UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

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

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, 10th 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
   Yes þ No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
   Yes o No þ

Indicate the number of shares outstanding of the registrant’s class of common stock, as of the latest practicable date. 177,328,702 shares as of the close of business on March 30, 2011.

 

 

JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FEBRUARY 28, 2011

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited) - February 28, 2011 and November 30, 2010			3
Consolidated Statements of Earnings (unaudited) - Three Months Ended February 28, 2011 and March 31, 2010			5
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) - Three Months Ended February 28, 2011 and Year Ended November 30, 2010			6
Consolidated Statements of Comprehensive Income (unaudited) - Three Months Ended February 28, 2011 and March 31, 2010			7
Consolidated Statements of Cash Flows (unaudited) - Three Months Ended February 28, 2011 and March 31, 2010			8
Notes to Consolidated Financial Statements (unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			57
Item 3. Quantitative and Qualitative Disclosures About Market Risk			80
Item 4. Controls and Procedures			83
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			83
Item 1A. Risk Factors			83
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			84
Item 6. Exhibits			85
Signature			86
EX-10.2
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

		February 28,				November 30,
		2011				2010
ASSETS
Cash and cash equivalents (including $282,491 and $202,565 at February 28, 2011 and November 30, 2010, respectively, from VIEs)		$	1,164,333			$	2,188,998
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations			1,794,503				1,636,755
Financial instruments owned, at fair value, including securities pledged of $15,024,808 and $12,338,728 in 2011 and 2010, respectively:
Corporate equity securities (including $176,815 and $120,606 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			2,173,967				1,565,793
Corporate debt securities (including $360,868 and $462,462 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			4,236,560				3,630,616
Government, federal agency and other sovereign obligations			5,875,860				5,191,973
Mortgage- and asset-backed securities (including $40,372 and $43,355 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			5,371,708				4,921,565
Loans and other receivables (including $297,398 and $362,465 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			444,205				434,573
Derivatives (including $16,274 and $7,579 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			82,608				119,268
Investments, at fair value (including $17,478 and $15,612 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			68,291				77,784
Total financial instruments owned, at fair value (including $909,205 and $1,012,079 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			18,253,199				15,941,572
Investments in managed funds			136,727				131,585
Other investments			387,288				220,323
Securities borrowed			8,137,278				8,152,678
Securities purchased under agreements to resell			3,402,301				3,252,322
Securities received as collateral			30,768				48,616
Receivables:
Brokers, dealers and clearing organizations (including $91,806 and $195,485 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			3,694,820				2,550,234
Customers			1,868,021				1,328,365
Fees, interest and other (including $6,655 and $127 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			240,819				165,603
Premises and equipment			146,683				142,729
Goodwill			366,500				364,964
Other assets (including $212 and $370 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			804,910				601,799
Total assets (including $1,290,369 and $1,410,626 at February 28, 2011 and November 30, 2010, respectively, from VIEs)		$	40,428,150			$	36,726,543

Continued on next page.

JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) — CONTINUED
(Dollars in thousands, except per share amounts)

		February 28,				November 30,
		2011				2010
LIABILITIES AND STOCKHOLDERS’ EQUITY
Financial instruments sold, not yet purchased, at fair value:
Corporate equity securities (including $1,121 and $2,708 at February 28, 2011 and November 30, 2010, respectively, from VIEs)		$	1,989,199			$	1,638,372
Corporate debt securities (including $366,331 and $443,100 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			2,295,374				2,375,925
Government, federal agency and other sovereign obligations			5,510,010				4,735,288
Mortgage- and asset-backed securities			119,849				129,384
Loans (including $59,826 and $150,100 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			70,062				171,278
Derivatives (including $-0- and $136 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			71,263				59,552
Total financial instruments sold, not yet purchased, at fair value (including $427,278 and $596,044 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			10,055,757				9,109,799
Securities loaned			3,030,690				3,108,977
Securities sold under agreements to repurchase			11,940,684				10,684,056
Obligation to return securities received as collateral			30,768				48,616
Payables:
Brokers, dealers and clearing organizations (including $68,799 and $157,134 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			3,076,859				1,885,357
Customers			4,263,789				3,716,357
Accrued expenses and other liabilities (including $121,046 and $94,402 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			865,730				1,142,850
Long-term debt			3,780,304				3,778,681
Mandatorily redeemable convertible preferred stock			125,000				125,000
Mandatorily redeemable preferred interest of consolidated subsidiaries (including $332,258 and $315,885 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			332,258				315,885
Total liabilities (including $949,381 and $1,163,465 at February 28, 2011 and November 30, 2010, respectively, from VIEs)			37,501,839				33,915,578
STOCKHOLDERS’ EQUITY
Common stock, $.0001 par value. Authorized 500,000,000 shares; issued 207,386,635 shares in 2011 and 200,301,656 shares in 2010			21				20
Additional paid-in capital			2,275,107				2,218,123
Retained earnings			922,478				850,654
Less:
Treasury stock, at cost, 30,318,925 shares in 2011 and 28,607,510 shares in 2010			(583,137	)			(539,530	)
Accumulated other comprehensive loss:
Currency translation adjustments			(28,347	)			(42,859	)
Additional minimum pension liability			(8,419	)			(8,419	)
Total accumulated other comprehensive loss			(36,766	)			(51,278	)
Total common stockholders’ equity			2,577,703				2,477,989
Noncontrolling interests			348,608				332,976
Total stockholders’ equity			2,926,311				2,810,965
Total liabilities and stockholders’ equity		$	40,428,150			$	36,726,543

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

		Three Months Ended
		February 28, 2011				March 31, 2010
Revenues:
Commissions		$	119,921			$	134,438
Principal transactions			290,151				150,380
Investment banking			239,059				198,337
Asset management fees and investment income from managed funds			23,868				6,599
Interest			273,216				218,935
Other			20,461				16,679
Total revenues			966,676				725,368
Interest expense			208,294				145,313
Net revenues			758,382				580,055
Interest on mandatorily redeemable preferred interest of consolidated subsidiaries			16,438				2,048
Net revenues, less mandatorily redeemable preferred interest			741,944				578,007
Non-interest expenses:
Compensation and benefits			442,892				319,801
Floor brokerage and clearing fees			28,132				30,729
Technology and communications			43,675				40,209
Occupancy and equipment rental			17,979				19,706
Business development			19,938				13,361
Professional services			13,276				14,423
Other			13,121				17,322
Total non-interest expenses			579,013				455,551
Earnings before income taxes			162,931				122,456
Income tax expense			60,886				46,369
Net earnings			102,045				76,087
Net earnings to noncontrolling interests			14,704				3,943
Net earnings to common shareholders		$	87,341			$	72,144
Earnings per common share:
Basic		$	0.42			$	0.35
Diluted		$	0.42			$	0.35
Weighted average common share:
Basic			199,141				198,507
Diluted			203,257				202,630

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

		Three Months Ended				Eleven Months Ended
		February 28, 2011				November 30, 2010
Common stock, par value $0.0001 per share
Balance, beginning of period		$	20			$	19
Issued			1				1
Balance, end of period			21				20
Additional paid-in capital
Balance, beginning of period			2,218,123				2,036,087
Benefit plan share activity (1)			6,648				19,230
Share-based expense, net of forfeitures and clawbacks			15,427				149,799
Proceeds from exercise of stock options			—				108
Acquisitions and contingent consideration			419				419
Tax benefit for issuance of share-based awards			32,368				2,965
Dividend equivalents on share-based plans			2,122				9,515
Balance, end of period			2,275,107				2,218,123
Retained earnings
Balance, beginning of period			850,654				688,039
Net earnings to common shareholders			87,341				223,666
Dividends			(15,517	)			(61,051	)
Balance, end of period			922,478				850,654
Treasury stock, at cost
Balance, beginning of period			(539,530	)			(384,379	)
Purchases			(37,761	)			(140,071	)
Returns / forfeitures			(5,846	)			(15,080	)
Balance, end of period			(583,137	)			(539,530	)
Accumulated other comprehensive (loss) income
Balance, beginning of period			(51,278	)			(41,626	)
Currency adjustment			14,512				(8,490	)
Pension adjustment, net of tax			—				(1,162	)
Balance, end of period			(36,766	)			(51,278	)
Total common stockholders’ equity			2,577,703				2,477,989
Noncontrolling interests
Balance, beginning of period			332,976				321,538
Net earnings to noncontrolling interests			14,704				16,601
Contributions			1,013				12,433
Distributions			(85	)			(15,177	)
Deconsolidation of asset management entity			—				(5,477	)
Adoption of accounting changes to ASC 810			—				3,058
Balance, end of period			348,608				332,976
Total stockholders’ equity		$	2,926,311			$	2,810,965

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

		Three Months Ended
		February 28,				March 31,
		2011				2010
Net earnings to common shareholders		$	87,341			$	72,144
Other comprehensive income (loss):
Currency translation adjustment			14,512				(18,118	)
Total other comprehensive income (loss) (1)			14,512				(18,118	)
Comprehensive income		$	101,853			$	54,026

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

		Three Months Ended
		February 28, 2011				March 31, 2010
Cash flows from operating activities:
Net earnings		$	102,045			$	76,087
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization			12,841				7,859
Fees related to assigned management agreements			(740	)			(920	)
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries			16,438				2,048
Accruals related to various benefit plans and stock issuances, net of estimated forfeitures			16,230				10,129
Increase in cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations			(157,690	)			(241,158	)
Increase in receivables:
Brokers, dealers and clearing organizations			(1,110,309	)			(594,811	)
Customers			(537,179	)			(226,101	)
Fees, interest and other			(73,977	)			(3,029	)
Decrease (increase) in securities borrowed			43,413				(1,201,770	)
Increase in financial instruments owned			(2,198,779	)			(3,454,521	)
Increase in other investments			(167,169	)			(12,635	)
Increase in investments in managed funds			(5,142	)			(5,406	)
Increase in securities purchased under agreements to resell			(130,021	)			(1,121,664	)
Increase in other assets			(195,096	)			(36,032	)
Increase in payables:
Brokers, dealers and clearing organizations			1,179,043				970,374
Customers			546,704				135,803
(Decrease) increase in securities loaned			(101,186	)			1,009,884
Increase in financial instruments sold, not yet purchased			834,651				1,977,040
Increase in securities sold under agreements to repurchase			1,232,264				2,272,072
Decrease in accrued expenses and other liabilities			(306,560	)			(318,300	)
Net cash used in operating activities			(1,000,219	)			(755,051	)
Cash flows from investing activities:
Net payments on premises and equipment			(14,104	)			(4,474	)
Cash received from contingent consideration			748				656
Cash paid for contingent consideration			—				(6,997	)
Net cash used in investing activities			(13,356	)			(10,815	)

Continued on next page.

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

		Three Months Ended
		February 28, 2011				March 31, 2010
Cash flows from financing activities:
Excess tax benefits from the issuance of share-based awards		$	33,763			$	18,475
Gross proceeds from short-term borrowings			907,000				1,099,000
Gross payments on short-term borrowings			(907,000	)			(1,099,000	)
Net (payments on) proceeds from:
Mandatorily redeemable preferred interest of consolidated subsidiaries			(65	)			(37	)
Noncontrolling interest			928				(199	)
Repurchase of common stock			(37,761	)			(63,220	)
Dividends			(13,395	)			(12,957	)
Exercise of stock options, not including tax benefits			—				56
Net cash used in financing activities			(16,530	)			(57,882	)
Effect of foreign currency translation on cash and cash equivalents			5,440				(4,031	)
Net decrease in cash and cash equivalents			(1,024,665	)			(827,779	)
Cash and cash equivalents at beginning of period			2,188,998				1,853,167
Cash and cash equivalents at end of period		$	1,164,333			$	1,025,388
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest		$	195,739			$	153,855
Income taxes, net			55,263				59,791

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

Index

		Page
Note 1. Organization and Basis of Presentation			11
Note 2. Summary of Significant Accounting Policies			13
Note 3. Cash, Cash Equivalents and Short-Term Investments			19
Note 4. Financial Instruments			20
Note 5. Derivative Financial Instruments			30
Note 6. Collateralized Transactions			33
Note 7. Securitization Activities and Variable Interest Entities			34
Note 8. Jefferies Finance LLC			40
Note 9. Acquisitions			41
Note 10. Short-Term Borrowings			42
Note 11. Long-Term Debt			43
Note 12. Mandatorily Redeemable Convertible Preferred Stock			43
Note 13 Noncontrolling Interest and Mandatorily Redeemable Preferred Interests of Consolidated Subsidiaries			44
Note 14. Benefit Plans			45
Note 15. Compensation Plans			45
Note 16. Earnings Per Share			50
Note 17. Income Taxes			51
Note 18. Commitments, Contingencies and Guarantees			51
Note 19. Net Capital Requirements			54
Note 20. Segment Reporting			54
Note 21. Related Party Transactions			56

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

Note 1. Organization and Basis of Presentation

Organization

The accompanying unaudited Consolidated Financial Statements include the accounts of Jefferies Group, Inc. and all its subsidiaries (together, “we” or “us”), including Jefferies & Company, Inc. (“Jefferies”), Jefferies Execution Services, Inc., (“Jefferies Execution”), Jefferies International Limited, Jefferies Hong Kong Limited, Jefferies Asset Management, LLC, Jefferies Financial Products, LLC and all other entities in which we have a controlling financial interest or are the primary beneficiary, including Jefferies High Yield Holdings, LLC (“JHYH”), Jefferies Special Opportunities Partners, LLC (“JSOP”) and Jefferies Employees Special Opportunities Partners, LLC (“JESOP”).

We operate in two business segments, Capital Markets and Asset Management. Capital Markets includes our securities trading (including the results of our indirectly partially-owned subsidiary, Jefferies High Yield Trading, LLC) and investment banking activities, which provides the research, sales, trading and origination effort for various equity, fixed income and advisory products and services. Asset Management provides investment management services to various private investment funds, separate accounts and mutual funds.

Change in Year End

On April 19, 2010, our Board of Directors approved a change to our fiscal year end from a calendar year basis to a fiscal year ending on November 30. As such, the first quarter represents the three months ended February 28, 2011 and has been reported on the basis of the new fiscal year. The prior year quarter ended March 31, 2010 is reported on the basis of the previous calendar year cycle.

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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 GAAP for complete financial statements. All adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. These unaudited consolidated financial statements should be read in conjunction with our Transition Report on Form 10-K for the eleven months ended November 30, 2010.

We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with GAAP. The most significant of these estimates and assumptions relate to fair value measurements, compensation and benefits, legal reserves and the realizability of deferred tax assets. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

Consolidation

Our policy is to consolidate all entities in which we own more than 50% of the outstanding voting stock and have control. In addition, we consolidate entities which lack characteristics of an operating entity or business for which we are the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. In situations where we have significant influence but not control of an entity that does not qualify as a variable interest entity, we apply the equity method of accounting or fair value accounting. We also have formed nonconsolidated investment vehicles with third-party investors that are typically organized as partnerships or limited liability companies. We act as general partner or managing member for these investment vehicles and have generally provided the third-party investors with termination or “kick-out” rights.

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

Intercompany accounts and transactions are eliminated in consolidation.

Immaterial Restatements

As indicated in our Transition Report on Form 10-K for the eleven months ended November 30, 2010, we made correcting adjustments (hereafter in this Note referred to as “adjustments”) to our financial statements for the first quarter of 2010 relating to the netting of interest income and interest expense, differences with our former clearing bank, and certain other immaterial adjustments. We do not believe that these adjustments are material to our financial statements for the quarterly period ended March 31, 2010. For additional information on these adjustments, see Note 1, Organization and Basis of Presentation, and Note 23, Selected Quarterly Financial Data (Unaudited), of the Consolidated Financial Statements of our Transition Report on Form 10-K for the eleven months ended November 30, 2010.

The following table sets forth the effects of the adjustments on Net earnings, on an after tax basis, for the three months ended March 31, 2010 (in thousands):

Decrease in Net earnings to common shareholders

		Three Months Ended
		March 31, 2010
Previously reported Net earnings to common shareholders		$	74,066
Netting of interest revenues and expense			—
Differences with clearing bank			(1,288	)
Other items (1)			(634	)
Total adjustments			(1,922	)
Adjusted Net earnings to common shareholders		$	72,144

The following table sets forth the effects of the adjustments on major caption items within our Consolidated Statement of Earnings for the three months ended March 31, 2010 (in thousands, except per share amounts):

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

		Three Months Ended
		March 31, 2010
		As Previously
		Reported				Adjusted
Principal transactions		$	152,546			$	150,380
Interest			150,020				218,935
Total revenues			658,619				725,368
Interest expense			75,377				145,313
Net revenues			583,242				580,055
Net revenues, less mandatorily redeemable perferred interest			581,194				578,007
Floor brokerage and clearing fees			30,730				30,729
Total non-interest expenses			455,644				455,551
Earnings before income taxes			125,550				122,456
Income tax expense			47,541				46,369
Net earnings			78,009				76,087
Net earnings to common shareholders			74,066				72,144
Earnings per common share:
Basic		$	0.36			$	0.35
Diluted		$	0.36			$	0.35

These adjustments affected certain line items within cash flows from operating activities on the Consolidated Statement of Cash Flows for the three months ended March 31, 2010, with no net effect on net cash used in operating activities. In addition, supplemental disclosures for cash paid for interest were also adjusted.

Note 2. Summary of Significant Accounting Policies

Revenue Recognition Policies

Commissions. All customer securities transactions are reported on the Consolidated Statements of Financial Condition on a settlement date basis with related income reported on a trade-date basis. We permit institutional customers to allocate a portion of their gross commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. Soft dollar expenses amounted to $10.5 million and $8.8 million for the three months ended February 28, 2011 and March 31, 2010, respectively. We account for the cost of these arrangements on an accrual basis. As we are not the primary obligor for these arrangements, expenses relating to soft dollars are netted against commission revenues.

Principal Transactions. Financial instruments owned, securities pledged and Financial instruments sold, but not yet purchased (all of which are recorded on a trade-date basis) are carried at fair value with gains and losses reflected in Principal transactions in the Consolidated Statements of Earnings on a trade date basis.

Investment Banking. Underwriting revenues and fees from mergers and acquisitions, restructuring and other investment banking advisory assignments or engagements are recorded when the services related to the underlying transactions are completed under the terms of the assignment or engagement. Expenses associated with such assignments are deferred until reimbursed by the client, the related revenue is recognized or the engagement is otherwise concluded. Out-of-pocket expenses are recorded net of client reimbursements. Revenues are presented net of related out-of-pocket unreimbursed expenses. Unreimbursed out-of-pocket expenses with no related revenues are included in Business development and Professional services expenses in the Consolidated Statements of Earnings.

Asset Management Fees and Investment Income From Managed Funds. Asset management fees and investment income from managed funds include revenues we earn from management, administrative and performance fees from

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funds managed by us, revenues from management and performance fees we earn from related-party managed funds and investment income from our investments in these funds. We earn fees in connection with management and investment advisory services performed for various funds and managed accounts. These fees are based on assets under management or an agreed upon notional amount and may include performance fees based upon the performance of the funds. Management and administrative fees are generally recognized over the period that the related service is provided. Generally, performance fees are earned when the return on assets under management exceeds certain benchmark returns, “high-water marks” or other performance targets. Performance fees are accrued on a monthly basis and are not subject to adjustment once the measurement period ends (generally annual periods) and performance fees have been realized.

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

Cash Equivalents

Cash equivalents include highly liquid investments, including money market funds, not held for resale with original maturities of three months or less.

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

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

Foreign Currency Translation

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

Financial Instruments

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

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Fair Value Hierarchy

In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. We apply a hierarchy to categorize our fair value measurements broken down into three levels based on the transparency of inputs as follows:

Level 1:		Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level 2:		Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level 3:		Instruments that have little to no pricing observability as of the reported date. These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The availability of observable inputs can vary and is affected by a wide variety of factors, including, for example, the type of financial instrument and market conditions. To the extent that valuation is based on models or input that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.

We use prices and inputs that are current as of the measurement date. As the observability of prices and inputs may change for a financial instrument from period to period, this condition may cause a transfer of an instrument among the fair value hierarchy levels. Transfers among the levels are recognized at the beginning of each period.

Valuation Process for Financial Instruments

Financial instruments are valued at quoted market prices, if available. Certain financial instruments have bid and ask prices that can be observed in the marketplace. For financial instruments whose inputs are based on bid-ask prices, we allow for mid-market pricing and adjust to the point within the bid-ask range that meets our best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid-ask spread is used to measure both the long and short positions.

For financial instruments that do not have readily determinable fair values using quoted market prices, the determination of fair value is based upon consideration of available information, including types of financial instruments, current financial information, restrictions on dispositions, fair values of underlying financial instruments and quotations for similar instruments. The valuation process for financial instruments may include the use of valuation models and other techniques. Adjustments to valuations (such as counterparty, credit, concentration or liquidity) derived from valuation models may be made when, in management’s judgment, either the size of the position in the financial instrument in a nonactive market or other features of the financial instrument such as its complexity, or the market in which the financial instrument is traded require that an adjustment be made to the value derived from the models. An adjustment may be made if a financial instrument is subject to sales restrictions that would result in a price less than the quoted market price. Adjustments from the price derived from a valuation model reflect management’s judgment that other participants in the market for the financial instrument being measured at fair

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value would also consider in valuing that same financial instrument and are adjusted for assumptions about risk uncertainties and market conditions. Results from valuation models and valuation techniques in one period may not be indicative of future period fair value measurements.

See Note 4, Financial Instruments, for a description of valuation techniques applied to the classes of financial instruments at fair value.

Investments in Managed Funds

Investments in managed funds include our investments in funds managed by us and our investments in related-party managed funds in which we are entitled to a portion of the management and/or performance fees. Investments in nonconsolidated managed funds are accounted for on the equity method or fair value. Gains or losses on our investments in managed funds are included in Asset management fees and investment income from managed funds in the Consolidated Statements of Earnings.

Other Investments

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

Receivable from, and Payable to, Customers

Receivable from and payable to customers includes amounts receivable and payable on cash and margin transactions. Securities owned by customers and held as collateral for these receivables are not reflected in the accompanying consolidated financial statements. Receivable from officers and directors included within this financial statement line item represents balances arising from their individual security transactions. These transactions are subject to the same regulations as customer transactions and are provided on substantially the same terms.

Securities Borrowed and Securities Loaned

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

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

Securities purchased under agreements to resell and Securities sold under agreements to repurchase (collectively “repos”) are accounted for as collateralized financing transactions and are recorded at their contracted repurchase amount. We earn and incur interest from this activity which is reflected in our Consolidated Statements of Earnings. We monitor the fair value of the underlying securities daily versus the related receivable or payable balances. Should

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the fair value of the underlying securities decline or increase, additional collateral is requested or excess collateral is returned, as appropriate. We carry repos on a net basis by counterparty when appropriate.

Premises and Equipment

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

Goodwill

At least annually, and more frequently if warranted, we assess whether goodwill has been impaired by comparing the estimated fair value of each reporting unit with its estimated net book value. Periodically estimating the fair value of a reporting unit requires significant judgment and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. We completed our annual assessment of goodwill as of June 1, 2010 and no impairment was identified. (Refer to Note 9, Acquisitions, for further details on our annual assessment of goodwill.)

Income Taxes

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

The tax benefit related to dividends and dividend equivalents paid on nonvested share based payment awards and outstanding equity options is recognized as an increase to Additional paid in capital. These amounts are included in tax benefits for issuance of share-based awards on the Consolidated Statement of Changes in Stockholders’ Equity.

Legal Reserves

In the normal course of business, we have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our activities as a global securities and investment banking firm. We are also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our businesses, certain of which may result in judgments, settlements, fines, penalties or other injunctions.

We recognize a liability for a contingency in Accrued expenses and other liabilities when it is probable that a liability has been incurred and when the amount of loss can be reasonably estimated. When a range of probable loss can be estimated, we accrue the most likely amount of such loss, and if such amount is not determinable, then we accrue the minimum of the range of probable loss. The determination of the outcome and loss estimates requires significant judgment on the part of management.

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In many instances, it is not possible to determine whether any loss is probable or even possible or to estimate the amount of any loss or the size of any range of loss. We believe that, in the aggregate, the pending legal actions or proceedings should not have a material adverse effect on our consolidated results of operations, cash flows or financial condition. In addition, we believe that any amount that could be reasonably estimated of potential loss or range of potential loss in excess of what has been provided in the consolidated financial statements is not material.

Share-based Compensation

Share-based awards are measured based on the grant-date fair value of the award and recognized over the period from the service inception date through the date the employee is no longer required to provide service to earn the award. Expected forfeitures are included in determining share-based compensation expense.

Earnings per Common Share

Basic earnings per share (“EPS”) is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding and certain other shares committed to be, but not yet issued. Net earnings available to common shareholders represent net earnings to common shareholders reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities. Common shares outstanding and certain other shares committed to be, but not yet issued, include restricted stock and restricted stock units for which no future service is required. Diluted EPS is computed by dividing net earnings available to common shareholders plus dividends on dilutive mandatorily redeemable convertible preferred stock by the weighted average number of common shares outstanding and certain other shares committed to be, but not yet issued, plus all dilutive common stock equivalents outstanding during the period.

Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and, therefore, are included in the earnings allocation in computing earnings per share under the two-class method of earning per share. We grant restricted stock and restricted stock units as part of our share-based compensation that contain nonforfeitable rights to dividends and dividend equivalents, respectively, and therefore, prior to the requisite service being rendered for the right to retain the award, restricted stock and restricted stock units meet the definition of a participating security. As such, we calculate Basic and Diluted earnings per share under the two-class method. All prior-period earnings per share data presented have been adjusted to include participating securities in the earnings per share computation using the two-class method.

Securitization Activities

We engage in securitization activities related to commercial mortgage loans and mortgage-backed and other asset-backed securities. Such transfers of financial assets are generally accounted for as sales when we have relinquished control over the transferred assets. The gain or loss on sale of such financial assets depends, in part, on the previous carrying amount of the assets involved in the transfer allocated between the assets sold and the retained interests, if any, based upon their respective fair values at the date of sale. We may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are included within Financial instruments owned in the Consolidated Statement of Financial Condition at fair value. Any changes in the fair value of such retained interests are recognized within Principal transactions revenues in the Consolidated Statement of Earnings.

When a transfer of assets does not meet the criteria of a sale, that transfer is treated as a secured borrowing. We continue to recognize the assets of a secured borrowing in Financial instruments owned and recognize the associated financing in Other liabilities in the Consolidated Statements of Financial Condition.

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Note 3. Cash, Cash Equivalents and Short-Term Investments

We generally invest our excess cash in money market funds and other short-term investments. Cash equivalents include highly liquid investments not held for resale with original maturities of three months or less. The following are financial instruments that are cash and cash equivalents that are deemed by us to be generally readily convertible into cash as of February 28, 2011 and November 30, 2010 (in thousands):

		February 28,				November 30,
		2011				2010
Cash and cash equivalents:
Cash in banks		$	406,048			$	325,227
Money market investments			758,285				1,863,771
Total cash and cash equivalents		$	1,164,333			$	2,188,998
Cash and securities segregated (1)		$	1,794,503			$	1,636,755

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Note 4. Financial Instruments

The following is a summary of our financial assets and liabilities that are accounted for at fair value on a recurring basis as of February 28, 2011 and November 30, 2010 by level within the fair value hierarchy (in thousands):

		As of February 28, 2011
														Counterparty
														and Cash
														Collateral
		Level 1 (3)				Level 2 (3)				Level 3				Netting (2)				Total
Assets:
Financial instruments owned:
Corporate equity securities		$	1,790,938			$	349,748			$	33,281			$	—			$	2,173,967
Corporate debt securities			6,011				4,155,565				74,984				—				4,236,560
Collateralized debt obligations			—				79,276				102,946				—				182,222
U.S. government and federal agency securities			1,762,559				251,107				—				—				2,013,666
Municipal securities			—				469,006				799				—				469,805
Sovereign obligations			2,442,345				950,044				—				—				3,392,389
Residential mortgage-backed securities			—				4,439,890				97,109				—				4,536,999
Commercial mortgage-backed securities			—				430,879				6,301				—				437,180
Other asset-backed securities			—				203,855				11,452				—				215,307
Loans and other receivables			—				226,454				217,751				—				444,205
Derivatives			208,432				163,593				—				(289,417	)			82,608
Investments at fair value			457				—				67,834				—				68,291
Total financial instruments owned		$	6,210,742			$	11,719,417				612,457			$	(289,417	)		$	18,253,199
Level 3 assets for which the firm does not bear economic exposure (1)											(209,843	)
Level 3 assets for which the firm bears economic exposure										$	402,614
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities		$	1,747,182			$	241,979			$	38			$	—			$	1,989,199
Corporate debt securities			2,823				2,292,551				—				—				2,295,374
U.S. government and federal agency securities			1,688,584				7,278				—				—				1,695,862
Municipal securities			—				35				—				—				35
Sovereign obligations			2,635,744				1,178,369				—				—				3,814,113
Residential mortgage-backed securities			—				119,439				—				—				119,439
Commercial mortgage-backed securities			—				389				—				—				389
Other asset-backed securities			—				21				—				—				21
Loans			—				52,286				17,776				—				70,062
Derivatives			194,648				286,078				4,957				(414,420	)			71,263
Total financial instruments sold, not yet purchased		$	6,268,981			$	4,178,425			$	22,771			$	(414,420	)		$	10,055,757

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		As of November 30, 2010
														Counterparty
														and Cash
														Collateral
		Level 1				Level 2				Level 3				Netting (2)				Total
Assets:
Financial instruments owned:
Corporate equity securities		$	1,453,744			$	89,430			$	22,619			$	—			$	1,565,793
Corporate debt securities			25				3,557,183				73,408				—				3,630,616
Collateralized debt obligations			—				27,863				31,121				—				58,984
U.S. government and federal agency securities			2,322,204				210,422				—				—				2,532,626
Municipal securities			—				477,462				472				—				477,934
Sovereign obligations			1,600,762				580,651				—				—				2,181,413
Residential mortgage-backed securities			—				3,912,708				132,359				—				4,045,067
Commercial mortgage-backed securities			—				524,614				6,004				—				530,618
Other asset-backed securities			—				286,329				567				—				286,896
Loans and other receivables			—				206,977				227,596				—				434,573
Derivatives			279,811				176,069				—				(336,612	)			119,268
Investments at fair value			—				—				77,784				—				77,784
Total financial instruments owned		$	5,656,546			$	10,049,708				571,930			$	(336,612	)		$	15,941,572
Level 3 assets for which the firm does not bear economic exposure (1)											(204,139	)
Level 3 assets for which the firm bears economic exposure										$	367,791
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities		$	1,554,489			$	83,845			$	38			$	—			$	1,638,372
Corporate debt securities			—				2,375,925				—				—				2,375,925
U.S. government and federal agency securities			1,688,684				51,604				—				—				1,740,288
Municipal securities			—				170				—				—				170
Sovereign obligations			2,180,667				814,163				—				—				2,994,830
Residential mortgage-backed securities			—				127,547				—				—				127,547
Commerical mortgage-backed securities			—				1,837				—				—				1,837
Loans			—				124,050				47,228				—				171,278
Derivatives			241,860				240,866				2,346				(425,520	)			59,552
Total financial instruments sold, not yet purchased		$	5,665,700			$	3,820,007			$	49,612			$	(425,520	)		$	9,109,799

We elected to apply the fair value option to loans and loan commitments made in connection with our investment banking and sales and trading activities and certain investments held by subsidiaries that are not registered broker-dealers. Loans and investments at fair value are included in Financial instruments owned and loan commitments are included in Financial instruments sold, not yet purchased — Derivatives on the Consolidated Statements of Financial Condition. The fair value option was elected for loans and loan commitments and investments held by subsidiaries that are not registered broker-dealers because they are risk managed by us on a fair value basis. We have elected to

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apply the fair value option to certain secured financings that arise in connection with our securitization activities. At February 28, 2011 and November 30, 2010, $97.7 million and $85.7 million, respectively, in secured financings, are included within Other liabilities on the Consolidated Statement of Financial Position, are accounted for at fair value and are classified as Level 3 liabilities. Cash and cash equivalents, the cash component of Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations, Receivables — Brokers, dealers and clearing organizations, Receivables — Customers, Receivables — Fees, interest and other, Payables — Brokers, dealers and clearing organizations and Payables — Customers, are not accounted for at fair value; however, the recorded amounts approximate fair value due to their liquid or short-term nature.

The following is a description of the valuation basis, including valuation techniques and inputs, used in measuring our financial assets and liabilities that are accounted for at fair value on a recurring basis:

Corporate Equity Securities

•

Exchange Traded Equity Securities: Exchange-traded equity securities are measured based on quoted exchange prices, which are generally obtained from pricing services, and are categorized as Level 1 in the fair value hierarchy.

•

Non-exchange Traded Equity Securities: Non-exchange traded equity securities are measured primarily using broker quotations, pricing service data from external providers and prices observed for recently executed market transactions and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange traded equity securities are categorized as Level 3 financial instruments and measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company. When using pricing data of comparable companies, judgment must be applied to adjust the pricing data to account for differences between the measured security and the comparable security (e.g., issuer market capitalization, yield, dividend rate, geographical concentration).

•

Equity warrants: Non-exchange traded equity warrants are generally classified within Level 3 of the fair value hierarchy and are measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price and maturity date.

Corporate Debt Securities

•

Corporate Bonds: Corporate bonds are measured primarily using broker quotations and pricing service data from external providers, where available, prices observed for recently executed market transactions of comparable size, and bond spreads or credit default swap spreads of the issuer adjusted for basis differences between the swap curve and the bond curve. Corporate bonds measured using these valuation methods are categorized within Level 2 of the fair value hierarchy. If broker quotes, pricing data or spread data is not available, alternative valuation techniques are used including cash flow models incorporating interest rate curves, single name or index credit default swap curves for comparable issuers and recovery rate assumptions. Corporate bonds measured using alternative valuation techniques are classified within Level 3 of the fair value hierarchy and comprise a limited portion of our corporate bonds.

•

High Yield Corporate and Convertible Bonds: A significant portion of our high yield corporate and convertible bonds are classified within Level 2 of the fair value hierarchy and are measured primarily using broker quotations and pricing service data from external providers, where available, and prices observed for recently executed market transactions of comparable size. Where pricing data is less observable, valuations are classified in Level 3 and are based on pending transactions involving the issuer or comparable issuers, prices implied from an issuer’s subsequent financings or recapitalizations, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.

•

Auction Rate Securities: Auction rate securities (“ARS”) included within corporate debt securities include ARS backed by pools of student loans and auction rate preferred securities issued by closed end mutual funds. ARS are measured using market data provided by external service providers, as available. The fair value of ARS is

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also determined by benchmarking to independent market data and adjusting for projected cash flows, level of seniority in the capital structure, leverage, liquidity and credit rating, as appropriate. ARS are classified within Level 3 of the fair value hierarchy based on our assessment of the transparency of the external market data received.

Collateralized Debt Obligations

Collateralized debt obligations measured using prices observed for recently executed market transactions are classified within Level 2 of the fair value hierarchy. When measured based on valuations received from third party brokers, collateralized debt obligations are classified within Level 3 due to the unobservable nature of the pricing inputs underlying the broker valuations.

U.S. Government and Federal Agency Securities

•

U.S. Treasury Securities: U.S. Treasury securities are measured based on quoted market prices and categorized in Level 1 of the fair value hierarchy.

•

U.S. Agency Issued Debt Securities: Callable and non-callable U.S. agency issued debt securities are measured primarily based on quoted market prices obtained from external pricing services. Non-callable U.S. agency securities are generally classified within Level 1 of the fair value hierarchy and callable U.S. agency securities are classified within Level 2.

Municipal Securities

Municipal securities are measured based on quoted prices obtained from external data providers and generally classified within Level 2 of the fair value hierarchy.

Sovereign Obligations

•

G-7 Government and non-G-7 Government Bonds: G-7 government and non-G-7 government bonds are measured based on quoted market prices obtained from external pricing services. G-7 government bonds are categorized within Level 1 of the fair value hierarchy and non-G-7 government bonds are categorized within Level 2.

•

Emerging Market Sovereign Debt Securities: Valuations are primarily based on market price quotations from external data providers, where available, or recently executed independent transactions of comparable size. To the extent market price quotations are not available or recent transactions have not been observed, valuation techniques incorporating foreign currency curves, interest rate yield curves and country spreads for bonds of similar issuers, seniority and maturity are used to determine fair value. Emerging market sovereign debt securities are generally classified within Level 2 of the fair value hierarchy.

Residential Mortgage-Backed Securities

•

Agency Residential Mortgage-Backed Securities: Agency residential mortgage-backed securities include mortgage pass-through securities (fixed and adjustable rate), collateralized mortgage obligations, interest-only and principal-only securities and to-be-announced securities and are generally measured using market price quotations from external data providers and categorized within Level 2 of the fair value hierarchy.

•

Agency Residential Inverse Interest-Only Securities (“Agency Inverse IOs”): The fair value of agency inverse IOs is estimated using expected future cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the underlying mortgage loan collateral. We use prices observed for recently executed transactions to develop market-clearing spread and yield curve assumptions. Valuation inputs with regard to underlying collateral incorporate weighted average coupon, loan-to-value, credit scores, geographic location, maximum and average loan size, originator, servicer, and weighted average loan age. Agency inverse

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IOs are categorized within Level 2 of the fair value hierarchy. We also use vendor data in developing assumptions, as appropriate.

•

Non-Agency Residential Mortgage-Backed Securities: Fair values are determined primarily using discounted cash flow methodologies and securities are categorized within Level 2 or Level 3 of the fair value hierarchy based on the observability of the pricing inputs used. Performance attributes of the underlying mortgage loans are evaluated to estimate pricing inputs, such as prepayment rates, default rates and the severity of credit losses. Attributes of the underlying mortgage loans that affect the pricing inputs include, but are not limited to, weighted average coupon; average and maximum loan size; loan-to-value; credit scores; documentation type; geographic location; weighted average loan age; originator; servicer; historical prepayment, default and loss severity experience of the mortgage loan pool; and delinquency rate. Yield curves used in the discounted cash flow models are based on observed market prices for comparable securities and published interest rate data to estimate market yields.

Commercial Mortgage-Backed Securities

•

Agency Commercial Mortgage-Backed Securities: GNMA project loan bonds and FNMA DUS mortgage-backed securities are generally measured by using prices observed for recently executed market transactions to estimate market-clearing spread levels for purposes of estimating fair value. GNMA project loan bonds and FNMA DUS mortgage-backed securities are categorized within Level 2 of the fair value hierarchy.

•

Non-Agency Commercial Mortgage-Backed Securities: Non-agency commercial mortgage-backed securities are measured using pricing data obtained from third party services and prices observed for recently executed market transactions and are categorized within Level 2 and Level 3 of the fair value hierarchy.

Other Asset-Backed Securities

Other asset-backed securities include, but are not limited to, securities backed by auto loans, credit card receivables and student loans and are categorized within Level 2 of the fair value hierarchy. Valuations are determined using pricing data obtained from third party services and prices observed for recently executed market transactions.

Loans and Other Receivables

•

Corporate Loans: Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market price quotations from external data providers where sufficient observability exists as to the extent of market transaction data supporting the pricing data. Corporate loans categorized within Level 3 are measured based on market price quotations that are considered to be less transparent, market prices for debt securities of the same creditor, and estimates of future cash flow incorporating assumptions regarding creditor default and recovery rates and consideration of the issuer’s capital structure.

•

Participation Certificates in GNMA Project and Construction Loans: Valuations of participation certificates in GNMA project and construction loans are based on observed market prices of recently executed purchases of similar loans which are then used to derive a market implied spread. The market implied spread is used as the primary input in estimating the fair value of loans at the measurement date. The loan participation certificates are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions.

•

Project Loans: Valuation of project loans are based on bench marks of prices for recently executed transactions of related realized collateralized securities and are classified within Level 3 of the fair value hierarchy.

•

Escrow and Trade Claim Receivables: Escrow and trade claim receivables are categorized within Level 3 of the fair value hierarchy with fair value estimated based on reference to market prices and implied yields of debt securities of the same or similar issuers.

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

Derivatives

•

Listed Derivative Contracts: Listed derivative contracts are measured based on quoted exchange prices, which are generally obtained from pricing services, and are categorized as Level 1 in the fair value hierarchy.

•

OTC Derivative Contracts: OTC derivative contracts are generally valued using models, whose inputs reflect assumptions that we believe market participants would use in valuing the derivative in a current period transaction. Inputs to valuation models are appropriately calibrated to market data. For many OTC derivative contracts, the valuation models do not involve material subjectivity as the methodologies do not entail significant judgment and the inputs to valuation models do not involve a high degree of subjectivity as the valuation model inputs are readily observable or can be derived from actively quoted markets. OTC derivative contracts are primarily categorized in Level 2 of the fair value hierarchy given the observability of the inputs to the valuation models.

OTC options include OTC equity and commodity options measured using Black-Scholes models with key inputs impacting the valuation including the underlying security or commodity price, implied volatility, dividend yield, interest rate curve, strike price and maturity date. Discounted cash flow models are utilized to measure certain OTC derivative contracts including the valuations of our interest rate swaps, which incorporate observable inputs related to interest rate curves, and valuations of our foreign exchange forwards and swaps, which incorporate observable inputs related to foreign currency spot rates and forward curves. Credit defaults swaps include both index and single-name credit default swaps. External prices are available as inputs in measuring index credit default swaps. For single-name credit default swaps, fair value is determined based on valuation statements provided by the counterparty. For commodity and equity total return swaps, market prices are observable for the underlying asset and used as the basis for measuring the fair value of the derivative contracts. Total return swaps executed on other underlyings are measured based on valuations received from third parties.

Investments at Fair Value

Investments at fair value include primarily investments in hedge funds, fund of funds and private equity funds, which are measured based on the net asset value of the funds provided by the fund managers and categorized within Level 3 of the fair value hierarchy. Additionally, investments at fair value include direct equity investments in private companies, which are measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company. Direct equity investments in private companies are categorized within Level 3 of the fair value hierarchy. The following tables provide further information about our investments in entities that have the characteristics of an investment company at February 28, 2011 and November 30, 2010 (in thousands):

		February 28, 2011
						Unfunded				Redemption Frequency
		Fair Value (f)				Commitments				(if currently eligible)
Equity Long/Short Hedge Funds (a)		$	22,318			$	10,000			Quarterly, Semiannually
High Yield Hedge Funds(b)			1,545				—			—
Fund of Funds(c)			1,195				129			Annually
Private Equity Funds(d)			23,167				6,651			—
Other Investments(e)			37				—			At Will
Total(g)		$	48,263			$	16,780

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(Unaudited)

		November 30, 2010
						Unfunded				Redemption Frequency
		Fair Value (f)				Commitments				(if currently eligible)
Equity Long/Short Hedge Funds (a)		$	19,865			$	—			Quarterly, Semiannually
High Yield Hedge Funds(b)			1,561				—			—
Fund of Funds(c)			2,622				131			Annually
Private Equity Funds(d)			26,567				6,792			—
Other Investments(e)			287				—			At Will
Total(g)		$	50,902			$	6,923

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

At February 28, 2011 and November 30, 2010, our Financial instruments owned and Financial instruments sold, not yet purchased are measured using different valuation basis as follows:

		February 28, 2011								November 30, 2010
						Financial								Financial
		Financial				Instruments Sold,				Financial				Instruments Sold,
		Instruments				Not Yet				Instruments				Not Yet
		Owned				Purchased				Owned				Purchased
Exchange closing prices			10	%			17	%			9	%			17	%
Recently observed transaction prices			1	%			0	%			5	%			2	%
Data providers/pricing services			67	%			65	%			65	%			60	%
Broker quotes			8	%			16	%			12	%			19	%
Valuation techniques			14	%			2	%			9	%			2	%
			100	%			100	%			100	%			100	%

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

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

The following is a summary of changes in fair value of our financial assets and liabilities that have been classified as Level 3 for the three months ended February 28, 2011 and March 31, 2010 (in thousands):

		Three Months Ended February 28, 2011
																										Change in
						Total gains/				Purchases,																unrealized gains/
						losses				sales,																(losses) relating to
		Balance,				(realized and				settlements,				Transfers				Transfers				Balance,				instruments still held
		November 30,				unrealized)				and issuances,				into				out of				February 28,				at February 28, 2011
		2010				(1)				net				Level 3				Level 3				2011				(1)
Assets:
Financial instruments owned:
Corporate equity securities		$	22,619			$	5,167			$	6,772			$	—			$	(1,277	)		$	33,281			$	4,581
Corporate debt securities			73,408				2,283				(293	)			106				(520	)			74,984				816
Collateralized debt obligations			31,121				10,310				60,299				1,216				—				102,946				10,087
U.S. issued municipal securities			472				19				308				—				—				799				19
Residential mortgage-backed securities			132,359				16,205				(64,301	)			12,886				(40	)			97,109				(2,745	)
Commercial mortgage-backed securities			6,004				222				2,804				—				(2,729	)			6,301				(824	)
Other asset-backed securities			567				(215	)			617				11,050				(567	)			11,452				(469	)
Loans and other receivables			227,596				5,974				(17,025	)			1,574				(368	)			217,751				3,021
Investments at fair value			77,784				108				(7,010	)			—				(3,048	)			67,834				626
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities		$	38			$	—			$	—			$	—			$	—			$	38			$	—
Net derivatives (2)			2,346				2,611				—				—				—				4,957				2,611
Loans			47,228				—				(29,452	)			—				—				17,776				—

Analysis of Level 3 Assets and Liabilities for the Three Months Ended February 28, 2011

During the three months ended February 28, 2011, transfers of assets of $26.8 million from Level 2 to Level 3 are primarily attributed to:

•

Non-agency residential mortgage-backed securities and other asset-backed securities for which no recent trade activity was observed for purposes of determining observable inputs.

During the three months ended February 28, 2011, transfers of assets of $8.5 million from Level 3 to Level 2 are primarily attributed to:

•

Commercial mortgage-backed securities, for which market trades were observed in the period for either identical or similar securities; and

•

Corporate equity securities, for which market transactions were announced or market data on comparable securities used as a benchmark became more observable.

During the three months ended February 28, 2011 there were no transfers of liabilities from Level 2 to Level 3 or from Level 3 to Level 2.

Net gains on Level 3 assets were $40.1 million and net losses on Level 3 liabilities were $2.6 million for the three months ended February 28, 2011. Net gains on Level 3 assets were primarily due to increased valuations of various collateralized debt obligations, loans and other receivables and corporate equity securities and sales of certain residential mortgage-backed securities.

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

		Three Months Ended March 31, 2010
																										Change in unrealized
										Purchases,																gains/ (losses)
						Total gains/				sales,																relating to
		Balance,				losses (realized				settlements,				Transfers				Transfers				Balance,				instruments still held
		December 31,				and unrealized)				and				into				out of				March 31,				at March 31, 2010
		2009				(1)				issuances, net				Level 3				Level 3				2010				(1)
Assets:
Financial instruments owned:
Corporate equity securities		$	43,042			$	(6,605	)		$	3,361			$	71			$	(2,803	)		$	37,066			$	(6,378	)
Corporate debt securities			116,648				(1,318	)			(5,163	)			50				(753	)			109,464				937
Collateralized debt obligations			9,570				3,935				—				—				—				13,505				3,935
U.S. issued municipal securities			420				5				—				—				—				425				5
Sovereign obligations			196				—				—				—				(196	)			—				—
Residential mortgage-backed securities			136,496				5,345				23,248				5,397				(3,950	)			166,536				392
Commercial mortgage-backed securities			3,215				(226	)			12,450				858				(1,331	)			14,966				(303	)
Other asset-backed securities			110				—				—				—				—				110				—
Loans and other receivables			506,542				6,735				(44,488	)			—				(232,559	)			236,230				4,025
Investments at fair value			65,564				282				38				4,285				—				70,169				(313	)
Investments in managed funds			—				1,106				7,272				—				—				8,378				1,106
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities		$	—			$	—			$	—			$	38			$	—			$	38			$	—
Corporate debt securities			—				(6	)			230				—				—				224				(5	)
Net Derivatives (2)			3,017				(3,409	)			—				—				1,909				1,517				(3,409	)
Loans			352,420				—				(48,282	)			—				(127,841	)			176,297				—