and under what circumstances cash, Shares, other Awards, or other property payable with respect to an Award will be deferred either automatically, at the election of the Committee, or at the election of the Participant; (f) to prescribe the form of each Award agreement, which need not be identical for each Participant; (g) to adopt, amend, suspend, and rescind such rules and regulations and appoint such agents as the Committee may deem necessary or advisable to administer the Plan; (h) to correct any defect or supply any omission or reconcile any inconsistency in the Plan and to construe and interpret the Plan and any Award, rules and regulations, Award agreement, or other instrument hereunder; and Page 4 (i) to make all other decisions and determinations as may be required under the terms of the Plan or as the Committee may deem necessary or advisable for the administration of the Plan. Other provisions of the Plan notwithstanding, until the effectiveness of the Spin-Off, in addition to any other required approval under this Plan, all grants of Awards under the Plan shall be subject to the approval of the Compensation Committee of the Board of Directors of the Predecessor, in order that such Awards can qualify as "performance-based compensation" under Section 162(m) of the Internal Revenue Code; provided, however, that any approval of such Predecessor Compensation Committee may be given prior to the effectiveness of this Plan or approval of it by Predecessor stockholders, and any grant or other transaction so approved may become effective at or following the Spin-Off in accordance with such terms as may have been approved by such Predecessor Compensation Committee. 3.2 Manner of Exercise of Committee Authority. Any action of the Committee with respect to the Plan shall be final, conclusive, and binding on all persons, including the Company, subsidiaries of the Company, Participants, any person claiming any rights under the Plan from or through any Participant, and stockholders. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to officers or managers of the Company or any subsidiary of the Company the authority, subject to such terms as the Committee shall determine, to perform such functions as the Committee may determine, to the extent that such delegation will not result in the loss of an exemption under Rule 16b-3(d)(1) for Awards granted to Participants subject to Section 16 of the Exchange Act in respect of the Company and will not cause Awards intended to qualify as "performance-based" compensation under Code Section 162(m) to fail to so qualify, and as otherwise limited by applicable law. Other provisions of the Plan notwithstanding, the Board may perform any function of the Committee under the Plan, in order to ensure that transactions under the Plan are exempt under Rule 16b-3 or for any other reason; provided, however, that authority specifically reserved to the Board under the terms of the Plan, the Company's Certificate of Incorporation or By-Laws, or applicable law shall be exercised by the Board and not by the Committee. 3.3 Limitation of Liability. Each member of the Committee shall be entitled to, in good faith, rely or act upon any report or other information furnished to him 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 Committee, nor any officer or employee of the Company acting on behalf of the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Committee and any officer or employee of the Company acting on behalf of the Committee or members thereof 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. ELIGIBILITY Persons who are eligible to be granted Awards under the Plan include (i) any executive officer and other officer or employee of the Company or any subsidiary, including any such person who may also be a director of the Company, (ii) any other person who provides substantial personal services to the Company or any subsidiary not solely in the capacity as a director, and (iii) any person who has agreed to Page 5 become an employee of the Company or a subsidiary provided that no such person may receive any payment or exercise any right relating to an Award until such person has commenced employment. In addition, Eligible Holders will be eligible to be granted Awards in substitution for Predecessor awards outstanding immediately prior to the Spin-Off, in accordance with agreements entered between the Company and Predecessor and as approved by the Committee. 5. LIMITATION ON SHARES SUBJECT TO OUTSTANDING AWARDS; PER-PERSON LIMITATIONS; ADJUSTMENTS 5.1 Aggregate Number of Shares Subject to Outstanding Awards. Awards relating to Shares may be granted if, at the time of grant of each Award, the aggregate number of Shares subject to outstanding Awards plus the number of Shares subject to the Award being granted do not exceed 25% of the number of Shares issued and outstanding immediately prior to the grant of such Award. For purposes of this Section 5.1, an Option is "outstanding" until it is exercised and any other Award is "outstanding" in the calendar year in which it is granted and for so long thereafter as it remains subject to any vesting condition requiring continued employment; provided, however, that Awards granted in substitution for Predecessor awards shall not be considered to be "outstanding" for purposes of this Section 5.1. The foregoing notwithstanding, the maximum number of shares that may be subject to ISOs granted under the Plan shall be 1.5 million (subject to adjustment as provided in Section 5.3). The Shares delivered in connection with Awards 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. 5.2 Annual Per-Person Limitations. In each fiscal year during any part of which the Plan is in effect, a Participant may be granted (i) Options and SARs under Sections 6.2 and 6.3 relating to no more than 800,000 Shares, and (ii) Performance Awards pursuant to Section 8 relating to no more than 500,000 Shares, subject in each case to adjustment as provided in Section 5.3. With respect to Annual Incentive Awards pursuant to Section 8, the maximum amount payable to a Participant in settlement of such Awards relating to a given fiscal year shall be (i), in the case of the Chief Executive Officer or any other executive officer principally having Company-wide responsibilities, 25% of Company profits after taxes but before payment of bonuses, and (ii), in the case of an executive officer or other person principally having responsibilities for one or more specific business units, the greatest of 30% of the net income of such business unit(s), 10% of the revenues of such business unit(s), or 25% of the EVA of such business unit(s). With respect to Performance Awards pursuant to Section 8 other than Annual Incentive Awards which Performance Awards are not valued by reference to Common Stock at the date of grant, the maximum amount that may be earned by any one Participant under the Plan upon achievement of performance objectives shall be $5 million for each full or partial year in the period over which performance is measured; for this purpose, the term "earned" refers to satisfaction of the performance conditions, regardless of any additional period of deferral or period in which the Award may be forfeitable upon termination of service by the Participant. 5.3 Adjustments. In the event of any change in the outstanding Shares after the Effective Date by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of Shares, repurchase, liquidation, dissolution or other corporate exchange, any large, special and non-recurring dividend or distribution to stockholders, or other similar corporate transaction, the Committee may make such substitution or adjustment, if any, as it deems to be equitable and in order to preserve, without enlarging, the rights of Participants, as to (i) the number and kind of Shares which may be delivered in connection with Awards granted thereafter, (ii) the number and kind of Shares by which annual per-person Award limitations are measured under Section 5.2, (iii) the Page 6 number and kind of Shares subject to or deliverable in respect of outstanding Awards, and (iv) the exercise price, grant price or purchase price relating to any Award and/or make provision for payment of cash, other Awards or other property in respect of any outstanding Award. In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards (including Performance Awards, Annual Incentive Awards, and the performance goals relating thereto) in recognition of unusual or nonrecurring events (including events described in the preceding sentence, as well as acquisitions and dispositions of businesses and assets) affecting the Company, any subsidiary or any business unit, or the financial statements of the Company or any subsidiary, or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations or business conditions or in view of the Committee's assessment of the business strategy of the Company, any subsidiary or business unit thereof, performance of comparable organizations, economic and business conditions, personal performance of a Participant, and any other circumstances deemed relevant; provided that no such adjustment shall be authorized or made if and to the extent that such authority or the making of such adjustment would cause Options, SARs, Performance Awards granted under Section 8.2 hereof, or Annual Incentive Awards granted under Section 8.3 hereof to Participants designated by the Committee as Covered Employees and intended to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder to otherwise fail to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder. 6. SPECIFIC TERMS OF AWARDS 6.1 General. Awards may be granted on the terms and conditions set forth in this Section 6. In addition, the Committee may impose on any Award, at the date of grant or thereafter (subject to Section 9.5), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms requiring forfeiture of Awards in the event of termination of employment or service by the Participant or upon the occurrence of other events. Except as expressly provided by the Committee (including for purposes of complying with requirements of the Delaware General Corporation Law relating to lawful consideration for issuance of shares), no consideration other than for services will be required for the grant (but not the exercise) of any Award. 6.2 Options. The Committee is authorized to grant options to purchase Shares ("Options") to Participants on the following terms and conditions: (a) Exercise Price. The exercise price per Share purchasable under an Option shall be determined by the Committee; provided, however, that, except as provided in Section 7.1, such exercise price shall be not less than the Fair Market Value of a share on the date of grant of such Option. (b) Time and Method of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part, the methods by which such exercise price may be paid or deemed to be paid, the form of such payment, including cash, Shares, other Awards or awards granted under other Company plans, or other property (including notes or other contractual obligations of Participants to make payment on a deferred basis, or through broker-assisted "cashless exercise" arrangements, to the extent permitted by applicable law), and the methods by which Shares will be delivered or deemed to be delivered to Participants. Page 7 (c) Incentive Stock Options. The terms of any incentive stock option ("ISO") granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, including but not limited to the requirement that no ISO shall be granted more than ten years after the Effective Date. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to ISOs shall be interpreted, amended, or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify either the Plan or any ISO under Section 422 of the Code, unless the Participant has first requested such disqualification. 6.3 Stock Appreciation Rights. The Committee is authorized to grant stock appreciation rights ("SARs") to Participants on the following terms and conditions: (a) Right to Payment. An SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine in the case of any such right other than one related to an ISO, the Fair Market Value of one share at any time during a specified period before or after the date of exercise), over (B) the grant price of the SAR as determined by the Committee as of the date of grant of the SAR, which, except as provided in Section 7.1, shall be not less than the Fair Market Value of one Share on the date of grant. (b) Other Terms. The Committee shall determine the time or times at which an SAR may be exercised in whole or in part, the method of exercise, method of settlement, form of consideration payable in settlement, method by which Shares will be delivered or deemed to be delivered to Participants, whether or not an SAR shall be in tandem with any other Award, and any other terms and conditions of any SAR. 6.4 Restricted Stock. The Committee is authorized to grant Awards, in the form of shares issued at or shortly after grant of the Award subject to restrictions ("Restricted Stock"), to Participants on the following terms and conditions: (a) Grant and Restrictions. Restricted Stock shall be subject to such restrictions on transferability and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise as the Committee may determine. Except to the extent restricted under the terms of the Plan and any Award agreement relating to the Restricted Stock, a Participant granted Restricted Stock shall have all of the rights of a stockholder including the right to vote Restricted Stock or the right to receive dividends thereon. (b) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment or service during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company; provided, however, that the Committee may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock will lapse in whole or in part in the event of terminations resulting from specified causes. Page 8 (c) Certificates for Shares. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the Participant, such certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, the Company shall retain physical possession of the certificate, and the Participant shall have delivered a stock power to the Company, endorsed in blank, relating to the Restricted Stock. (d) Dividends and Distributions. Dividends paid on Restricted Stock shall be either paid at the dividend payment date in cash or in Shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or the payment of such dividends shall be deferred and/or the amount or value thereof automatically reinvested in additional Restricted Stock, other Awards, or other investment vehicles, as the Committee shall determine or permit the Participant to elect. Shares distributed in connection with a stock split or Share dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Shares or other property is distributed. 6.5 Deferred Stock. The Committee is authorized to grant Awards in the form of Shares to be delivered at a specified future date ("Deferred Stock") to Participants, subject to the following terms and conditions: (a) Award and Restrictions. Issuance of Shares will occur upon expiration of the deferral period specified for an Award of Deferred Stock by the Committee (or, if permitted by the Committee, as elected by the Participant). In addition, Deferred Stock shall be subject to such restrictions as the Committee may impose, if any, which restrictions may lapse at the expiration of the deferral period or at earlier specified times, separately or in combination, under such circumstances, in such installments, or otherwise as the Committee may determine. (b) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment or service during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award agreement evidencing the Deferred Stock), all Deferred Stock that is at that time subject to such risk of forfeiture shall be forfeited; provided, however, that the Committee may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Deferred Stock will lapse in whole or in part in the event of terminations resulting from specified causes. (c) Dividend Equivalents. The Committee may provide that payments in the form of dividend equivalents will be credited in respect of Deferred Stock, which amounts may be paid or distributed when accrued or deemed reinvested in additional Deferred Stock. 6.6 Bonus Shares and Awards in Lieu of Cash Obligations. The Committee is authorized to grant Shares as a bonus, or to grant Shares or other Awards in lieu of Company obligations to pay cash under other plans or compensatory arrangements. Shares or Awards granted hereunder shall be subject to such other terms as shall be determined by the Committee. Page 9 6.7 Other Stock-Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Shares and factors that may influence the value of Shares, as deemed by the Committee to be consistent with the purposes of the Plan, including convertible or exchangeable debt securities, other rights convertible or exchangeable into Shares, purchase rights for Shares, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee, and Awards valued by reference to the book value of Shares or the value of securities of or the performance of specified subsidiaries. The Committee shall determine the terms and conditions of such Awards. Shares issued pursuant to an Award in the nature of a purchase right granted under this Section 6.7 shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including cash, Shares, other Awards, or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, may be granted pursuant to this Section 6.7. 7. CERTAIN PROVISIONS APPLICABLE TO AWARDS 7.1 Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any subsidiary, or any business entity to be acquired by the Company or a subsidiary, any other right of a Participant to receive payment from the Company or any subsidiary, and, in the case of Eligible Holders, in substitution for awards granted by Predecessor. Such additional, tandem, and substituted or exchanged Awards may be granted at any time. If an Award is granted in substitution or exchange for another Award or award, the Committee shall require the surrender of such other Award or award in consideration for the grant of the new Award. In addition, Awards may be granted in lieu of cash compensation, including in lieu of cash amounts payable under other plans of the Company or any subsidiary, in which the value of Shares subject to the Award is equivalent in value to the cash compensation, or in which the value of the cash or other compensation surrendered is applied to the exercise price, grant price, or purchase price of the Award. 7.2 Term of Awards. The term of each Award shall be for such period as may be determined by the Committee; provided, however, that in no event shall the term of any ISO or an SAR granted in tandem therewith exceed a period of ten years from the date of its grant (or such shorter period as may be applicable under Section 422 of the Code). 7.3 Form and Timing of Payment under Awards; Deferrals. Subject to the terms of the Plan and any applicable Award agreement, payments to be made by the Company or a subsidiary upon the exercise of an Option or other Award or settlement of an Award may be made in such forms as the Committee shall determine, including cash, Shares, other Awards, or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The settlement of any Award may be accelerated, and cash paid in lieu of Shares in connection with such settlement, in the discretion of the Committee or upon occurrence of one or more specified events. The foregoing notwithstanding, no Award specified as settleable in Shares may be settled otherwise than by delivery of Shares if the Award agreement does not specify such alternative form of settlement and the authorization of alternative forms of settlement would preclude fixed accounting for the compensation expense relating to such Award under APB 25 prior to the determination or event which causes settlement to be in a form other than Shares. Installment or deferred payments may be required by the Committee (subject to Section 9.5 of Page 10 the Plan, including the consent provisions thereof in the case of any deferral of an outstanding Award not provided for in the original Award agreement) or permitted at the election of the Participant on terms and conditions established by the Committee. Payments may include provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of dividend equivalents or other amounts in respect of installment or deferred payments denominated in Shares. 7.4 Cancellation and Rescission of Awards. Unless the Award agreement specifies otherwise, the Committee may cancel any unexpired, unpaid, or deferred Awards at any time, and, unless otherwise determined by the Committee, the Company shall have the additional rights set forth in subsection (d) below, if the Participant is not in compliance with all applicable material provisions of the Award agreement and the Plan, including the following conditions: (a) A Participant shall not render services for any organization or engage directly or indirectly in any business which, in the judgment of the Chief Executive Officer of the Company or other senior executive officer designated by the Committee, is or becomes competitive with the Company. For Participants whose employment has terminated, the judgment of the Chief Executive Officer or other senior officer designated by the Committee shall be based on the Participant's post-employment responsibilities and position with the other organization or business, the extent of past, current and potential competition or conflict between the Company and the other organization or business, the effect on the Company's stockholders, customers, suppliers and competitors of the Participant assuming the post-employment responsibilities and such other considerations as are deemed relevant given the applicable facts and circumstances. A Participant who has terminated employment shall be free, however, to purchase as an investment or otherwise, stock or other securities of such organization or business so long as they 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. (b) A Participant shall not, without prior written authorization from the Company, disclose to anyone outside the Company or use in other than the Company's business any confidential information or material relating to the business of the Company which is acquired by the Participant either during or after employment with the Company. (c) A Participant shall disclose promptly and assign to the Company all right, title, and interest in any invention or idea, patentable or not, made or conceived by the Participant during employment by the Company, relating in any manner to the actual or anticipated business, research, or development work of the Company and shall do anything reasonably necessary to enable the Company to secure a patent where appropriate in the United States and in foreign countries. (d) Upon exercise, settlement, payment, or delivery pursuant to an Award, the Participant shall certify on a form acceptable to the Committee that he or she is in compliance with the terms and conditions of this Section 7.4. Failure to comply with the provisions of this Section 7.4 prior to, or during the six months after, any exercise, payment or delivery pursuant to an Award shall cause such exercise, payment or delivery to be rescinded. The Company shall notify the Participant in writing of any such rescission within two years after such exercise, payment, or delivery. Within ten days after receiving such a Page 11 notice from the Company, the Participant shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment, or delivery pursuant to an Award. Such payment shall be made either in cash or by returning to the Company the number of Shares that the Participant received in connection with the rescinded exercise, payment, or delivery, in which case the Company shall promptly repay the lesser of the exercise price or the then-Fair Market Value of the Shares returned. The Committee may modify the conditions imposed under this Section 7.4 with respect to any Award. 7.5 Loan Provisions. With the consent of the Committee, and subject at all times to, and only to the extent, if any, permitted under and in accordance with, laws and regulations and other binding obligations or provisions applicable to the Company, the Company may make, guarantee, or arrange for a loan or loans to a Participant with respect to the exercise of any Option or other payment in connection with any Award, including the payment by a Participant of any or all federal, state, or local income or other taxes due in connection with any Award. Subject to such limitations, the Committee shall have full authority to decide whether to make a loan or loans hereunder and to determine the amount, terms, and provisions of any such loan or loans, including the interest rate to be charged in respect of any such loan or loans, whether the loan or loans are to be with or without recourse against the borrower, the terms on which the loan is to be repaid and conditions, if any, under which the loan or loans may be forgiven. 8. PERFORMANCE AND ANNUAL INCENTIVE AWARDS 8.1 Performance Conditions. The right of a Participant to exercise or receive a grant or settlement of any Award, and the timing thereof, may be subject to such performance conditions as may be specified by the Committee. The Committee may use such business criteria and measures of performance as it may deem appropriate in establishing performance conditions, and may exercise its discretion to reduce or increase the amounts payable under any Award subject to performance conditions, except as limited under Sections 8.2 and 8.3 hereof in the case of a Performance Award or Annual Incentive Award intended to qualify under Code Section 162(m). 8.2 Performance Awards Granted to Designated Covered Employees. If the Committee determines that a Performance Award to be granted to an eligible person who is designated by the Committee as likely to be a Covered Employee should qualify as "performance-based compensation" for purposes of Code Section 162(m), the grant, exercise, and/or settlement of such Performance Award shall be contingent upon achievement of preestablished performance goals and other terms set forth in this Section 8.2. (a) Performance Goals Generally. The performance goals for such Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each such criteria, as specified by the Committee consistent with this Section 8.2. Performance goals shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder (including Regulation 1.162-27 and successor regulations thereto), including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being "substantially uncertain." The Committee may determine that such Performance Awards shall be granted, exercised, and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be Page 12 achieved as a condition to grant, exercise, and/or settlement of such Performance Awards. Performance goals may differ for Performance Awards granted to any one Participant or to different Participants. (b) Business Criteria. One or more of the following business criteria for the Company, on a consolidated basis, and/or for specified subsidiaries, divisions, or other business units of the Company (where the criteria are applicable), shall be used by the Committee in establishing performance goals for such Performance Awards: (1) earnings per share; (2) revenues; (3) cash flow; (4) cash flow return on investment; (5) return on net assets, return on assets, return on investment, return on capital, return on equity; profitability; (6) economic value added ("EVA"); (7) operating margins or profit margins; (8) income or earnings before or after taxes; pretax earnings; pretax earnings before interest, depreciation and amortization; operating earnings; pretax operating earnings, before or after interest expense and before or after incentives, service fees, and extraordinary or special items; net income; (9) total stockholder return or stock price; (10) book value per share; (11) expense management; improvements in capital structure; working capital; costs; and (12) any of the above goals as compared to the performance of a published or special index deemed applicable by the Committee including, but not limited to, the Standard & Poor's 500 Stock Index or a group of comparator companies. EVA means the amount by which a business unit's income exceeds the cost of the capital used by the business unit during the performance period, as determined by the Committee. Income of a business unit may be before payment of bonuses, capital charges, non-recurring or extraordinary income or expense, and general and administrative expenses for the performance period, if so specified by the Committee. One or more of the foregoing business criteria shall also be exclusively used in establishing performance goals for Annual Incentive Awards granted to a Covered Employee under Section 8.3 hereof. (c) Performance Period; Timing for Establishing Performance Award Terms. Achievement of performance goals in respect of such Performance Awards shall be measured over a performance period of up to ten years, as specified by the Committee. Performance goals, amounts payable upon achievement of such goals, and other material terms of Performance Awards shall be established by the Committee (i) while the performance outcome for that performance period is substantially uncertain and (ii) no more than 90 days after the commencement of the performance period to which the performance goal relates or, if less, the number of days which is equal to 25 percent of the relevant performance period. In all cases, the maximum amount payable in respect of a Performance Award to any Participant shall be subject to the limitation set forth in Section 5 hereof. (d) Performance Award Pool. The Committee may establish a Performance Award pool, which shall be an unfunded pool, for purposes of measuring performance of the Company in connection with Performance Awards. The amount of such Performance Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 8.2(b) hereof during the given performance period, as specified by the Committee in accordance with Section 8.2(c) hereof. The Committee may specify the amount of the Performance Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical Page 13 relationship to such business criteria. In such case, Performance Awards may be granted as rights to payment of a specified portion of the Award pool; such grants shall be subject to the requirements of Section 8.2(c). (e) Settlement of Performance Awards; Other Terms. Settlement of such Performance Awards shall be in cash, Shares, other Awards, or other property, in the discretion of the Committee. The Committee may, in its discretion, reduce the amount of a settlement otherwise to be made in connection with such Performance Awards, but may not exercise discretion to increase any such amount payable to a Covered Employee in respect of a Performance Award subject to this Section 8.2. The Committee shall specify the circumstances in which such Performance Awards shall be paid or forfeited in the event of termination of employment by the Participant prior to the end of a performance period or settlement of Performance Awards. 8.3 Annual Incentive Awards Granted to Designated Covered Employees. If the Committee determines that an Annual Incentive Award to be granted to an eligible person who is designated by the Committee as likely to be a Covered Employee should qualify as "performance-based compensation" for purposes of Code Section 162(m), the grant, exercise, and/or settlement of such Annual Incentive Award shall be contingent upon achievement of preestablished performance goals and other terms set forth in this Section 8.3. (a) Potential Annual Incentive Awards. Not later than the deadline specified in Section 8.2(c) above, the Committee shall determine the eligible persons who will potentially receive Annual Incentive Awards, and the amounts potentially payable thereunder, for that fiscal year, either out of an Annual Incentive Award pool established by such date under Section 8.3(b) hereof or as individual Annual Incentive Awards. In the case of individual Annual Incentive Awards intended to qualify under Code Section 162(m), the amount potentially payable shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 8.2(b) hereof in the given performance year, as specified by the Committee; in other cases, such amount shall be based on such criteria as shall be established by the Committee. In all cases, the maximum Annual Incentive Award of any Participant shall be subject to the limitation set forth in Section 5 hereof. (b) Annual Incentive Award Pool. The Committee may establish an Annual Incentive Award pool, which shall be an unfunded pool, for purposes of measuring performance of the Company in connection with Annual Incentive Awards. The amount of such Annual Incentive Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 8.2(b) hereof during the given performance period, as specified by the Committee in accordance with Section 8.2(c) hereof. The Committee may specify the amount of the Annual Incentive Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical relationship to such business criteria. (c) Payout of Annual Incentive Awards. After the end of each fiscal year, the Committee shall determine the amount, if any, of the potential Annual Incentive Award payable to each Participant eligible therefor and, if applicable, the amount of any Annual Incentive Page 14 Award pool. The Committee may, in its discretion, determine that the amount payable to any Participant as a final Annual Incentive Award shall be increased or reduced from the amount of his or her potential Annual Incentive Award, including a determination to make no final Award whatsoever, but may not exercise discretion to increase any such amount in the case of an Annual Incentive Award intended to qualify under Code Section 162(m). The Committee shall specify the circumstances in which an Annual Incentive Award shall be paid or forfeited in the event of termination of employment by the Participant prior to the end of a fiscal year or prior to settlement of such Annual Incentive Award. 8.4 Written Determinations. Determinations by the Committee as to the establishment of performance goals, the amount potentially payable in respect of Performance Awards and Annual Incentive Awards, the achievement of performance goals relating to Performance Awards and Annual Incentive Awards, and the amount of any final Performance Award and Annual Incentive Award shall be recorded in writing, except that the Committee may determine that this requirement shall not apply in the case of Performance Awards not intended to qualify under Section 162(m). Specifically, the Committee shall certify in writing, in a manner conforming to applicable regulations under Section 162(m), prior to settlement of each such Award granted to a Covered Employee, that the performance goals and other material terms of the Award upon which settlement of the Award was conditioned have been satisfied. The Committee may not delegate any responsibility relating to such Performance Awards or Annual Incentive Awards, and the Board shall not perform such functions at any time that the Committee is composed solely of Qualified Members. 8.5 Status of Section 8.2 and Section 8.3 Awards under Code Section 162(m). It is the intent of the Company that Performance Awards and Annual Incentive Awards under Sections 8.2 and 8.3 hereof granted to persons who are designated by the Committee as likely to be Covered Employees within the meaning of Code Section 162(m) and regulations thereunder (including Regulation 1.162-27 and successor regulations thereto) shall, if so designated by the Committee, constitute "performance-based compensation" within the meaning of Code Section 162(m) and regulations thereunder. Accordingly, the terms of Sections 8.2, 8.3, 8.4 and 8.5, including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing notwithstanding, because the Committee cannot determine with certainty whether a given Participant will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Committee, at the time of grant of a Performance Award or Annual Incentive Award, as likely to be a Covered Employee with respect to a specified fiscal year. If any provision of the Plan as in effect on the date of adoption of any agreements relating to Performance Awards or Annual Incentive Awards that are designated as intended to comply with Code Section 162(m) does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements. 8.6 Assumption of Certain Annual Incentive Awards of Predecessor. The Committee may authorize the Company to assume annual incentive awards granted by Predecessor for performance in the year the Spin-Off becomes effective. Upon such an assumption, the awards shall be Annual Incentive Awards under the Plan, the terms of which shall be the identical to the terms of the Predecessor annual incentive awards, except insofar as adjustment of such terms is necessary and permitted in accordance with this Plan and the Predecessor plan and would not otherwise result in such Annual Incentive Awards failing to qualify as "performance-based compensation" under Section 162(m). Page 15 9. GENERAL PROVISIONS. 9.1 Compliance with Laws and Obligations. The Company shall not be obligated to issue or deliver Shares in connection with any Award or take any other action under the Plan in a transaction subject to the registration requirements of the Securities Act of 1933, as amended, or any other federal or state securities law, any requirement under any listing agreement between the Company and any national securities exchange or automated quotation system, or any other law, regulation, or contractual obligation of the Company, until the Company is satisfied that such laws, regulations, and other obligations of the Company have been complied with in full. Certificates representing Shares issued under the Plan will be subject to such stop-transfer orders and other restrictions as may be applicable under such laws, regulations, and other obligations of the Company, including any requirement that a legend or legends be placed thereon. 9.2 Limitations on Transferability. Awards and 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 designated Beneficiary in the event of the Participant's death), and, if exercisable, shall be exercisable during the lifetime of a Participant only by such Participant or his guardian or legal representative; provided, however, that such Awards and other rights (other than ISOs and SARs in tandem therewith) may be transferred during the lifetime of the Participant, for purposes of the Participant's estate planning or other purposes consistent with the purposes of the Plan (as determined by the Committee), and may be exercised by such transferees in accordance with the terms of such Award, but only if and to the extent permitted by the Committee. Awards and other rights under the Plan may not be pledged, mortgaged, hypothecated, or otherwise encumbered, and shall not be subject to the claims of creditors. A Beneficiary, transferee, or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any Award agreement applicable to such Participant, except as otherwise determined by the Committee, and to any additional terms and conditions deemed necessary or appropriate by the Committee. 9.3 No Right to Continued Employment; Leaves of Absence. Neither the Plan, the grant of any Award, nor any other action taken hereunder shall be construed as giving any employee, consultant, director, or other person the right to be retained in the employ or service of the Company or any of its subsidiaries, nor shall it interfere in any way with the right of the Company or any of its subsidiaries to terminate any person's employment or service at any time. Unless otherwise specified in the applicable Award agreement, an approved leave of absence shall not be considered a termination of employment or service for purposes of an Award under the Plan. 9.4 Taxes. The Company and any subsidiary is authorized to withhold from any Award granted or to be settled, any delivery of Shares in connection with an Award, any other payment relating to an Award, or any payroll or other payment to a Participant amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Shares or other property and to make cash payments in respect thereof in satisfaction of a Participant's tax obligations. Page 16 9.5 Changes to the Plan and Awards. The Board may amend, suspend, discontinue, or terminate the Plan or the Committee's 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 5.3) 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. 9.6 No Rights to Awards; No Stockholder Rights. No Participant or other person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Participants, employees, consultants, or directors. No Award shall confer on any Participant any of the rights of a stockholder of the Company unless and until Shares are duly issued or transferred and delivered to the Participant in accordance with the terms of the Award or, in the case of an Option, the Option is duly exercised. 9.7 International Participants. With respect to Participants who reside or work outside the United States of America, the Committee may, in its sole discretion, amend the terms of the Plan with respect to such Participants or grant Awards not conforming to the terms of the Plan to such Participants in order that such Awards conform to the requirements of local law and customary employment practices in such locations and in order that such Awards shall serve the purposes of the Plan in light of such local laws and customary employment practices. 9.8 Unfunded Status of Awards; Creation of Trusts. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided, however, that the Committee may authorize the creation of trusts or make other arrangements to meet the Company's obligations under the Plan to deliver cash, Shares, other Awards, or other property pursuant to any Award, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant. 9.9 Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board nor its submission to the stockholders of Predecessor or, in the case of any amendment, submission to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other compensatory arrangements as it may deem desirable, including the granting of awards otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. 9.10 Payments in the Event of Forfeitures; Fractional Shares. Unless otherwise determined by the Committee, in the event of a forfeiture of an Award with respect to which a Participant paid cash consideration, the Participant shall be repaid the amount of such cash consideration. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award (although fractional share units may be credited in connection with any Award if so authorized by the Committee). The Committee shall Page 17 determine whether cash, other Awards, or other property shall be issued or paid in lieu of such fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated. 9.11 Successors and Assigns. The Plan shall be binding on all successors and assigns of the Company and a Participant, including any permitted transferee of a Participant, the Beneficiary or estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant's creditors. 9.12 Governing Law. The validity, construction, and effect of the Plan, any rules and regulations under the Plan, and any Award agreement 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. 9.13 Effective Date, Stockholder Approval, and Plan Termination. The Plan shall become effective on the later of its approval by stockholders of the Predecessor or the effectiveness of the Company's registration under Section 12 of the Exchange Act. 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 Awards under the Plan. The foregoing notwithstanding, if the rules of the New York Stock Exchange ("NYSE") are at any time amended to provide that the automatic operation of the share reservation formula under Section 5.1 hereof would constitute a material revision of the Plan subject to stockholder approval, the Plan shall thereafter terminate on the day before the tenth anniversary of the effectiveness of such NYSE amendment, or such earlier date as may be required under the NYSE rules, if and so that such termination provision will cause the automatic operation of Section 5.1 to not constitute a material revision of the Plan subject to stockholder approval under the NYSE rules. Upon any resulting termination of the Plan, no new authorizations of grants of Awards may be made (and such Plan termination shall in other respects satisfy any requirements of the NYSE necessary to effectuate the foregoing sentence), but then outstanding Awards shall remain outstanding in accordance with the terms of the Plan and the terms of such Awards. Page 18 EX-99.1 4 v92092exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard B. Handler, Chief Executive Officer, and I, Joseph A. Schenk, Chief Financial Officer, of Jefferies Group, Inc, a Delaware corporation (the "Company"), each hereby certifies, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Company's periodic report on Form 10-Q for the period ended June 27, 2003 (the "Form 10-Q") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. * * * CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER /s/ Richard B. Handler /s/ Joseph A. Schenk - ---------------------------------- ---------------------------------- Richard B. Handler Joseph A. Schenk Date: August 8, 2003 Date: August 8, 2003 A signed original of this written statement required by Section 906 has been provided to Jefferies Group, Inc. and will be retained by Jefferies Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Page 1 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.3

                                                                    EXHIBIT 10.3





                              JEFFERIES GROUP, INC.

                        1999 INCENTIVE COMPENSATION PLAN

                 AS AMENDED AND RESTATED AS OF OCTOBER 22, 2002


                                     Page 1

                              JEFFERIES GROUP, INC.

                        1999 INCENTIVE COMPENSATION PLAN

                 AS AMENDED AND RESTATED AS OF OCTOBER 22, 2002



1.    PURPOSE OF THE PLAN

      The purpose of this 1999 Incentive Compensation Plan (the "Plan") is to
advance the interests of the Company and its stockholders by providing a means
to attract, retain, and reward officers, other employees, and persons who
provide services to the Company and its subsidiaries, to link compensation to
measures of the Company's performance in order to provide additional incentives,
including stock-based incentives and cash-based annual incentives, to such
persons for the creation of stockholder value, and to enable such persons to
acquire or increase a proprietary interest in the Company in order to promote a
closer identity of interests between such persons and the Company's
stockholders. The Plan is intended to qualify certain compensation awarded under
the Plan as "performance-based" compensation under Code Section 162(m) to the
extent deemed appropriate by the Committee which administers the Plan.

2.    DEFINITIONS

            The definitions of awards under the Plan, including Options, SARs,
Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of other
awards, and Other Stock-Based Awards, are set forth in Section 6, and the
definition of Performance Awards, including Annual Incentive Awards, is set
forth in Section 8. Such awards, together with any other right or interest
granted to a Participant under the Plan, are termed "Awards." In addition to
such terms and the terms defined in Section 1, the following terms shall be
defined as set forth below:

      2.1 "Annual Incentive Award" means a conditional right granted to a
Participant under Section 8.3 to receive a cash payment, Shares or other Awards
based on performance during all or part of a specified fiscal year.

      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 Committee 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.


                                     Page 2

      2.4 "Code" means the Internal Revenue Code of 1986, as amended, including
regulations thereunder and successor provisions and regulations thereto.

      2.5 "Committee" means the Compensation Committee of the Board or such
other Board committee or committees, as may be designated by the Board to
administer the Plan, and the term "Committee" shall refer to the full Board in
any case in which it is performing any function of the Committee under the Plan.
In appointing members of the Committee, the Board will consider whether each
member will qualify as a "Non-Employee Director" within the meaning of Rule
16b-3(b)(3) and as an "outside director" within the meaning of Treasury
Regulation 1.162-27(e)(3) under Code Section 162(m), but the members are not
required to so qualify at the time of appointment or during their term of
service on the Committee.

      2.6 "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.

      2.7 "Covered Employee" has the meaning as defined in Section 8.5 of the
Plan.

      2.8 "Effective Date" means the date on which the Plan takes effect, as set
forth in Section 9.13 of the Plan.

      2.9 "Eligible Holder" means each employee of the Company who, at the
Spin-off Date, holds an option or other award relating to stock under a
compensatory plan of Predecessor with respect to which the Company has agreed to
grant, or offer to grant, an Award relating to Shares in substitution for such
person's Predecessor award or to offset any lost value due to the early
termination of such award.

      2.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended,
including rules thereunder and successor provisions and rules thereto.

      2.11 "Fair Market Value," means, with respect to Shares, Awards, or other
property, the fair market value of such Shares, Awards, or other property
determined by such methods or procedures as shall be established from time to
time by the Committee. Unless otherwise determined by the Committee, 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.

      2.12 "Participant" means an individual who has been granted an Award under
the Plan, for so long as the Company has any obligation under the Plan with
respect to such Award or such Award remains subject to any restriction under the
Plan.

      2.13 "Predecessor" means Jefferies Group, Inc., a Delaware corporation, as
it existed immediately prior to the Spin-off.

      2.14 "Qualified Member" means a member of the Committee who is a
"Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the
Exchange Act and an "outside director" within the meaning of Regulation 1.162-27
under Code Section 162(m).


                                     Page 3

      2.15 "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.

      2.16 "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.

      2.17 "Spin-off Date" means the record date for Predecessor's distribution
of Shares in the Spin-off.

3.    ADMINISTRATION

      3.1 Authority of the Committee. The Plan shall be administered by the
Committee. The Committee shall have full and final authority to take the
following actions, in each case subject to and consistent with the provisions of
the Plan:

      (a)   to select persons to whom Awards may be granted, including Eligible
            Holders to whom Awards may be granted in substitution for
            Predecessor awards;

      (b)   to determine the type or types of Awards to be granted to each
            Participant;

      (c)   to determine the number of Awards to be granted, the number of
            Shares to which an Award will relate, the cash amount payable in
            settlement of an Annual Incentive Award and the performance
            conditions applicable thereto, all other terms and conditions of any
            Award granted under the Plan (including, but not limited to, any
            exercise price, grant price, or purchase price, any restriction or
            condition, any schedule or performance conditions for the lapse of
            restrictions or conditions relating to transferability, forfeiture,
            exercisability, or settlement of an Award, and accelerations or
            modifications thereof, based in each case on such considerations as
            the Committee shall determine), and all other matters to be
            determined in connection with an Award;

      (d)   to determine whether, to what extent, and under what circumstances
            an Award may be settled, or the exercise price of an Award may be
            paid, in cash, Shares, other Awards, or other property, or an Award
            may be cancelled, forfeited, or surrendered;

      (e)   to determine whether, to what extent, and under what circumstances
            cash, Shares, other Awards, or other property payable with respect
            to an Award will be deferred either automatically, at the election
            of the Committee, or at the election of the Participant;

      (f)   to prescribe the form of each Award agreement, which need not be
            identical for each Participant;

      (g)   to adopt, amend, suspend, and rescind such rules and regulations and
            appoint such agents as the Committee may deem necessary or advisable
            to administer the Plan;

      (h)   to correct any defect or supply any omission or reconcile any
            inconsistency in the Plan and to construe and interpret the Plan and
            any Award, rules and regulations, Award agreement, or other
            instrument hereunder; and


                                     Page 4

      (i)   to make all other decisions and determinations as may be required
            under the terms of the Plan or as the Committee may deem necessary
            or advisable for the administration of the Plan.

Other provisions of the Plan notwithstanding, until the effectiveness of the
Spin-Off, in addition to any other required approval under this Plan, all grants
of Awards under the Plan shall be subject to the approval of the Compensation
Committee of the Board of Directors of the Predecessor, in order that such
Awards can qualify as "performance-based compensation" under Section 162(m) of
the Internal Revenue Code; provided, however, that any approval of such
Predecessor Compensation Committee may be given prior to the effectiveness of
this Plan or approval of it by Predecessor stockholders, and any grant or other
transaction so approved may become effective at or following the Spin-Off in
accordance with such terms as may have been approved by such Predecessor
Compensation Committee.

      3.2 Manner of Exercise of Committee Authority. Any action of the Committee
with respect to the Plan shall be final, conclusive, and binding on all persons,
including the Company, subsidiaries of the Company, Participants, any person
claiming any rights under the Plan from or through any Participant, and
stockholders. The express grant of any specific power to the Committee, and the
taking of any action by the Committee, shall not be construed as limiting any
power or authority of the Committee. The Committee may delegate to officers or
managers of the Company or any subsidiary of the Company the authority, subject
to such terms as the Committee shall determine, to perform such functions as the
Committee may determine, to the extent that such delegation will not result in
the loss of an exemption under Rule 16b-3(d)(1) for Awards granted to
Participants subject to Section 16 of the Exchange Act in respect of the Company
and will not cause Awards intended to qualify as "performance-based"
compensation under Code Section 162(m) to fail to so qualify, and as otherwise
limited by applicable law. Other provisions of the Plan notwithstanding, the
Board may perform any function of the Committee under the Plan, in order to
ensure that transactions under the Plan are exempt under Rule 16b-3 or for any
other reason; provided, however, that authority specifically reserved to the
Board under the terms of the Plan, the Company's Certificate of Incorporation or
By-Laws, or applicable law shall be exercised by the Board and not by the
Committee.

      3.3 Limitation of Liability. Each member of the Committee shall be
entitled to, in good faith, rely or act upon any report or other information
furnished to him 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
Committee, nor any officer or employee of the Company acting on behalf of the
Committee, shall be personally liable for any action, determination, or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Committee and any officer or employee of the Company acting on
behalf of the Committee or members thereof 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.    ELIGIBILITY

      Persons who are eligible to be granted Awards under the Plan include (i)
any executive officer and other officer or employee of the Company or any
subsidiary, including any such person who may also be a director of the Company,
(ii) any other person who provides substantial personal services to the Company
or any subsidiary not solely in the capacity as a director, and (iii) any person
who has agreed to


                                     Page 5

become an employee of the Company or a subsidiary provided that no such person
may receive any payment or exercise any right relating to an Award until such
person has commenced employment. In addition, Eligible Holders will be eligible
to be granted Awards in substitution for Predecessor awards outstanding
immediately prior to the Spin-Off, in accordance with agreements entered between
the Company and Predecessor and as approved by the Committee.

5.    LIMITATION ON SHARES SUBJECT TO OUTSTANDING AWARDS; PER-PERSON
      LIMITATIONS; ADJUSTMENTS

      5.1 Aggregate Number of Shares Subject to Outstanding Awards. Awards
relating to Shares may be granted if, at the time of grant of each Award, the
aggregate number of Shares subject to outstanding Awards plus the number of
Shares subject to the Award being granted do not exceed 25% of the number of
Shares issued and outstanding immediately prior to the grant of such Award. For
purposes of this Section 5.1, an Option is "outstanding" until it is exercised
and any other Award is "outstanding" in the calendar year in which it is granted
and for so long thereafter as it remains subject to any vesting condition
requiring continued employment; provided, however, that Awards granted in
substitution for Predecessor awards shall not be considered to be "outstanding"
for purposes of this Section 5.1. The foregoing notwithstanding, the maximum
number of shares that may be subject to ISOs granted under the Plan shall be 1.5
million (subject to adjustment as provided in Section 5.3). The Shares delivered
in connection with Awards 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.

      5.2 Annual Per-Person Limitations. In each fiscal year during any part of
which the Plan is in effect, a Participant may be granted (i) Options and SARs
under Sections 6.2 and 6.3 relating to no more than 800,000 Shares, and (ii)
Performance Awards pursuant to Section 8 relating to no more than 500,000
Shares, subject in each case to adjustment as provided in Section 5.3. With
respect to Annual Incentive Awards pursuant to Section 8, the maximum amount
payable to a Participant in settlement of such Awards relating to a given fiscal
year shall be (i), in the case of the Chief Executive Officer or any other
executive officer principally having Company-wide responsibilities, 25% of
Company profits after taxes but before payment of bonuses, and (ii), in the case
of an executive officer or other person principally having responsibilities for
one or more specific business units, the greatest of 30% of the net income of
such business unit(s), 10% of the revenues of such business unit(s), or 25% of
the EVA of such business unit(s). With respect to Performance Awards pursuant to
Section 8 other than Annual Incentive Awards which Performance Awards are not
valued by reference to Common Stock at the date of grant, the maximum amount
that may be earned by any one Participant under the Plan upon achievement of
performance objectives shall be $5 million for each full or partial year in the
period over which performance is measured; for this purpose, the term "earned"
refers to satisfaction of the performance conditions, regardless of any
additional period of deferral or period in which the Award may be forfeitable
upon termination of service by the Participant.

      5.3 Adjustments. In the event of any change in the outstanding Shares
after the Effective Date by reason of any Share dividend or split,
reorganization, recapitalization, merger, consolidation, spin-off, combination
or exchange of Shares, repurchase, liquidation, dissolution or other corporate
exchange, any large, special and non-recurring dividend or distribution to
stockholders, or other similar corporate transaction, the Committee may make
such substitution or adjustment, if any, as it deems to be equitable and in
order to preserve, without enlarging, the rights of Participants, as to (i) the
number and kind of Shares which may be delivered in connection with Awards
granted thereafter, (ii) the number and kind of Shares by which annual
per-person Award limitations are measured under Section 5.2, (iii) the


                                     Page 6

number and kind of Shares subject to or deliverable in respect of outstanding
Awards, and (iv) the exercise price, grant price or purchase price relating to
any Award and/or make provision for payment of cash, other Awards or other
property in respect of any outstanding Award. In addition, the Committee is
authorized to make adjustments in the terms and conditions of, and the criteria
included in, Awards (including Performance Awards, Annual Incentive Awards, and
the performance goals relating thereto) in recognition of unusual or
nonrecurring events (including events described in the preceding sentence, as
well as acquisitions and dispositions of businesses and assets) affecting the
Company, any subsidiary or any business unit, or the financial statements of the
Company or any subsidiary, or in response to changes in applicable laws,
regulations, accounting principles, tax rates and regulations or business
conditions or in view of the Committee's assessment of the business strategy of
the Company, any subsidiary or business unit thereof, performance of comparable
organizations, economic and business conditions, personal performance of a
Participant, and any other circumstances deemed relevant; provided that no such
adjustment shall be authorized or made if and to the extent that such authority
or the making of such adjustment would cause Options, SARs, Performance Awards
granted under Section 8.2 hereof, or Annual Incentive Awards granted under
Section 8.3 hereof to Participants designated by the Committee as Covered
Employees and intended to qualify as "performance-based compensation" under Code
Section 162(m) and regulations thereunder to otherwise fail to qualify as
"performance-based compensation" under Code Section 162(m) and regulations
thereunder.

      6.    SPECIFIC TERMS OF AWARDS

      6.1 General. Awards may be granted on the terms and conditions set forth
in this Section 6. In addition, the Committee may impose on any Award, at the
date of grant or thereafter (subject to Section 9.5), such additional terms and
conditions, not inconsistent with the provisions of the Plan, as the Committee
shall determine, including terms requiring forfeiture of Awards in the event of
termination of employment or service by the Participant or upon the occurrence
of other events. Except as expressly provided by the Committee (including for
purposes of complying with requirements of the Delaware General Corporation Law
relating to lawful consideration for issuance of shares), no consideration other
than for services will be required for the grant (but not the exercise) of any
Award.

      6.2 Options. The Committee is authorized to grant options to purchase
Shares ("Options") to Participants on the following terms and conditions:

      (a)   Exercise Price. The exercise price per Share purchasable under an
            Option shall be determined by the Committee; provided, however,
            that, except as provided in Section 7.1, such exercise price shall
            be not less than the Fair Market Value of a share on the date of
            grant of such Option.

      (b)   Time and Method of Exercise. The Committee shall determine the time
            or times at which an Option may be exercised in whole or in part,
            the methods by which such exercise price may be paid or deemed to be
            paid, the form of such payment, including cash, Shares, other Awards
            or awards granted under other Company plans, or other property
            (including notes or other contractual obligations of Participants to
            make payment on a deferred basis, or through broker-assisted
            "cashless exercise" arrangements, to the extent permitted by
            applicable law), and the methods by which Shares will be delivered
            or deemed to be delivered to Participants.


                                     Page 7

      (c)   Incentive Stock Options. The terms of any incentive stock option
            ("ISO") granted under the Plan shall comply in all respects with the
            provisions of Section 422 of the Code, including but not limited to
            the requirement that no ISO shall be granted more than ten years
            after the Effective Date. Anything in the Plan to the contrary
            notwithstanding, no term of the Plan relating to ISOs shall be
            interpreted, amended, or altered, nor shall any discretion or
            authority granted under the Plan be exercised, so as to disqualify
            either the Plan or any ISO under Section 422 of the Code, unless the
            Participant has first requested such disqualification.

      6.3 Stock Appreciation Rights. The Committee is authorized to grant stock
appreciation rights ("SARs") to Participants on the following terms and
conditions:

      (a)   Right to Payment. An SAR shall confer on the Participant to whom it
            is granted a right to receive, upon exercise thereof, the excess of
            (A) the Fair Market Value of one Share on the date of exercise (or,
            if the Committee shall so determine in the case of any such right
            other than one related to an ISO, the Fair Market Value of one share
            at any time during a specified period before or after the date of
            exercise), over (B) the grant price of the SAR as determined by the
            Committee as of the date of grant of the SAR, which, except as
            provided in Section 7.1, shall be not less than the Fair Market
            Value of one Share on the date of grant.

      (b)   Other Terms. The Committee shall determine the time or times at
            which an SAR may be exercised in whole or in part, the method of
            exercise, method of settlement, form of consideration payable in
            settlement, method by which Shares will be delivered or deemed to be
            delivered to Participants, whether or not an SAR shall be in tandem
            with any other Award, and any other terms and conditions of any SAR.

      6.4 Restricted Stock. The Committee is authorized to grant Awards, in the
form of shares issued at or shortly after grant of the Award subject to
restrictions ("Restricted Stock"), to Participants on the following terms and
conditions:

      (a)   Grant and Restrictions. Restricted Stock shall be subject to such
            restrictions on transferability and other restrictions, if any, as
            the Committee may impose, which restrictions may lapse separately or
            in combination at such times, under such circumstances, in such
            installments, or otherwise as the Committee may determine. Except to
            the extent restricted under the terms of the Plan and any Award
            agreement relating to the Restricted Stock, a Participant granted
            Restricted Stock shall have all of the rights of a stockholder
            including the right to vote Restricted Stock or the right to receive
            dividends thereon.

      (b)   Forfeiture. Except as otherwise determined by the Committee, upon
            termination of employment or service during the applicable
            restriction period, Restricted Stock that is at that time subject to
            restrictions shall be forfeited and reacquired by the Company;
            provided, however, that the Committee may provide, by rule or
            regulation or in any Award agreement, or may determine in any
            individual case, that restrictions or forfeiture conditions relating
            to Restricted Stock will lapse in whole or in part in the event of
            terminations resulting from specified causes.


                                     Page 8

      (c)   Certificates for Shares. Restricted Stock granted under the Plan may
            be evidenced in such manner as the Committee shall determine. If
            certificates representing Restricted Stock are registered in the
            name of the Participant, such certificates shall bear an appropriate
            legend referring to the terms, conditions, and restrictions
            applicable to such Restricted Stock, the Company shall retain
            physical possession of the certificate, and the Participant shall
            have delivered a stock power to the Company, endorsed in blank,
            relating to the Restricted Stock.

      (d)   Dividends and Distributions. Dividends paid on Restricted Stock
            shall be either paid at the dividend payment date in cash or in
            Shares of unrestricted Stock having a Fair Market Value equal to the
            amount of such dividends, or the payment of such dividends shall be
            deferred and/or the amount or value thereof automatically reinvested
            in additional Restricted Stock, other Awards, or other investment
            vehicles, as the Committee shall determine or permit the Participant
            to elect. Shares distributed in connection with a stock split or
            Share dividend, and other property distributed as a dividend, shall
            be subject to restrictions and a risk of forfeiture to the same
            extent as the Restricted Stock with respect to which such Shares or
            other property is distributed.

      6.5 Deferred Stock. The Committee is authorized to grant Awards in the
form of Shares to be delivered at a specified future date ("Deferred Stock") to
Participants, subject to the following terms and conditions:

      (a)   Award and Restrictions. Issuance of Shares will occur upon
            expiration of the deferral period specified for an Award of Deferred
            Stock by the Committee (or, if permitted by the Committee, as
            elected by the Participant). In addition, Deferred Stock shall be
            subject to such restrictions as the Committee may impose, if any,
            which restrictions may lapse at the expiration of the deferral
            period or at earlier specified times, separately or in combination,
            under such circumstances, in such installments, or otherwise as the
            Committee may determine.

      (b)   Forfeiture. Except as otherwise determined by the Committee, upon
            termination of employment or service during the applicable deferral
            period or portion thereof to which forfeiture conditions apply (as
            provided in the Award agreement evidencing the Deferred Stock), all
            Deferred Stock that is at that time subject to such risk of
            forfeiture shall be forfeited; provided, however, that the Committee
            may provide, by rule or regulation or in any Award agreement, or may
            determine in any individual case, that restrictions or forfeiture
            conditions relating to Deferred Stock will lapse in whole or in part
            in the event of terminations resulting from specified causes.

      (c)   Dividend Equivalents. The Committee may provide that payments in the
            form of dividend equivalents will be credited in respect of Deferred
            Stock, which amounts may be paid or distributed when accrued or
            deemed reinvested in additional Deferred Stock.

      6.6 Bonus Shares and Awards in Lieu of Cash Obligations. The Committee is
authorized to grant Shares as a bonus, or to grant Shares or other Awards in
lieu of Company obligations to pay cash under other plans or compensatory
arrangements. Shares or Awards granted hereunder shall be subject to such other
terms as shall be determined by the Committee.


                                     Page 9

      6.7 Other Stock-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other Awards
that may be denominated or payable in, valued in whole or in part by reference
to, or otherwise based on, or related to, Shares and factors that may influence
the value of Shares, as deemed by the Committee to be consistent with the
purposes of the Plan, including convertible or exchangeable debt securities,
other rights convertible or exchangeable into Shares, purchase rights for
Shares, Awards with value and payment contingent upon performance of the Company
or any other factors designated by the Committee, and Awards valued by reference
to the book value of Shares or the value of securities of or the performance of
specified subsidiaries. The Committee shall determine the terms and conditions
of such Awards. Shares issued pursuant to an Award in the nature of a purchase
right granted under this Section 6.7 shall be purchased for such consideration,
paid for at such times, by such methods, and in such forms, including cash,
Shares, other Awards, or other property, as the Committee shall determine. Cash
awards, as an element of or supplement to any other Award under the Plan, may be
granted pursuant to this Section 6.7.

7.    CERTAIN PROVISIONS APPLICABLE TO AWARDS

      7.1 Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted
under the Plan may, in the discretion of the Committee, be granted either alone
or in addition to, in tandem with, or in substitution or exchange for, any other
Award or any award granted under another plan of the Company, any subsidiary, or
any business entity to be acquired by the Company or a subsidiary, any other
right of a Participant to receive payment from the Company or any subsidiary,
and, in the case of Eligible Holders, in substitution for awards granted by
Predecessor. Such additional, tandem, and substituted or exchanged Awards may be
granted at any time. If an Award is granted in substitution or exchange for
another Award or award, the Committee shall require the surrender of such other
Award or award in consideration for the grant of the new Award. In addition,
Awards may be granted in lieu of cash compensation, including in lieu of cash
amounts payable under other plans of the Company or any subsidiary, in which the
value of Shares subject to the Award is equivalent in value to the cash
compensation, or in which the value of the cash or other compensation
surrendered is applied to the exercise price, grant price, or purchase price of
the Award.

      7.2 Term of Awards. The term of each Award shall be for such period as may
be determined by the Committee; provided, however, that in no event shall the
term of any ISO or an SAR granted in tandem therewith exceed a period of ten
years from the date of its grant (or such shorter period as may be applicable
under Section 422 of the Code).

      7.3 Form and Timing of Payment under Awards; Deferrals. Subject to the
terms of the Plan and any applicable Award agreement, payments to be made by the
Company or a subsidiary upon the exercise of an Option or other Award or
settlement of an Award may be made in such forms as the Committee shall
determine, including cash, Shares, other Awards, or other property, and may be
made in a single payment or transfer, in installments, or on a deferred basis.
The settlement of any Award may be accelerated, and cash paid in lieu of Shares
in connection with such settlement, in the discretion of the Committee or upon
occurrence of one or more specified events. The foregoing notwithstanding, no
Award specified as settleable in Shares may be settled otherwise than by
delivery of Shares if the Award agreement does not specify such alternative form
of settlement and the authorization of alternative forms of settlement would
preclude fixed accounting for the compensation expense relating to such Award
under APB 25 prior to the determination or event which causes settlement to be
in a form other than Shares. Installment or deferred payments may be required by
the Committee (subject to Section 9.5 of


                                    Page 10

the Plan, including the consent provisions thereof in the case of any deferral
of an outstanding Award not provided for in the original Award agreement) or
permitted at the election of the Participant on terms and conditions established
by the Committee. Payments may include provisions for the payment or crediting
of reasonable interest on installment or deferred payments or the grant or
crediting of dividend equivalents or other amounts in respect of installment or
deferred payments denominated in Shares.

      7.4 Cancellation and Rescission of Awards. Unless the Award agreement
specifies otherwise, the Committee may cancel any unexpired, unpaid, or deferred
Awards at any time, and, unless otherwise determined by the Committee, the
Company shall have the additional rights set forth in subsection (d) below, if
the Participant is not in compliance with all applicable material provisions of
the Award agreement and the Plan, including the following conditions:

      (a)   A Participant shall not render services for any organization or
            engage directly or indirectly in any business which, in the judgment
            of the Chief Executive Officer of the Company or other senior
            executive officer designated by the Committee, is or becomes
            competitive with the Company. For Participants whose employment has
            terminated, the judgment of the Chief Executive Officer or other
            senior officer designated by the Committee shall be based on the
            Participant's post-employment responsibilities and position with the
            other organization or business, the extent of past, current and
            potential competition or conflict between the Company and the other
            organization or business, the effect on the Company's stockholders,
            customers, suppliers and competitors of the Participant assuming the
            post-employment responsibilities and such other considerations as
            are deemed relevant given the applicable facts and circumstances. A
            Participant who has terminated employment shall be free, however, to
            purchase as an investment or otherwise, stock or other securities of
            such organization or business so long as they 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.

      (b)   A Participant shall not, without prior written authorization from
            the Company, disclose to anyone outside the Company or use in other
            than the Company's business any confidential information or material
            relating to the business of the Company which is acquired by the
            Participant either during or after employment with the Company.

      (c)   A Participant shall disclose promptly and assign to the Company all
            right, title, and interest in any invention or idea, patentable or
            not, made or conceived by the Participant during employment by the
            Company, relating in any manner to the actual or anticipated
            business, research, or development work of the Company and shall do
            anything reasonably necessary to enable the Company to secure a
            patent where appropriate in the United States and in foreign
            countries.

      (d)   Upon exercise, settlement, payment, or delivery pursuant to an
            Award, the Participant shall certify on a form acceptable to the
            Committee that he or she is in compliance with the terms and
            conditions of this Section 7.4. Failure to comply with the
            provisions of this Section 7.4 prior to, or during the six months
            after, any exercise, payment or delivery pursuant to an Award shall
            cause such exercise, payment or delivery to be rescinded. The
            Company shall notify the Participant in writing of any such
            rescission within two years after such exercise, payment, or
            delivery. Within ten days after receiving such a


                                    Page 11

            notice from the Company, the Participant shall pay to the Company
            the amount of any gain realized or payment received as a result of
            the rescinded exercise, payment, or delivery pursuant to an Award.
            Such payment shall be made either in cash or by returning to the
            Company the number of Shares that the Participant received in
            connection with the rescinded exercise, payment, or delivery, in
            which case the Company shall promptly repay the lesser of the
            exercise price or the then-Fair Market Value of the Shares returned.

The Committee may modify the conditions imposed under this Section 7.4 with
respect to any Award.

      7.5 Loan Provisions. With the consent of the Committee, and subject at all
times to, and only to the extent, if any, permitted under and in accordance
with, laws and regulations and other binding obligations or provisions
applicable to the Company, the Company may make, guarantee, or arrange for a
loan or loans to a Participant with respect to the exercise of any Option or
other payment in connection with any Award, including the payment by a
Participant of any or all federal, state, or local income or other taxes due in
connection with any Award. Subject to such limitations, the Committee shall have
full authority to decide whether to make a loan or loans hereunder and to
determine the amount, terms, and provisions of any such loan or loans, including
the interest rate to be charged in respect of any such loan or loans, whether
the loan or loans are to be with or without recourse against the borrower, the
terms on which the loan is to be repaid and conditions, if any, under which the
loan or loans may be forgiven.

8.    PERFORMANCE AND ANNUAL INCENTIVE AWARDS

      8.1 Performance Conditions. The right of a Participant to exercise or
receive a grant or settlement of any Award, and the timing thereof, may be
subject to such performance conditions as may be specified by the Committee. The
Committee may use such business criteria and measures of performance as it may
deem appropriate in establishing performance conditions, and may exercise its
discretion to reduce or increase the amounts payable under any Award subject to
performance conditions, except as limited under Sections 8.2 and 8.3 hereof in
the case of a Performance Award or Annual Incentive Award intended to qualify
under Code Section 162(m).

      8.2 Performance Awards Granted to Designated Covered Employees. If the
Committee determines that a Performance Award to be granted to an eligible
person who is designated by the Committee as likely to be a Covered Employee
should qualify as "performance-based compensation" for purposes of Code Section
162(m), the grant, exercise, and/or settlement of such Performance Award shall
be contingent upon achievement of preestablished performance goals and other
terms set forth in this Section 8.2.

      (a)   Performance Goals Generally. The performance goals for such
            Performance Awards shall consist of one or more business criteria
            and a targeted level or levels of performance with respect to each
            such criteria, as specified by the Committee consistent with this
            Section 8.2. Performance goals shall be objective and shall
            otherwise meet the requirements of Code Section 162(m) and
            regulations thereunder (including Regulation 1.162-27 and successor
            regulations thereto), including the requirement that the level or
            levels of performance targeted by the Committee result in the
            achievement of performance goals being "substantially uncertain."
            The Committee may determine that such Performance Awards shall be
            granted, exercised, and/or settled upon achievement of any one
            performance goal or that two or more of the performance goals must
            be


                                    Page 12

            achieved as a condition to grant, exercise, and/or settlement of
            such Performance Awards. Performance goals may differ for
            Performance Awards granted to any one Participant or to different
            Participants.

      (b)   Business Criteria. One or more of the following business criteria
            for the Company, on a consolidated basis, and/or for specified
            subsidiaries, divisions, or other business units of the Company
            (where the criteria are applicable), shall be used by the Committee
            in establishing performance goals for such Performance Awards: (1)
            earnings per share; (2) revenues; (3) cash flow; (4) cash flow
            return on investment; (5) return on net assets, return on assets,
            return on investment, return on capital, return on equity;
            profitability; (6) economic value added ("EVA"); (7) operating
            margins or profit margins; (8) income or earnings before or after
            taxes; pretax earnings; pretax earnings before interest,
            depreciation and amortization; operating earnings; pretax operating
            earnings, before or after interest expense and before or after
            incentives, service fees, and extraordinary or special items; net
            income; (9) total stockholder return or stock price; (10) book value
            per share; (11) expense management; improvements in capital
            structure; working capital; costs; and (12) any of the above goals
            as compared to the performance of a published or special index
            deemed applicable by the Committee including, but not limited to,
            the Standard & Poor's 500 Stock Index or a group of comparator
            companies. EVA means the amount by which a business unit's income
            exceeds the cost of the capital used by the business unit during the
            performance period, as determined by the Committee. Income of a
            business unit may be before payment of bonuses, capital charges,
            non-recurring or extraordinary income or expense, and general and
            administrative expenses for the performance period, if so specified
            by the Committee. One or more of the foregoing business criteria
            shall also be exclusively used in establishing performance goals for
            Annual Incentive Awards granted to a Covered Employee under Section
            8.3 hereof.

      (c)   Performance Period; Timing for Establishing Performance Award Terms.
            Achievement of performance goals in respect of such Performance
            Awards shall be measured over a performance period of up to ten
            years, as specified by the Committee. Performance goals, amounts
            payable upon achievement of such goals, and other material terms of
            Performance Awards shall be established by the Committee (i) while
            the performance outcome for that performance period is substantially
            uncertain and (ii) no more than 90 days after the commencement of
            the performance period to which the performance goal relates or, if
            less, the number of days which is equal to 25 percent of the
            relevant performance period. In all cases, the maximum amount
            payable in respect of a Performance Award to any Participant shall
            be subject to the limitation set forth in Section 5 hereof.

      (d)   Performance Award Pool. The Committee may establish a Performance
            Award pool, which shall be an unfunded pool, for purposes of
            measuring performance of the Company in connection with Performance
            Awards. The amount of such Performance Award pool shall be based
            upon the achievement of a performance goal or goals based on one or
            more of the business criteria set forth in Section 8.2(b) hereof
            during the given performance period, as specified by the Committee
            in accordance with Section 8.2(c) hereof. The Committee may specify
            the amount of the Performance Award pool as a percentage of any of
            such business criteria, a percentage thereof in excess of a
            threshold amount, or as another amount which need not bear a
            strictly mathematical


                                    Page 13

            relationship to such business criteria. In such case, Performance
            Awards may be granted as rights to payment of a specified portion of
            the Award pool; such grants shall be subject to the requirements of
            Section 8.2(c).

      (e)   Settlement of Performance Awards; Other Terms. Settlement of such
            Performance Awards shall be in cash, Shares, other Awards, or other
            property, in the discretion of the Committee. The Committee may, in
            its discretion, reduce the amount of a settlement otherwise to be
            made in connection with such Performance Awards, but may not
            exercise discretion to increase any such amount payable to a Covered
            Employee in respect of a Performance Award subject to this Section
            8.2. The Committee shall specify the circumstances in which such
            Performance Awards shall be paid or forfeited in the event of
            termination of employment by the Participant prior to the end of a
            performance period or settlement of Performance Awards.

      8.3 Annual Incentive Awards Granted to Designated Covered Employees. If
the Committee determines that an Annual Incentive Award to be granted to an
eligible person who is designated by the Committee as likely to be a Covered
Employee should qualify as "performance-based compensation" for purposes of Code
Section 162(m), the grant, exercise, and/or settlement of such Annual Incentive
Award shall be contingent upon achievement of preestablished performance goals
and other terms set forth in this Section 8.3.

      (a)   Potential Annual Incentive Awards. Not later than the deadline
            specified in Section 8.2(c) above, the Committee shall determine the
            eligible persons who will potentially receive Annual Incentive
            Awards, and the amounts potentially payable thereunder, for that
            fiscal year, either out of an Annual Incentive Award pool
            established by such date under Section 8.3(b) hereof or as
            individual Annual Incentive Awards. In the case of individual Annual
            Incentive Awards intended to qualify under Code Section 162(m), the
            amount potentially payable shall be based upon the achievement of a
            performance goal or goals based on one or more of the business
            criteria set forth in Section 8.2(b) hereof in the given performance
            year, as specified by the Committee; in other cases, such amount
            shall be based on such criteria as shall be established by the
            Committee. In all cases, the maximum Annual Incentive Award of any
            Participant shall be subject to the limitation set forth in Section
            5 hereof.

      (b)   Annual Incentive Award Pool. The Committee may establish an Annual
            Incentive Award pool, which shall be an unfunded pool, for purposes
            of measuring performance of the Company in connection with Annual
            Incentive Awards. The amount of such Annual Incentive Award pool
            shall be based upon the achievement of a performance goal or goals
            based on one or more of the business criteria set forth in Section
            8.2(b) hereof during the given performance period, as specified by
            the Committee in accordance with Section 8.2(c) hereof. The
            Committee may specify the amount of the Annual Incentive Award pool
            as a percentage of any of such business criteria, a percentage
            thereof in excess of a threshold amount, or as another amount which
            need not bear a strictly mathematical relationship to such business
            criteria.

      (c)   Payout of Annual Incentive Awards. After the end of each fiscal
            year, the Committee shall determine the amount, if any, of the
            potential Annual Incentive Award payable to each Participant
            eligible therefor and, if applicable, the amount of any Annual
            Incentive


                                    Page 14

            Award pool. The Committee may, in its discretion, determine that the
            amount payable to any Participant as a final Annual Incentive Award
            shall be increased or reduced from the amount of his or her
            potential Annual Incentive Award, including a determination to make
            no final Award whatsoever, but may not exercise discretion to
            increase any such amount in the case of an Annual Incentive Award
            intended to qualify under Code Section 162(m). The Committee shall
            specify the circumstances in which an Annual Incentive Award shall
            be paid or forfeited in the event of termination of employment by
            the Participant prior to the end of a fiscal year or prior to
            settlement of such Annual Incentive Award.

      8.4 Written Determinations. Determinations by the Committee as to the
establishment of performance goals, the amount potentially payable in respect of
Performance Awards and Annual Incentive Awards, the achievement of performance
goals relating to Performance Awards and Annual Incentive Awards, and the amount
of any final Performance Award and Annual Incentive Award shall be recorded in
writing, except that the Committee may determine that this requirement shall not
apply in the case of Performance Awards not intended to qualify under Section
162(m). Specifically, the Committee shall certify in writing, in a manner
conforming to applicable regulations under Section 162(m), prior to settlement
of each such Award granted to a Covered Employee, that the performance goals and
other material terms of the Award upon which settlement of the Award was
conditioned have been satisfied. The Committee may not delegate any
responsibility relating to such Performance Awards or Annual Incentive Awards,
and the Board shall not perform such functions at any time that the Committee is
composed solely of Qualified Members.

      8.5 Status of Section 8.2 and Section 8.3 Awards under Code Section
162(m). It is the intent of the Company that Performance Awards and Annual
Incentive Awards under Sections 8.2 and 8.3 hereof granted to persons who are
designated by the Committee as likely to be Covered Employees within the meaning
of Code Section 162(m) and regulations thereunder (including Regulation 1.162-27
and successor regulations thereto) shall, if so designated by the Committee,
constitute "performance-based compensation" within the meaning of Code Section
162(m) and regulations thereunder. Accordingly, the terms of Sections 8.2, 8.3,
8.4 and 8.5, including the definitions of Covered Employee and other terms used
therein, shall be interpreted in a manner consistent with Code Section 162(m)
and regulations thereunder. The foregoing notwithstanding, because the Committee
cannot determine with certainty whether a given Participant will be a Covered
Employee with respect to a fiscal year that has not yet been completed, the term
Covered Employee as used herein shall mean only a person designated by the
Committee, at the time of grant of a Performance Award or Annual Incentive
Award, as likely to be a Covered Employee with respect to a specified fiscal
year. If any provision of the Plan as in effect on the date of adoption of any
agreements relating to Performance Awards or Annual Incentive Awards that are
designated as intended to comply with Code Section 162(m) does not comply or is
inconsistent with the requirements of Code Section 162(m) or regulations
thereunder, such provision shall be construed or deemed amended to the extent
necessary to conform to such requirements.

      8.6 Assumption of Certain Annual Incentive Awards of Predecessor. The
Committee may authorize the Company to assume annual incentive awards granted by
Predecessor for performance in the year the Spin-Off becomes effective. Upon
such an assumption, the awards shall be Annual Incentive Awards under the Plan,
the terms of which shall be the identical to the terms of the Predecessor annual
incentive awards, except insofar as adjustment of such terms is necessary and
permitted in accordance with this Plan and the Predecessor plan and would not
otherwise result in such Annual Incentive Awards failing to qualify as
"performance-based compensation" under Section 162(m).


                                    Page 15

      9.    GENERAL PROVISIONS.

      9.1 Compliance with Laws and Obligations. The Company shall not be
obligated to issue or deliver Shares in connection with any Award or take any
other action under the Plan in a transaction subject to the registration
requirements of the Securities Act of 1933, as amended, or any other federal or
state securities law, any requirement under any listing agreement between the
Company and any national securities exchange or automated quotation system, or
any other law, regulation, or contractual obligation of the Company, until the
Company is satisfied that such laws, regulations, and other obligations of the
Company have been complied with in full. Certificates representing Shares issued
under the Plan will be subject to such stop-transfer orders and other
restrictions as may be applicable under such laws, regulations, and other
obligations of the Company, including any requirement that a legend or legends
be placed thereon.

      9.2 Limitations on Transferability. Awards and 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 designated Beneficiary in the event of the
Participant's death), and, if exercisable, shall be exercisable during the
lifetime of a Participant only by such Participant or his guardian or legal
representative; provided, however, that such Awards and other rights (other than
ISOs and SARs in tandem therewith) may be transferred during the lifetime of the
Participant, for purposes of the Participant's estate planning or other purposes
consistent with the purposes of the Plan (as determined by the Committee), and
may be exercised by such transferees in accordance with the terms of such Award,
but only if and to the extent permitted by the Committee. Awards and other
rights under the Plan may not be pledged, mortgaged, hypothecated, or otherwise
encumbered, and shall not be subject to the claims of creditors. A Beneficiary,
transferee, or other person claiming any rights under the Plan from or through
any Participant shall be subject to all terms and conditions of the Plan and any
Award agreement applicable to such Participant, except as otherwise determined
by the Committee, and to any additional terms and conditions deemed necessary or
appropriate by the Committee.

      9.3 No Right to Continued Employment; Leaves of Absence. Neither the Plan,
the grant of any Award, nor any other action taken hereunder shall be construed
as giving any employee, consultant, director, or other person the right to be
retained in the employ or service of the Company or any of its subsidiaries, nor
shall it interfere in any way with the right of the Company or any of its
subsidiaries to terminate any person's employment or service at any time. Unless
otherwise specified in the applicable Award agreement, an approved leave of
absence shall not be considered a termination of employment or service for
purposes of an Award under the Plan.

      9.4 Taxes. The Company and any subsidiary is authorized to withhold from
any Award granted or to be settled, any delivery of Shares in connection with an
Award, any other payment relating to an Award, or any payroll or other payment
to a Participant amounts of withholding and other taxes due or potentially
payable in connection with any transaction involving an Award, and to take such
other action as the Committee may deem advisable to enable the Company and
Participants to satisfy obligations for the payment of withholding taxes and
other tax obligations relating to any Award. This authority shall include
authority to withhold or receive Shares or other property and to make cash
payments in respect thereof in satisfaction of a Participant's tax obligations.


                                    Page 16

      9.5 Changes to the Plan and Awards. The Board may amend, suspend,
discontinue, or terminate the Plan or the Committee's 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 5.3) 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.

      9.6 No Rights to Awards; No Stockholder Rights. No Participant or other
person shall have any claim to be granted any Award under the Plan, and there is
no obligation for uniformity of treatment of Participants, employees,
consultants, or directors. No Award shall confer on any Participant any of the
rights of a stockholder of the Company unless and until Shares are duly issued
or transferred and delivered to the Participant in accordance with the terms of
the Award or, in the case of an Option, the Option is duly exercised.

      9.7 International Participants. With respect to Participants who reside or
work outside the United States of America, the Committee may, in its sole
discretion, amend the terms of the Plan with respect to such Participants or
grant Awards not conforming to the terms of the Plan to such Participants in
order that such Awards conform to the requirements of local law and customary
employment practices in such locations and in order that such Awards shall serve
the purposes of the Plan in light of such local laws and customary employment
practices.

      9.8 Unfunded Status of Awards; Creation of Trusts. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant pursuant to an Award,
nothing contained in the Plan or any Award shall give any such Participant any
rights that are greater than those of a general creditor of the Company;
provided, however, that the Committee may authorize the creation of trusts or
make other arrangements to meet the Company's obligations under the Plan to
deliver cash, Shares, other Awards, or other property pursuant to any Award,
which trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan unless the Committee otherwise determines with the consent of
each affected Participant.

      9.9 Nonexclusivity of the Plan. Neither the adoption of the Plan by the
Board nor its submission to the stockholders of Predecessor or, in the case of
any amendment, submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other compensatory arrangements as it may deem desirable, including the granting
of awards otherwise than under the Plan, and such arrangements may be either
applicable generally or only in specific cases.

      9.10 Payments in the Event of Forfeitures; Fractional Shares. Unless
otherwise determined by the Committee, in the event of a forfeiture of an Award
with respect to which a Participant paid cash consideration, the Participant
shall be repaid the amount of such cash consideration. No fractional Shares
shall be issued or delivered pursuant to the Plan or any Award (although
fractional share units may be credited in connection with any Award if so
authorized by the Committee). The Committee shall


                                    Page 17

determine whether cash, other Awards, or other property shall be issued or paid
in lieu of such fractional Shares or whether such fractional Shares or any
rights thereto shall be forfeited or otherwise eliminated.

      9.11 Successors and Assigns. The Plan shall be binding on all successors
and assigns of the Company and a Participant, including any permitted transferee
of a Participant, the Beneficiary or estate of such Participant and the
executor, administrator or trustee of such estate, or any receiver or trustee in
bankruptcy or representative of the Participant's creditors.

      9.12 Governing Law. The validity, construction, and effect of the Plan,
any rules and regulations under the Plan, and any Award agreement 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.

      9.13 Effective Date, Stockholder Approval, and Plan Termination. The Plan
shall become effective on the later of its approval by stockholders of the
Predecessor or the effectiveness of the Company's registration under Section 12
of the Exchange Act. 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 Awards under the Plan. The foregoing
notwithstanding, if the rules of the New York Stock Exchange ("NYSE") are at any
time amended to provide that the automatic operation of the share reservation
formula under Section 5.1 hereof would constitute a material revision of the
Plan subject to stockholder approval, the Plan shall thereafter terminate on the
day before the tenth anniversary of the effectiveness of such NYSE amendment, or
such earlier date as may be required under the NYSE rules, if and so that such
termination provision will cause the automatic operation of Section 5.1 to not
constitute a material revision of the Plan subject to stockholder approval under
the NYSE rules. Upon any resulting termination of the Plan, no new
authorizations of grants of Awards may be made (and such Plan termination shall
in other respects satisfy any requirements of the NYSE necessary to effectuate
the foregoing sentence), but then outstanding Awards shall remain outstanding in
accordance with the terms of the Plan and the terms of such Awards.


                                    Page 18

EX-99.1

                                                                    EXHIBIT 99.1


    CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
                       PURSUANT TO 18 U.S.C. SECTION 1350,
      AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


      I, Richard B. Handler, Chief Executive Officer, and I, Joseph A. Schenk,
Chief Financial Officer, of Jefferies Group, Inc, a Delaware corporation (the
"Company"), each hereby certifies, pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:

      (1) The Company's periodic report on Form 10-Q for the period ended June
27, 2003 (the "Form 10-Q") fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and

      (2) The information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations of the
Company.


                                      * * *

                                       
CHIEF EXECUTIVE OFFICER                   CHIEF FINANCIAL OFFICER


/s/   Richard B. Handler                  /s/   Joseph A. Schenk
- ----------------------------------        ----------------------------------
      Richard B. Handler                        Joseph A. Schenk

Date: August 8, 2003                      Date: August 8, 2003



      A signed original of this written statement required by Section 906 has
been provided to Jefferies Group, Inc. and will be retained by Jefferies Group,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.


                                     Page 1