UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

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

For the fiscal year ended December 31, 2008

OR

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

For the transition period from                             to                            

Commission File Number: 1-14947

JEFFERIES GROUP, INC.

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

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

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

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

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

Yes þ      No o

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

Yes o      No þ

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

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

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

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

Yes o      No þ

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

LOCATION OF EXHIBIT INDEX

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

 

 

JEFFERIES GROUP, INC.

2008 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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

Exhibit Index located on page 103 of this report.

PART I

Item 1. Business.

Introduction

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

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

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

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

	•		Code of Ethics;
	•		Reportable waivers, if any, from our Code of Ethics by our executive officers;
	•		Board of Directors Corporate Governance Guidelines;
	•		Charter of the Audit Committee of the Board of Directors;
	•		Charter of the Corporate Governance and Nominating Committee of the Board of Directors;
	•		Charter of the Compensation Committee of the Board of Directors;
	•		Annual reports on Form 10-K;
	•		Quarterly reports on Form 10-Q;
	•		Current reports on Form 8-K; and
	•		Beneficial ownership reports on Forms 3, 4 and 5.

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

Business Segments

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

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

Our Businesses

Capital Markets

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

     Equities

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

     Equity Sales and Trading

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

     Execution

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

     Equity Research

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

     Equity Derivatives

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

     Securities Lending

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

     Prime Brokerage

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

     Fixed Income and Commodities

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

     Investment Grade Fixed Income

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

     High Yield Secondary Market Activities

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

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

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

     Fixed Income Research

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

     Convertibles

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

     Commodities

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

     Investment Banking

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

     Underwriting

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

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

     Advisory Services

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

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

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

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

Asset Management

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

     Our Sources of Revenues

     Commissions

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

     Principal Transactions

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

     Investment Banking

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

     Interest

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

Competition

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

Regulation

     The securities industry in the United States is subject to extensive regulation under both federal and state laws. The Securities and Exchange Commission is the federal agency responsible for the administration of federal securities laws. In addition, self-regulatory organizations, principally Financial Industry Regulatory Authority (“FINRA”), are actively involved in the regulation of broker-dealers. These self-regulatory organizations conduct periodic examinations of member broker-dealers in accordance with rules they have adopted and amended from time to time, subject to approval by the SEC. Securities firms are also subject to regulation by foreign regulatory bodies, state securities commissions and state attorneys general in those foreign jurisdictions and states in which they do business.

     Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales and trading methods, trade practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure of securities firms, anti-money laundering, record-keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the mode of operation and profitability of broker-dealers. Broker-dealers that engage in commodities and futures transactions are also subject to regulation by the Commodity Futures Trading Commission (“CFTC”) and the National Futures Association (“NFA”). The SEC, self-regulatory organizations, state securities commissions, state attorneys general, the CFTC and the NFA may conduct administrative proceedings which can result in censure, fine, suspension, expulsion of a broker-dealer, its officers or employees, or revocation of broker-dealer licenses. The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets, rather than protection of creditors and stockholders of broker-dealers.

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

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

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

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

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

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

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

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

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

Item 1A. Risk Factors.

Factors Affecting Our Business

     The following factors describe some of the assumptions, risks, uncertainties and other factors that could adversely affect our business or that could otherwise result in changes that differ materially from our expectations. In addition to the factors mentioned in this report, we may also be affected by changes in general economic and business conditions, acts of war, terrorism and natural disasters.

Changing conditions in financial markets and the economy could result in decreased revenues, continued losses, increased losses or other adverse consequences.

     Our net revenues and profits were adversely affected in 2008 by the equity and credit market turmoil, and may be further impacted by continued or further credit market dislocations or sustained market downturns. As an investment banking and securities firm, changes in the financial markets or economic conditions in the United States and elsewhere in the world could adversely affect our business in many ways, including the following:

•		A market downturn could lead to a further decline in the volume of transactions executed for customers and, therefore, to a decline in the revenues we receive from commissions and spreads.
•		Continued unfavorable financial or economic conditions could reduce the number and size of transactions in which we provide underwriting, financial advisory and other services. Our investment banking revenues, in the form of financial advisory and underwriting or placement fees, are directly related to the number and size of the transactions in which we participate and could therefore be adversely affected by unfavorable financial or economic conditions.
•		Adverse changes in the market could lead to losses from principal transactions.
•		Adverse changes in the market could also lead to a reduction in revenues from asset management fees and investment income from managed funds and losses on our own capital invested in managed funds. Even in the absence of a market downturn, below-market investment performance by our funds and portfolio managers could reduce asset management revenues and assets under management and result in reputational damage that might make it more difficult to attract new investors.
•		Increases in credit spreads, as well as limitations on the availability of credit, such as occurred during 2008, can affect our ability to borrow on a secured or unsecured basis, which may adversely affect our liquidity and results of operations.

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

     A considerable portion of our revenues is derived from trading in which we act as principal. Although a significant portion of our principal trading is “riskless principal” in nature, we may incur trading losses relating to the purchase, sale or short sale of high yield, international, convertible, and equity securities and futures and commodities for our own account. In any period, we may experience losses as a result of price declines, lack of trading volume, and illiquidity. From time to time, we may engage in a large block trade in a single security or maintain large position concentrations in a single security, securities of a single issuer, or securities of issuers engaged in a specific industry. In general, because our inventory is marked to market on a daily basis, any downward price movement in these securities could result in a reduction of our revenues and profits. In addition, we may engage in hedging transactions that if not successful, could result in losses.

Increased competition may adversely affect our revenues and profitability.

     All aspects of our business are intensely competitive. We compete directly with numerous other brokers and dealers, investment banking firms and commercial banks. In addition to competition from firms currently in the securities business, there has been increasing competition from others offering financial services, including automated trading and other services based on technological innovations. Recent changes, such as financial institution consolidations and the government’s involvement with financial institutions through the Emergency Economic Stabilization Act of 2008 and other transactions, may provide a competitive advantage for some of our competitors. We believe that the principal factors affecting competition involve market focus, reputation, the abilities of professional personnel, the ability to execute the transaction, relative price of the service and products being offered, bundling of products and services and the quality of service. Increased competition or an adverse change in our competitive position could lead to a reduction of business and therefore a reduction of revenues and profits. Competition also extends to the hiring and retention of highly skilled employees. A competitor may be successful in hiring away an employee or group of employees, which may result in our losing business formerly serviced by such employee or employees. Competition can also raise our costs of hiring and retaining the key employees we need to effectively execute our business plan.

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

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

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

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

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

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

     Asset management revenue includes revenues we receive from management, administrative and performance fees from funds managed by us, revenues from asset management and performance fees we receive from third-party managed funds, and investment income from our investments in these funds. These revenues are dependent upon the amount of assets under management and the performance of the funds. If these funds do not perform as well as our asset management clients expect, our clients may withdraw their assets from these funds, which would reduce our revenues. Some of our revenues are derived from our own investments in these funds. We experience significant fluctuations in our quarterly operating results due to the nature of our asset management business and therefore may fail to meet revenue expectations. Even in the absence of a market downturn, below-market investment performance by our funds and portfolio managers could reduce asset management revenues and assets under management and result in reputational damage that might make it more difficult to attract new investors.

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

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

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

Extensive regulation of our business limits our activities, and, if we violate these regulations, we may be subject to significant penalties.

     The securities industry in the United States is subject to extensive regulation under both federal and state laws. The SEC is the federal agency responsible for the administration of federal securities laws. In addition, self-regulatory organizations, principally FINRA and the securities exchanges, are actively involved in the regulation of broker-dealers. Securities firms are also subject to regulation by regulatory bodies, state securities commissions and state attorneys general in those foreign jurisdictions and states in which they do business. Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales and trading methods, trade practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure of securities firms, anti-money laundering, record-keeping and the conduct of directors, officers and employees. Broker-dealers that engage in commodities and futures transactions are also subject to regulation by the CFTC and the NFA. The SEC, self-regulatory organizations, state securities commissions, state attorneys general, the CFTC and the NFA may conduct administrative proceedings which can result in censure, fine, suspension, expulsion of a broker-dealer or its officers or employees, or revocation of broker-dealer licenses. The events of 2007 and 2008 have led to various suggestions of an overhaul in financial regulation. Additional legislation, changes in rules, changes in the interpretation or enforcement of existing laws and rules, or the entering into businesses that subject us to new rules and regulations may directly affect our mode of operation and our profitability. Continued efforts by market regulators to increase transparency and reduce the transaction costs for investors, such as decimalization and FINRA’s Trade Reporting and Compliance Engine, or TRACE, has affected and could continue to affect our trading revenue.

Our business is substantially dependent on our Chief Executive Officer.

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

Legal liability may harm our business.

     Many aspects of our business involve substantial risks of liability, and in the normal course of business, we have been named as a defendant or co-defendant in lawsuits involving primarily claims for damages. The risks associated with potential legal liabilities often may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. Private Client Services involves an aspect of the business that has historically had more risk of litigation than our institutional business. Additionally, the expansion of our business, including increases in the number and size of investment banking transactions and our expansion into new areas, such as the municipal securities business, imposes greater risks of liability. In addition, unauthorized or illegal acts of our employees could result in substantial liability to us. Substantial legal liability could have a material adverse financial effect or cause us significant reputational harm, which in turn could seriously harm our business and our prospects.

Our business is subject to significant credit risk.

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

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

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

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

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

Item 1B. Unresolved Staff Comments.

     None.

Item 2. Properties.

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

Item 3. Legal Proceedings.

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

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

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

     None.

PART II

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

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

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

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

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

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

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

Issuer Purchases of Equity Securities

(c) Total Number of

(d) Maximum Number

(a) Total

(b)

Shares Purchased as

of Shares that May

Number of

Average

Part of Publicly

Yet Be Purchased

Shares

Price Paid

Announced Plans or

Under the Plans or

Period

Purchased (1)

per Share

Programs (2)(3)

Programs

October 1 - October 31, 2008

224,400

12.64

224,400

15,849,178

November 1 - November 30, 2008

752,296

8.52

751,664

15,097,514

December 1 - December 31, 2008

—

—

—

15,097,514

Total

976,696

9.46

976,064

Shareholder Return Performance Presentation

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

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

     Item 6. Selected Financial Data.

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

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

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

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

     This report contains or incorporates by reference “forward-looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include statements about our future and statements that are not historical facts. These forward-looking statements are usually preceded by the words “believe,” “intend,” “may,” “will,” or similar expressions. Forward-looking statements may contain expectations regarding revenues, earnings, operations and other financial projections, and may include statements of future performance, plans and objectives. Forward-looking statements also include statements pertaining to our strategies for future development of our business and products. Forward-looking statements represent only our belief regarding future events, many of which by their nature are inherently uncertain and outside of our control. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Information regarding important factors that could cause actual results to differ, perhaps materially, from those in our forward-looking statements is contained in this report and other documents we file. You should read and interpret any forward-looking statement together with these documents, including the following:

	•		the description of our business contained in this report under the caption “Business”;
	•		the risk factors contained in this report under the caption “Risk Factors”;
	•		the discussion of our analysis of financial condition and results of operations contained in this report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;
	•		the discussion of our risk management policies, procedures and methodologies contained in this report under the caption “Risk Management” included within Management’s Discussion and Analysis of Financial Condition and Results of Operations;
	•		the notes to the Consolidated Financial Statements contained in this report; and
	•		cautionary statements we make in our public documents, reports and announcements.

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

Critical Accounting Policies

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

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

     Our management believes our critical accounting policies (policies that are both material to the financial condition and results of operations and require management’s most subjective or complex judgments) are our valuation of financial instruments, goodwill and our use of estimates related to compensation and benefits during the year. For further discussion of these and other significant accounting policies, see Note 1, “Organization and Summary of Significant Accounting Policies,” in our consolidated financial statements.

Valuation of Financial Instruments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     Goodwill

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

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

     Compensation and Benefits

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

Business Environment

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

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

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

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

Consolidated Results of Operations

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

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

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

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

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

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

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

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

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

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

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

Revenues by Source

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

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

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

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

     Net Revenues

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

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

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

     Equities Revenues

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

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

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

     Fixed Income and Commodities Revenue

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

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

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

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

     Investment Banking Revenues

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

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

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

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

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

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

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

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

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

     Assets under Management

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

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

     Change in Assets under Management

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

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

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

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

     Net Interest

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

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

     Compensation and Benefits

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

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

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

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

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

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

     Non-Compensation Expense

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

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

     (Loss) / Earnings before Income Taxes and Minority Interest

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

     Income Taxes

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

     Minority Interest

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

     (Loss) Earnings per Share

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

Mortgage and Lending Related Trading Exposures

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

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

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

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

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

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

Liquidity, Financial Condition and Capital Resources

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

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

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

Liquidity

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

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

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

     A substantial portion of our assets are liquid, consisting of cash or assets readily convertible into cash. The majority of securities positions (both long and short) in our trading accounts are readily marketable and actively traded. In addition, receivables from brokers and dealers are primarily current open transactions, margin deposits or securities borrowed transactions, which are typically settled or closed out within a few days. Receivable from customers includes margin balances and amounts due on transactions in the process of settlement. Most of our receivables are secured by marketable securities.

     Our assets are funded by equity capital, senior debt, mandatorily redeemable convertible preferred stock, securities loaned, securities sold under agreements to repurchase, customer free credit balances, bank loans and other payables. Bank loans represent temporary (usually overnight) secured and unsecured short-term borrowings, which are generally payable on demand. We have arrangements with various banks for financing of up to $718.4 million, including $623.0 million of bank loans and $95.4 million of letters of credit. Of the $718.4 million of uncommitted lines of credit, $468.4 million is unsecured and $250.0 million is secured. Secured amounts are collateralized by a combination of customer, non-customer and firm securities. Letters of credit are used in the normal course of business mostly to satisfy various collateral requirements in lieu of depositing cash or securities.

Liquidity Management Policies

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

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

•		Funding Action Plan. The Funding Action Plan models a potential liquidity contraction over a one-year time period. Our funding action plan model scenarios incorporate potential cash outflows during a liquidity stress event, including, but not limited to, the following: (a) repayment of all unsecured debt maturing within one year and no incremental unsecured debt issuance; (b) maturity roll-off of outstanding letters of credit with no further issuance and replacement with cash collateral; (c) higher margin requirements on or lower availability of secured funding; (d) client cash withdrawals; (e) the anticipated funding of outstanding investment commitments and (f) certain accrued expenses and other liabilities and fixed costs.
•		Cash Capital Policy. We maintain a cash capital model that measures long-term funding sources against requirements. Sources of cash capital include our equity, preferred stock and the non-current portion of long-term borrowings. Uses of cash capital include the following: (a) illiquid assets such as buildings, equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets and certain investments; (b) a portion of securities inventory that is not expected to be financed on a secured basis in a credit-stressed environment (i.e., margin requirements) and (c) drawdowns of unfunded commitments. We seek to maintain a surplus cash capital position. Our equity capital of $2,121.3 million, mandatorily redeemable convertible preferred stock of $125.0 million and long-term borrowings (debt obligations scheduled to mature in more than 12 months) of $1,764.3 million comprise our total capital of $4,010.6 million as of December 31, 2008, which exceeded cash capital requirements.

     Analysis of Financial Condition and Capital Resources

     Financial Condition

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

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

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

     Tangible stockholders’ equity, tangible book value per share, pro forma book value per share and pro forma tangible book value per share are “non-GAAP financial measures.” A “non-GAAP financial measure” is a numerical measure of financial performance that includes adjustments to the most directly comparable measure calculated and presented in accordance with GAAP, or for which there is no specific GAAP guidance. We calculate tangible stockholders’ equity as stockholders’ equity less intangible assets, specifically goodwill. Goodwill is subtracted from stockholders’ equity in determining tangible stockholders’ equity as we believe that goodwill does not constitute an operating asset, which can be deployed in a liquid manner. We calculate tangible book value per share by dividing tangible stockholders’ equity by common stock outstanding. We calculate pro forma book value per share as stockholders’ equity divided by common shares outstanding adjusted for outstanding restricted stock units. We calculate pro forma tangible book value per share by dividing tangible stockholders’ equity by common shares outstanding adjusted for outstanding restricted stock units. We believe the adjustment to shares outstanding for outstanding restricted stock units reflects potential economic claims on our net assets enabling shareholders to better assess their standing with respect to our financial condition. Valuations of financial companies are often measured as a multiple of tangible stockholders’ equity, inclusive of any dilutive effects, making these ratios, and changes in these ratios, a meaningful measurement for investors.

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

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

Capital Resources

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

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

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

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

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

     Our long-term debt ratings are as follows:

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

     Net Capital

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

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

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

     Contractual Obligations and Commitments

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

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

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

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

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

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

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

     Leverage Ratios

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

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