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		(I.R.S. Employer
incorporation or organization)		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 o     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. 168,186,211 shares as of the close of business November 3, 2009.

 

 

JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2009

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited)- September 30, 2009 and December 31, 2008			3
Consolidated Statements of Earnings (unaudited)- Three Months and Nine Months Ended September 30, 2009 and 2008			5
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)- Nine Months Ended September 30, 2009 and Year Ended December 31, 2008			6
Consolidated Statements of Comprehensive Income (unaudited)- Three Months and Nine Months Ended September 30, 2009 and 2008			7
Consolidated Statements of Cash Flows (unaudited)- Nine Months Ended September 30, 2009 and 2008			8
Notes to Consolidated Financial Statements (unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			50
Item 3. Quantitative and Qualitative Disclosures About Market Risk			79
Item 4. Controls and Procedures			82
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			82
Item 1A. Risk Factors			82
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			83
Item 6. Exhibits			84
Signature			85
EX-31.1
EX-31.2
EX-32

PART I. FINANCIAL INFORMATION

(Dollars in thousands, except per share amounts)

		September 30,				December 31,
		2009				2008
ASSETS
Cash and cash equivalents		$	1,405,401			$	1,294,329
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations			1,252,830				1,151,522
Financial instruments owned, at fair value, including securities pledged to creditors of $555,948 and $361,765 in 2009 and 2008, respectively:
Corporate equity securities			1,600,335				945,747
Corporate debt securities			2,552,523				1,851,216
Government, federal agency and other sovereign obligations			1,752,027				447,233
Mortgage- and asset-backed securities			3,275,192				1,035,996
Loans and other receivables			494,198				34,407
Derivatives			85,238				298,144
Investments			73,502				75,059
Total financial instruments owned, at fair value			9,833,015				4,687,802
Investments in managed funds			114,307				100,245
Other investments			184,588				140,012
Securities borrowed			8,092,955				9,011,903
Securities purchased under agreements to resell			2,905,837				1,247,002
Receivables:
Brokers, dealers and clearing organizations			1,701,988				732,073
Customers			1,390,138				507,292
Fees, interest and other			102,810				87,151
Premises and equipment			135,823				139,390
Goodwill			355,563				358,837
Other assets			388,085				521,127
Total assets		$	27,863,340			$	19,978,685

See accompanying unaudited notes to consolidated financial statements.

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

		September 30,				December 31,
		2009				2008
LIABILITIES AND STOCKHOLDERS’ EQUITY
Financial instruments sold, not yet purchased, at fair value:
Corporate equity securities		$	1,472,146			$	739,166
Corporate debt securities			1,934,129				1,578,395
Government, federal agency and other sovereign obligations			1,508,786				211,045
Mortgage- and asset-backed securities			14,486				—
Loans			495,932				—
Derivatives			52,306				220,738
Other			—				223
Total financial instruments sold, not yet purchased, at fair value			5,477,785				2,749,567
Securities loaned			2,457,029				3,259,575
Securities sold under agreements to repurchase			9,317,086				6,727,390
Payables:
Brokers, dealers and clearing organizations			1,103,301				383,363
Customers			3,441,849				1,736,971
Accrued expenses and other liabilities			717,873				542,546
			22,514,923				15,399,412
Long-term debt			2,452,894				1,764,274
Mandatorily redeemable convertible preferred stock			125,000				125,000
Mandatorily redeemable preferred interest of consolidated subsidiaries			311,418				280,923
Total liabilities			25,404,235				17,569,609
STOCKHOLDERS’ EQUITY
Common stock, $.0001 par value. Authorized 500,000,000 shares; issued 187,036,056 shares in 2009 and 171,167,666 shares in 2008			19				17
Additional paid-in capital			1,862,287				1,870,120
Retained earnings			604,968				418,445
Less:
Treasury stock, at cost, 17,704,370 shares in 2009 and 7,951,628 shares in 2008			(278,357	)			(115,190	)
Accumulated other comprehensive loss:
Currency translation adjustments			(35,942	)			(43,675	)
Additional minimum pension liability			(8,446	)			(8,446	)
Total accumulated other comprehensive loss			(44,388	)			(52,121	)
Total common stockholders’ equity			2,144,529				2,121,271
Noncontrolling interests			314,576				287,805
Total stockholders’ equity			2,459,105				2,409,076
Total liabilities and stockholders’ equity		$	27,863,340			$	19,978,685

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

(In thousands, except per share amounts)

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2009				2008				2009				2008
Revenues:
Commissions		$	94,243			$	113,416			$	298,621			$	329,588
Principal transactions			372,109				(3,430	)			807,629				138,303
Investment banking			122,529				130,125				280,446				338,704
Asset management fees and investment income (loss) from managed funds			20,966				(3,431	)			21,485				(17,748	)
Interest			161,091				209,183				413,777				624,614
Other			6,239				7,388				28,699				20,302
Total revenues			777,177				453,251				1,850,657				1,433,763
Interest expense			76,756				178,605				218,086				565,839
Net revenues			700,421				274,646				1,632,571				867,924
Interest on mandatorily redeemable preferred interest of consolidated subsidiaries			23,596				(24,105	)			30,620				(36,054	)
Net revenues, less mandatorily redeemable preferred interest			676,825				298,751				1,601,951				903,978
Non-interest expenses:
Compensation and benefits			395,031				246,186				956,619				783,651
Floor brokerage and clearing fees			23,510				18,946				60,570				50,482
Technology and communications			36,141				31,500				104,508				91,894
Occupancy and equipment rental			18,121				19,205				52,168				56,898
Business development			10,293				11,228				29,273				35,106
Other			18,699				25,342				52,273				66,440
Total non-interest expenses			501,795				352,407				1,255,411				1,084,471
Earnings (loss) before income taxes			175,030				(53,656	)			346,540				(180,493	)
Income tax expense (benefit)			65,210				(6,090	)			130,299				(59,966	)
Net earnings (loss)			109,820				(47,566	)			216,241				(120,527	)
Net earnings (loss) to noncontrolling interests			23,534				(16,262	)			29,718				(24,301	)
Net earnings (loss) to common shareholders		$	86,286			$	(31,304	)		$	186,523			$	(96,226	)
Earnings (loss) per common share:
Basic		$	0.42			$	(0.18	)		$	0.92			$	(0.64	)
Diluted		$	0.42			$	(0.18	)		$	0.92			$	(0.64	)
Weighted average common shares:
Basic			200,609				173,757				201,860				160,458
Diluted			204,736				173,757				205,986				160,458

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

(Unaudited)
(Dollars in thousands, except per share amounts)

		Nine Months Ended				Year Ended
		September 30, 2009				December 31, 2008
Common stock, par value $0.0001 per share
Balance, beginning of period		$	17			$	16
Issued			2				1
Balance, end of period			19				17
Additional paid-in capital
Balance, beginning of period			1,870,120				1,115,011
Benefit plan share activity (1)			15,556				52,912
Share-based expense, net of forfeitures and clawbacks			(3,768	)			561,661
Proceeds from exercise of stock options			69				840
Acquisitions and contingent consideration			(2,710	)			5,647
Tax (deficiency) benefit for issuance of share-based awards			(16,980	)			6,233
Issuance of treasury stock			—				90,160
Dividend equivalents on restricted stock units			—				37,656
Balance, end of period			1,862,287				1,870,120
Retained earnings
Balance, beginning of period			418,445				1,031,764
Net earnings (loss) to common shareholders			186,523				(536,128	)
Dividends			—				(76,477	)
Acquisition adjustments			—				(714	)
Balance, end of period			604,968				418,445
Treasury stock, at cost
Balance, beginning of period			(115,190	)			(394,406	)
Purchases			(158,418	)			(21,765	)
Returns / forfeitures			(7,459	)			(42,438	)
Issued			2,710				343,419
Balance, end of period			(278,357	)			(115,190	)
Accumulated other comprehensive (loss) income
Balance, beginning of period			(52,121	)			9,159
Currency adjustment, net of tax			7,733				(54,661	)
Pension adjustment, net of tax			—				(6,619	)
Balance, end of period			(44,388	)			(52,121	)
Total common stockholders’ equity			2,144,529				2,121,271
Noncontrolling interests
Balance, beginning of period			287,805				249,380
Net earnings (loss) to noncontrolling interests			29,718				(53,884	)
Contributions			410				99,725
Distributions			(3,357	)			(11,553	)
Consolidation of asset management entity			—				4,137
Balance, end of period			314,576				287,805
Total stockholders’ equity		$	2,459,105			$	2,409,076

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2009				2008				2009				2008
Net earnings (loss) to common shareholders		$	86,286			$	(31,304	)		$	186,523			$	(96,226	)
Other comprehensive income (loss):
Currency translation adjustments			(5,751	)			(23,213	)			7,733				(21,288	)
Total other comprehensive income (loss) (1)			(5,751	)			(23,213	)			7,733				(21,288	)
Comprehensive income (loss)		$	80,535			$	(54,517	)		$	194,256			$	(117,514	)

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

		Nine Months Ended
		September 30, 2009				September 30, 2008
Cash flows from operating activities:
Net earnings (loss)		$	216,241			$	(120,527	)
Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization			23,390				21,998
Gain on repurchase of long-term debt			(7,673	)			—
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries			30,620				(36,054	)
Accruals related to various benefit plans, stock issuances, net of forfeitures			4,331				147,919
Increase in cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations			(101,213	)			(617,039	)
(Increase) decrease in receivables:
Brokers, dealers and clearing organizations			(948,060	)			(1,507,054	)
Customers			(861,053	)			32,654
Fees, interest and other			(15,648	)			7,652
Decrease in securities borrowed			914,875				8,139,139
Increase in financial instruments owned			(5,108,735	)			(266,946	)
Increase in other investments			(44,576	)			(51,090	)
(Increase) decrease in investments in managed funds			(14,062	)			167,326
Increase in securities purchased under agreements to resell			(1,658,835	)			(124,071	)
Decrease in other assets			143,602				118,760
Increase in payables:
Brokers, dealers and clearing organizations			708,141				657,298
Customers			1,687,146				564,944
Decrease in securities loaned			(802,546	)			(2,746,747	)
Increase in financial instruments sold, not yet purchased			2,727,098				241,723
Increase (decrease) in securities sold under agreements to repurchase			2,589,696				(4,647,217	)
Increase in accrued expenses and other liabilities			159,941				32,611
Net cash (used in) provided by operating activities			(357,320	)			15,279
Cash flows from investing activities:
Purchase of premises and equipment			(18,324	)			(21,500	)
Deconsolidation of asset management entity			—				(63,665	)
Business acquisition			(38,760	)			—
Cash paid for contingent consideration			(28,653	)			(37,670	)
Net cash used in investing activities			(85,737	)			(122,835	)

Continued on next page.

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

		Nine Months Ended
		September 30, 2009				September 30, 2008
Cash flows from financing activities:
Excess tax benefits from the issuance of share-based awards		$	8,155			$	11,544
Net proceeds from (payments on):
Equity financing			—				433,579
Issuance of senior notes, net of issuance costs			713,526				—
Repurchase of long-term debt			(12,796	)			—
Bank loans			—				(269,717	)
Mandatorily redeemable preferred interest of consolidated subsidiaries			(125	)			(4,317	)
Noncontrolling interest			(2,947	)			(2,043	)
Repurchase of treasury stock			(158,418	)			(12,522	)
Dividends			—				(38,821	)
Exercise of stock options, not including tax benefits			69				743
Net cash provided by financing activities			547,464				118,446
Effect of foreign currency translation on cash and cash equivalents			6,665				10,804
Net increase in cash and cash equivalents			111,072				21,694
Cash and cash equivalents at beginning of year			1,294,329				897,872
Cash and cash equivalents at end of period		$	1,405,401			$	919,566
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest		$	219,085			$	599,838
Income taxes, net			(42,361	)			(20,713	)
Acquisitions:
Fair value of assets acquired, including goodwill			53,104
Liabilities assumed			14,344
Cash paid for acquisition			38,760

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Index

		Page
Note 1. Organization and Summary of Significant Accounting Policies			11
Note 2. Cash, Cash Equivalents and Short-Term Investments			20
Note 3. Financial Instruments			21
Note 4. Derivative Financial Instruments			27
Note 5. Securitization Activities and Variable Interest Entities			31
Note 6. Acquisitions			35
Note 7. Short-Term Borrowings			36
Note 8. Long-Term Debt			36
Note 9. Mandatorily Redeemable Convertible Preferred Stock			36
Note 10. Noncontrolling Interest and Mandatorily Redeemable Preferred Interests of Consolidated Subsidiaries			37
Note 11. Benefit Plans			38
Note 12. Compensation Plans			38
Note 13. Income Taxes			42
Note 14. Earnings Per Share			43
Note 15. Segment Reporting			44
Note 16. Commitments, Contingencies and Guarantees			45
Note 17. Net Capital Requirements			47
Note 18. Quarterly Dividends			48
Note 19. Related Party Transactions			48
Note 20. Subsequent Events			48

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

Note 1. Organization and Summary of Significant Accounting Policies

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 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”). The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles 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 U.S generally accepted accounting principles for complete financial statements. All adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. These unaudited consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008.

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

Reclassifications

Certain reclassifications have been made to previously reported balances to conform to the current presentation. As of the quarter ended September 30, 2009, we have classified certain amounts within Receivables on the Consolidated Statements of Financial Condition that previously were classified within Other assets. Approximately $117.0 million has been reclassified from Other assets to Receivables at December 31, 2008 to conform with the current presentation.

Prior to January 1, 2009, we reported minority interest within liabilities on our Consolidated Statements of Financial Condition and in earnings (loss) of consolidated subsidiaries in the determination of net earnings (loss). We now present noncontrolling interests within stockholders’ equity, separately from our own equity. We have recast certain prior financial statements to retrospectively reflect noncontrolling interest within stockholders’ equity and to allocate net (earnings) loss to noncontrolling interests and to common shareholders’. See Note 10 for further discussion.

In addition, as of January 1, 2009, net earnings are allocated among common shareholders and participating securities based on their right to share in earnings. These financial statements have been recast to retrospectively apply this accounting policy. This reduced previously reported Diluted EPS. See Note 14 to these financial statements for an explanation of the calculation of earnings per share.

Summary of Significant Accounting Policies

Accounting Standards Codification

The FASB established the Accounting Standards Codification™ (“ASC”) on July 1, 2009 as the single source of authoritative generally accepted accounting principles (“GAAP”) to be applied by nongovernmental entities. The ASC supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in the ASC is no longer authoritative.

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

Following the ASC, the FASB no longer issues new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it issues Accounting Standards Updates, which serve to update the ASC, provide background information about the guidance and provide the basis for conclusions on the changes to the ASC. GAAP was not changed as a result of the FASB’s codification project, but the codification project changes the way the guidance is organized and presented. As a result, these changes have a significant impact on how we reference GAAP in our financial statements and in our accounting policies for financial statements issued for interim and annual periods.

Principles of Consolidation

Our policy is to consolidate all entities in which we own more than 50% of the outstanding voting stock and have control. In addition, 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 that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests, direct or implied. In situations where we have significant influence but not control of an entity that does not qualify as a variable interest entity, we apply the equity method of accounting or fair value accounting. We also have formed nonconsolidated investment vehicles with third-party investors that are typically organized as 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.

All material intercompany accounts and transactions are eliminated in consolidation.

Revenue Recognition

Commissions. All customer securities transactions are reported on the Consolidated Statements of Financial Condition on a settlement date basis with related income reported on a trade-date basis. Under clearing agreements, we clear trades for unaffiliated correspondent brokers and retain a portion of commissions as a fee for our services. Correspondent clearing revenues are included in other revenue. We permit institutional customers to allocate a portion of their gross commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. Soft dollar expenses amounted to $9.2 million and $12.4 million for the three months ended September 30, 2009 and 2008, respectively, and $24.3 million and $32.7 million for the nine months ended September 30, 2009 and 2008, 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 the commission revenues.

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

Investment Banking. Underwriting revenues and fees from mergers and acquisitions, restructuring and other investment banking advisory assignments are recorded when the services related to the underlying transaction are completed under the terms of the assignment or engagement. Expenses associated with such assignments are deferred until reimbursed by the client, the related revenue is recognized or the engagement is otherwise concluded. Expenses are recorded net of client reimbursements. Revenues are presented net of related unreimbursed expenses. Unreimbursed expenses with no related revenues are included in business development in the Consolidated Statements of Earnings. Reimbursed expenses totaled approximately $1.9 million and $3.1 million for the three months ended September 30, 2009 and 2008, respectively, and approximately $4.6 million and $10.7 million for the nine months ended September 30, 2009 and 2008, respectively.

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

Asset Management Fees and Investment Income (Loss) From Managed Funds. Asset management fees and investment income (loss) from managed funds include revenues we receive from management, administrative and performance fees from funds managed by us, revenues from management and performance fees we receive from third-party managed funds and investment income (loss) from our investments in these funds. We receive fees in connection with management and investment advisory services performed for various funds and managed accounts. These fees are based on the value of assets under management and may include performance fees based upon the performance of the funds. Management and administrative fees are generally recognized over the period that the related service is provided based upon the beginning or ending net asset value of the relevant period. Generally, performance fees are earned when the return on assets under management exceeds certain benchmark returns, “high-water marks” or other performance targets. Performance fees are accrued on a monthly basis and are not subject to adjustment once the measurement period ends (annually) and performance fees have been realized.

Interest Revenue and Expense. We recognize contractual interest on financial instruments owned and financial instruments sold, but not yet purchased, on an accrual basis as a component of interest revenue and expense. Interest flows on derivative trading transactions and dividends are included as part of the fair valuation of these contracts in principal transactions in the Consolidated 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 not held for resale with original maturities of three months or less.

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

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

Foreign Currency Translation

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

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

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

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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 the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. 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.

Valuation Process for Financial Instruments

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

The valuation process for financial instruments may include the use of valuation models and other techniques. Adjustments to valuations (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 value would also consider in valuing that same financial instrument and are adjusted for assumptions about risk uncertainties and market conditions. Results from valuation models and valuation techniques in one period may not be indicative of future period fair value measurements.

Cash products — Where quoted prices are available in an active market, cash products are classified in Level 1 of the fair value hierarchy and valued based on the quoted price, primarily quoted exchange prices. Level 1 cash products are highly liquid instruments and include listed equity and money market securities and G-7 government and agency securities. Cash products classified within Level 2 of the fair value hierarchy are based primarily on broker quotations, pricing service data from external providers and prices for actual executed market transactions. If quoted

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

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

Investments in Managed Funds

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

Other Investments

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

Receivable from and Payable to Customers

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

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Securities Borrowed and Securities Loaned

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

We monitor the fair value of the underlying securities daily versus the related receivable or payable balances. Should the fair value of the underlying securities decline or increase, additional collateral is requested or excess collateral is returned, as appropriate. We carry repos on a net basis 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, calculated based on earnings and book value multiples, of each reporting unit with its estimated net book value, by estimating the amount of stockholders’ equity required to support each reporting unit. Periodically estimating the fair value of a reporting unit requires significant judgment and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. We have completed our annual assessment of goodwill as of September 30, 2009 and no impairment was identified.

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

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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. Prior to January 1, 2008, such income tax benefit was recognized as a reduction of income tax expense. These amounts are included in tax benefits for issuance of share-based awards on the Consolidated Statement of Changes in Stockholders’ Equity.

Legal Reserves

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

We record reserves related to legal proceedings in accrued expenses and other liabilities to the extent such losses are probable and can be estimated. The determination of these reserve amounts requires significant judgment on the part of management. We consider many factors including, but not limited to: the amount of the claim; the basis and validity of the claim; previous results in similar cases; and legal precedents and case law. Each legal proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management.

Share-Based Compensation

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 (loss) 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 (loss) available to common shareholders represent net earnings (loss) 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.

As of January 1, 2009, 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.

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Securitization Activities

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

Accounting Developments

The following is a summary of ASC Topics that have impacted or will impact our disclosures and/or accounting policies for financial statements issued for interim and annual periods:

Earnings per Share

We adopted accounting described in ASC 260, Earnings per Share Topic, on January 1, 2009 which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, are included in the earnings allocation in computing earnings per share under the two-class method described in ASC 260. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. Accordingly, all prior-period EPS data presented has been adjusted to comply with the provisions of ASC 260. The adoption of accounting changes described in ASC 260 did not have an effect on previously reported Basic and Diluted EPS of $(0.18) for the three months ended September 30, 2008 and reduced previously reported Basic and Diluted EPS from a loss of $0.60 to a loss of $0.64 for the nine months ended September 30, 2008.

Debt

We apply the provisions of accounting updates described in ASC 470, Debt Topic, effective January 1, 2009, which clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) were not previously addressed ASC 470 and specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This is effective for fiscal years and interim periods beginning after December 31, 2008. Adoption of this accounting update did not affect our financial condition, results of operations or cash flows.

Business Combinations

We apply the provisions of accounting described in ASC 805, Business Combinations Topic, to business combinations occurring after January 1, 2009. This requires an entity to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at their fair value at the acquisition date for any business combination consummated after the effective date. It further requires that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. Adoption of this accounting change did not affect our financial condition, results of operations or cash flows, but may have an effect on accounting for future business combinations.

Consolidation

We adopted the provisions of accounting described in ASC 810, Consolidation Topic, on January 1, 2009, which requires an entity to clearly identify and present ownership interests in subsidiaries held by parties other than the entity in the consolidated financial statements within the equity section but separate from the entity’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; changes in ownership interest be accounted for

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similarly, as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. Refer to Note 10 for further discussion on the adoption of the changes described in ASC 810.

We will adopt further accounting changes described in ASC 810, Consolidation Topic, as of January 1, 2010, which require that 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 consolidate the variable interest entity. The changes to ASC 810, effective as of January 1, 2010, eliminate the quantitative approach previously applied to assessing the consolidation of a variable interest entity and require ongoing reassessments for consolidation. We are currently evaluating the impact on our consolidated financial statements.

Derivatives and Hedging

We adopted certain accounting disclosures described in ASC 815, Derivative and Hedging Topic, for our year end consolidated financial statements as of December 31, 2008. This requires enhanced disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument, and require additional disclosure about the current status of the payment/performance risk of a guarantee. The adoption did not have an effect on our financial condition, results of operations or cash flows.

We adopted accounting changes described in ASC 815, Derivative and Hedging Topic, effective January 1, 2009, requiring qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts and disclosures about credit-risk-related contingent features in derivative agreements. Since changes required as of January 1, 2009 required only additional disclosures concerning derivatives and hedging activities, adoption did not affect our financial condition, results of operations or cash flows.

Fair Value Measurements and Disclosures

We adopted accounting updates included in ASC 820, Fair Value Measurements and Disclosures Topic, as of April 1, 2009, which provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. ASC 820 also includes guidance on identifying circumstances that indicate a transaction is not orderly. The adoption of these updates did not have a material effect on our financial condition, results of operations and cash flows.

In August 2009, the FASB issued accounting updates to ASC 820, Fair Value Measurements and Disclosures Topic — Measuring Liabilities at Fair Value, which provides clarifying guidance for determining the fair value of a liability. We will adopt this accounting update on October 1, 2009 and do not expect this update to have a material effect on our financial condition, results of operations or cash flows.

In September 2009, the FASB issued accounting updates to ASC 820, Fair Value Measurements and Disclosures Topic — Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The accounting updates in this topic permit an investment that has the characteristics of an investment company and has no readily determinable fair value to be measured based on the net asset value per share of the investment. The accounting updates also require disclosure by major category of investment about the attributes of the investment, the nature of any redemption restrictions on the investment, any unfunded commitments we have pertaining to the investment and the investment strategies of the underlying investees. We will adopt the provisions contained in the accounting update in the fourth quarter of 2009 and do not expect there to be a material effect on our financial condition, results of operations or cash flows.

Subsequent Events

We adopted accounting described in ASC 855, Subsequent Events Topic, as of our financial period ended June 30, 2009, requiring that management evaluate events and transactions that may occur for potential recognition or

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disclosure in the financial statements after the balance sheet date through the date the financial statements are issued and determining the circumstances under which such events or transactions must be recognized in the financial statements. The adoption did not have an effect on our financial condition, results of operations or cash flows.

Transfers and Servicing

We adopted accounting updates included in ASC 860, Transfers and Servicing Topic, effective January 1, 2009, which require an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction unless certain criteria are met. The updates to ASC 860 are to be applied prospectively for new transactions entered into after the adoption date. The adoption did not have a material effect on financial condition, cash flows or results of operations.

We will adopt further accounting changes described in ASC 860, Transfers and Servicing Topic, as of January 1, 2010, which eliminate the concept of a qualifying special purpose entity, require that a transferor consider all arrangements made contemporaneously with, or in contemplation of, a transfer of assets when determining whether derecognition of a financial asset is appropriate, clarify the requirement that a transferred financial asset be legally isolated from the transferor and any of its consolidated affiliates, stipulate that constraints on a transferee’s ability to freely pledge or exchange transferred assets causes the transfer to fail sale accounting, and define participating interests and provides guidance on derecognizing participating interests. We are currently evaluating the impact on our consolidated financial statements.

Use of Estimates

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 U.S. generally accepted accounting principles. The most important of these estimates and assumptions relate to fair value measurements and compensation and benefits. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

Note 2. Cash, Cash Equivalents and Short-Term Investments

We generally invest our excess cash in money market funds and other short-term investments. Cash equivalents include highly liquid investments not held for resale with original maturities of three months or less. The following are financial instruments that are cash and cash equivalents or are deemed by us to be generally readily convertible into cash as of September 30, 2009 and December 31, 2008 (in thousands of dollars):

		September 30, 2009				December 31, 2008
Cash and cash equivalents:
Cash in banks		$	227,004			$	765,056
Money market investments			1,178,397				529,273
Total cash and cash equivalents			1,405,401				1,294,329
Cash and securities segregated (1)			1,252,830				1,151,522
		$	2,658,231			$	2,445,851

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Note 3. Financial Instruments

The following is a summary of the fair value of major categories of financial instruments owned and financial instruments sold, not yet purchased, as of September 30, 2009 and December 31, 2008 (in thousands of dollars):

		September 30, 2009								December 31, 2008
						Financial								Financial
						Instruments								Instruments
		Financial				Sold,				Financial				Sold,
		Instruments				Not Yet				Instruments				Not Yet
		Owned				Purchased				Owned				Purchased
Corporate equity securities		$	1,600,335			$	1,472,146			$	945,747			$	739,166
Corporate debt securities			2,552,523				1,934,129				1,851,216				1,578,395
Government, federal agency and other sovereign obligations			1,752,027				1,508,786				447,233				211,045
Mortgage- and asset-backed securities			3,275,192				14,486				1,035,996				—
Loans and other receivables			494,198				495,932				34,407				—
Derivatives			85,238				52,306				298,144				220,738
Investments			73,502				—				75,059				—
Other			—				—				—				223
		$	9,833,015			$	5,477,785			$	4,687,802			$	2,749,567

We elected to apply the fair value option to loans and loan commitments made in connection with our investment banking and senior loan 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.

Financial instruments owned includes securities pledged to creditors. The following is a summary of the fair value of major categories of securities pledged to creditors as of September 30, 2009 and December 31, 2008 (in thousands of dollars):

		September 30, 2009				December 31, 2008
Corporate equity securities		$	555,744			$	360,356
Corporate debt securities			204				1,409
		$	555,948			$	361,765

At September 30, 2009 and December 31, 2008, the approximate fair value of collateral received by us that may be sold or repledged by us was $11.3 billion and $9.7 billion, respectively. This collateral was received in connection with resale agreements and securities borrowings. At September 30, 2009 and December 31, 2008, a substantial portion of this collateral received by us had been sold or repledged.

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The following is a summary of our financial assets and liabilities that are accounted for at fair value as of September 30, 2009 and December 31, 2008 by level within the fair value hierarchy (in thousands of dollars):

		As of September 30, 2009
														Counterparty
														and Cash
														Collateral
		Level 1				Level 2				Level 3				Netting				Total
Assets:
Financial instruments owned:
Corporate equity securities		$	1,532,260			$	47,672			$	20,403			$	—			$	1,600,335
Corporate debt securities			2,870				2,395,520				147,388				—				2,545,778
Collateralized debt obligations			—				3				6,742				—				6,745
U.S. government and federal agency securities			858,536				550,924				—				—				1,409,460
U.S. issued municipal securities			—				165,543				240				—				165,783
Foreign government issued securities			—				176,646				138				—				176,784
Residential mortgage backed securities			—				2,881,216				105,069				—				2,986,285
Commercial mortgage backed securities			—				171,404				—				—				171,404
Other asset backed securities			—				117,393				110				—				117,503
Derivatives			239,246				339,007				2,399				(495,414	)			85,238
Loans and other receivables			—				7,946				486,252				—				494,198
Investments at fair value			—				—				73,502				—				73,502
Total financial instruments owned		$	2,632,912			$	6,853,274				842,243			$	(495,414	)		$	9,833,015
Level 3 assets for which the firm does not bear economic exposure (1)											(377,227	)
Level 3 assets for which the firm bears economic exposure										$	465,016
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities		$	1,425,322			$	46,786			$	38			$	—			$	1,472,146
Corporate debt securities			—				1,934,129				—				—				1,934,129
U.S. government and federal agency securities			1,055,075				272,341				—				—				1,327,416
U.S. issued municipal securities			—				25				—				—				25
Foreign government issued securities			—				181,345				—				—				181,345
Residential mortgage backed securities			—				6,214				—				—				6,214
Commercial mortgage backed securities			—				3,945				—				—				3,945
Other asset backed securities			—				4,327				—				—				4,327
Derivatives			200,181				367,244				8,017				(523,136	)			52,306
Loans			—				—				495,932				—				495,932
Total financial instruments sold, not yet purchased		$	2,680,578			$	2,816,356			$	503,987			$	(523,136	)		$	5,477,785

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

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 September 30, 2009 and 2008 (in thousands of dollars):

		Three Months Ended September 30, 2009
																										Change in unrealized
										Purchases,																gains/ (losses)
						Total gains/				sales,																relating to
						losses				settlements,				Transfers				Transfers				Balance,				instruments still held
		Balance, June				(realized and				and				into				out of				September				at September 30,
		30, 2009				unrealized) (1)				issuances				Level 3				Level 3				30, 2009				2009 (1)
Assets:
Financial instruments owned:
Corporate equity securities		$	20,297			$	(752	)		$	(44	)		$	1,581			$	(679	)		$	20,403			$	(582	)
Corporate debt securities			164,466				(4,855	)			(4,676	)			2,038				(9,585	)			147,388				(7,054	)
Collateralized debt obligations			2,119				4,623				—				—				—				6,742				4,623
U.S. issued municipal securities			509				(193	)			(76	)			—				—				240				(193	)
Foreign government issued securities			78				68				—				—				(8	)			138				68
Residential mortgage backed securities			117,760				65,948				(79,304	)			702				(37	)			105,069				12,836
Commercial mortgage backed securities			—				—				—				—				—				—				—
Other asset backed securities			1,422				—				(1,312	)			—				—				110				—
Derivatives			5,499				(3,100	)			—				—				—				2,399				(3,100	)
Loans and other receivables			275,694				12,558				198,000				—				—				486,252				8,725
Investments at fair value			73,441				1,121				(479	)			—				(581	)			73,502				1,121
		$	661,285			$	75,418			$	112,109			$	4,321			$	(10,890	)		$	842,243			$	16,444
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities		$	—			$	—			$	—			$	38			$	—			$	38			$	—
Corporate debt securities			4,802				536				(3,751	)			—				(1,587	)			—				—
Derivatives			7,538				499				(20	)			—				—				8,017				(499	)
Loans			229,438				—				266,494				—				—				495,932				—
		$	241,778			$	1,035			$	262,723			$	38			$	(1,587	)		$	503,987			$	(499	)

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

		Three Months Ended September 30, 2008
		Non-derivative				Non-derivative				Derivative				Derivative
		instruments –				instruments –				instruments –				instruments –
		Assets				Liabilities				Assets				Liabilities				Investments
Balance, June 30, 2008		$	405,850			$	47,804			$	727			$	33,921			$	90,111
Total gains/ losses (realized and unrealized) (1)			(29,279	)			¾				¾				(15,156	)			364
Purchases, sales, settlements, and issuances			(45,415	)			(46,502	)			(727	)			¾				1,271
Transfers into Level 3			28,240				25				¾				¾				¾
Transfers out of Level 3			(71,684	)			(1,264	)			¾				¾				¾
Balance, September 30, 2008		$	287,712			$	63			$	¾			$	18,765			$	91,746
Change in unrealized gains/ (losses) relating to instruments still held at September 30, 2008 (1)		$	(34,028	)		$	¾			$	¾			$	15,156			$	364

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 nine months ended September 30, 2009 and 2008 (in thousands of dollars):

		Nine Months Ended September 30, 2009
																										Change in
										Purchases,																unrealized gains/
						Total gains/				sales,																(losses) relating to
						losses (realized				settlements,				Transfers				Transfers				Balance,				instruments still held
		Balance, December				and unrealized)				and				into				out of				September				at September 30,
		31, 2008				(1)				issuances				Level 3				Level 3				30, 2009				2009 (1)
Assets:
Financial instruments owned:
Corporate equity securities		$	41,351			$	(14,134	)		$	(9,323	)		$	6,391			$	(3,882	)		$	20,403			$	(12,430	)
Corporate debt securities			177,603				(47,757	)(2)			54,251				35,928				(72,637	)			147,388				(42,204	)
Collateralized debt obligations			2,179				4,563				—				—				—				6,742				4,563
U.S. issued municipal securities			—				(243	)(2)			483				—				—				240				(193	)
Foreign government issued securities			—				79				—				67				(8	)			138				79
Residential mortgage backed securities			63,065				78,077				(91,681	)			76,945				(21,337	)			105,069				15,135
Commercial mortgage backed securities			—				—				322				—				(322	)			—				—
Other asset backed securities			2,089				(583	)			485				—				(1,881	)			110				—
Derivatives			—				2,446				(47	)			—				—				2,399				4,832
Loans and other receivables			108,029				10,304				367,919				—				—				486,252				(2,095	)
Investments at fair value			75,059				(2,665	)			1,727				6				(625	)			73,502				(3,445	)
		$	469,375			$	30,087			$	324,136			$	119,337			$	(100,692	)		$	842,243			$	(35,758	)
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities		$	—			$	—			$	—			$	38			$	—			$	38			$	—
Corporate debt securities			3,515				739				(2,104	)			2,952				(5,102	)			—				—
Derivatives			8,197				(180	)			—				—				—				8,017				(2,252	)
Loans			—				—				495,932				—				—				495,932				—
Other			—				225				(225	)			—				—				—				—
		$	11,712			$	784			$	493,603			$	2,990			$	(5,102	)		$	503,987			$	(2,252	)