10-K 1 v69408e10-k.txt FORM 10-K 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER: 1-14947 JEFFERIES GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4719745 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 11100 SANTA MONICA BOULEVARD, 11TH FLOOR 90025 LOS ANGELES, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 445-1199 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, $.0001 PAR VALUE (TITLE OF CLASS) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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. [ ] State the aggregate market value of the common stock held by nonaffiliates of the registrant. $510,213,093 as of March 1, 2001. Indicate the number of shares outstanding of the registrant's class of common stock, as of the latest practical date. 25,056,139 shares as of the close of business March 1, 2001. DOCUMENTS INCORPORATED BY REFERENCE Registrant's Definitive Proxy Statement with respect to the 2001 Annual Meeting of Stockholders to be held on June 7, 2001 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 41. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 JEFFERIES GROUP, INC. 2000 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS

PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 6 Item 3. Legal Proceedings........................................... 6 Item 4. Submission of Matters to a Vote of Security Holders......... 6 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters......................................... 7 Item 6. Selected Financial Data..................................... 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 9 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 12 Item 8. Financial Statements and Supplementary Data................. 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 41 PART III Item 10. Directors and Executive Officers of the Registrant.......... 41 Item 11. Executive Compensation...................................... 41 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 41 Item 13. Certain Relationships and Related Transactions.............. 41 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.................................................... 41

Exhibit Index located on page 41 of this report. 3 PART I ITEM 1. BUSINESS. Jefferies Group, Inc. is a holding company which, through its three primary subsidiaries, Jefferies & Company, Inc., Jefferies International Limited and Jefferies Pacific Limited, is engaged as an international investment bank that focuses on capital raising, research, mergers and acquisitions, advisory and restructuring services for small- to medium-sized companies and trading in equity and high yield securities, convertible bonds, options, futures and international securities for institutional clients. The term "Company" refers, unless the context requires otherwise, to Jefferies Group, Inc., its subsidiaries and W & D Securities, Inc. The Company and its various subsidiaries maintain 21 offices worldwide, including Boston, Chicago, Dallas, Hong Kong, London, Los Angeles, New York, Paris, San Francisco, Tokyo and Zurich. As of December 31, 2000, the Company and its subsidiaries had 1,014 full-time employees, including 504 representatives registered with NASD Regulation, Inc. ("NASDR"). The Company's executive offices are located at 11100 Santa Monica Boulevard, Los Angeles, California 90025, and its telephone number is (310) 445-1199. SEPARATION OF INVESTMENT TECHNOLOGY GROUP, INC. FROM JEFFERIES GROUP, INC. The Company was originally incorporated in 1998 as a holding company under the name JEF Holding Company, Inc. At the time of its incorporation, JEF Holding Company, Inc. was a wholly owned subsidiary of a predecessor company also named Jefferies Group, Inc. ("Old Group"). On April 20, 1999, the stockholders of Old Group approved and adopted the Agreement and Plan of Merger (the "Merger Agreement") between Old Group and Old Group's approximately 80.5% owned subsidiary, Investment Technology Group, Inc. ("ITGI"). The Merger Agreement provided for the merger (the "Merger") of ITGI with and into Old Group and for the issuance of shares of the common stock of Old Group to all stockholders of ITGI other than Old Group. Prior to the effective date of the Merger, Old Group distributed all of the outstanding common stock of JEF Holding Company, Inc. to Old Group stockholders in a spin-off transaction (the "Spin-Off"). Prior to the Spin-Off, Old Group transferred all of the assets of Old Group, except for the common stock of ITGI, and all of Old Group's liabilities other than liabilities related to ITGI to JEF Holding Company, Inc. (the "Transfer" and, together with the Spin-Off, the "Transactions"). Coincident with the Merger, Old Group, as the surviving corporation in the Merger, changed its name to Investment Technology Group, Inc. and JEF Holding Company, Inc. changed its name to Jefferies Group, Inc. JEFFERIES & COMPANY, INC. Jefferies & Company, Inc. ("JEFCO") was founded in 1962 and is engaged in equity, convertible debt and high yield securities brokerage and trading and corporate finance. JEFCO is one of the leading national firms engaged in the distribution and trading of blocks of equity securities both on the national securities exchanges and in the "third market." The term "third market" refers to transactions in listed equity securities effected away from national securities exchanges. JEFCO's revenues are derived primarily from commission revenues and market making or trading as principal in equity, high yield, convertible securities, options, futures and international securities with or on behalf of institutional investors, with the balance generated by corporate finance and other activities. JEFCO currently provides fundamental equity and/or high yield research in the areas of: Banks, Thrifts & Wired Financials; eFinance/Financial Technology; eLearning; Electric Utilities; Energy Exploration & Production; Gaming & Leisure; Healthcare -- Acute-Care Hospitals; Healthcare Information Systems & Services; Healthcare Information Technology; Healthcare Internet Technology; Healthcare Services -- Facility-Based; Internet - Content & Commerce; Internet Services; Maritime Shipping; Media & Entertainment; Oil Services; Pharmaceutical IT; Pharmaceutical Services; Retail -- Apparel; Retail -- Specialty; Specialty Healthcare Services; Software -- Enterprise; Software -- Interactive Entertainment; Telecom Services; Telecommunications Equipment; and Wireless Telecom. 1 4 JEFFERIES INTERNATIONAL LIMITED AND JEFFERIES PACIFIC LIMITED Jefferies International Limited ("JIL"), a broker-dealer subsidiary, was incorporated in 1986 in England. JIL is a member of The International Stock Exchange and The Securities and Futures Authority. JIL introduces customers trading in U.S. securities to JEFCO and also trades as a broker-dealer in international equity and convertible securities and American Depositary Receipts ("ADRs"). In 1995, JIL formed a wholly owned Swiss subsidiary, Jefferies (Switzerland) Ltd. In 1996, JIL formed a wholly owned English subsidiary, Jefferies (Japan) Limited, which maintains a branch office in Tokyo. Jefferies Pacific Limited ("JPL"), a broker subsidiary, was incorporated in 1992 in Hong Kong. JPL presently introduces foreign customers trading in U.S. securities to JEFCO. THE EUROPE COMPANY LIMITED To expand its European capabilities, the Company acquired The Europe Company Ltd. in the third quarter of 2000, with a combination of restricted stock, zero coupon unsecured Euro denominated convertible loan notes and cash totaling approximately $18.0 million. The acquisition was accounted for as a purchase and resulted in approximately $13.6 million in goodwill. The approximately $3.0 million in zero coupon unsecured Euro denominated convertible loan notes mature in 2010 and have been classified on the consolidated statement of financial condition as long-term convertible debt. The conversion price for the notes is approximately 28.80 Euros (as of December 31, 2000, this was equivalent to approximately $27.00) per common share until August 4, 2003 and the closing stock price on the date of conversion subsequent to that date. W & D SECURITIES, INC. W & D Securities, Inc. ("W & D") primarily provides execution services on the New York Stock Exchange ("NYSE") and other exchanges to Jefferies and others. The Company gave up its formal legal control of W & D, effective January 1, 1983, by exchanging all of the W & D common stock owned by it for non-voting preferred stock of W & D. The common stock of W & D is presently held by an officer of W & D who has agreed with the Company that, at the option of the Company, he will sell such stock to the Company for nominal consideration. In light of these arrangements and the high proportion of the equity of W & D represented by the non-voting preferred stock held by the Company, W & D is consolidated as a subsidiary of the Company for financial statement purposes. DISCONTINUED OPERATIONS OF ITGI On April 27, 1999, Old Group and ITGI consummated the Transactions that resulted in the separation of ITGI from the other Old Group businesses. On April 22, 1999, Old Group transferred all non-ITGI assets and liabilities to JEF Holding Company, Inc., a holding company. Old Group then distributed all of the common stock of JEF Holding Company, Inc. to Old Group stockholders through a tax-free Spin-Off. After the transfers, Old Group's 15 million shares of ITGI became its only asset. The Spin-Off was immediately followed by a tax-free Merger of ITGI with and into Old Group. Following the Merger, Old Group was renamed Investment Technology Group, Inc. and JEF Holding Company, Inc. was renamed Jefferies Group, Inc., the Registrant in this annual report. The Transactions were treated for financial reporting purposes as if Old Group had spun-off its entire 80.5% stake in ITGI to Old Group stockholders. Accordingly, since the results of ITGI were previously consolidated with Old Group, all financial information for the periods prior to April 27, 1999 have been restated to reflect the results of ITGI as a discontinued operation. The net assets of ITGI have been segregated for prior periods from the other assets and liabilities of Old Group. For financial reporting purposes, the net assets of ITGI as of April 27, 1999 have been treated as a distribution to Old Group stockholders. 2 5 COMMISSION BUSINESS A substantial portion of the Company's revenues is derived from customer commissions on brokerage transactions in equity (primarily listed) and debt securities for domestic and international investors such as investment advisors, banks, mutual funds, insurance companies and pension and profit sharing plans. Such investors normally purchase and sell securities in block transactions, the execution of which requires special marketing and trading expertise. JEFCO, for example, is one of the leading national firms in the execution of equity block transactions, and believes that its institutional customers are attracted by the quality of its execution (with respect to considerations of quantity, timing and price) and its competitive commission rates, which are negotiated on the basis of market conditions, the size of the particular transaction and other factors. In addition to domestic equity securities, JEFCO executes transactions in high yield securities, domestic and international convertible securities, international equity securities, ADRs, options, preferred stocks, financial futures and other similar products. All of JEFCO's equity account executives are electronically interconnected through a system permitting simultaneous verbal and graphic communication of trading and order information by all participants. JEFCO believes that its execution capability is significantly enhanced by this system, which permits its account executives to respond to each other and to negotiate order indications directly with customers rather than through a separate trading department. Prime Brokerage. JEFCO offers centralized custody and clearance of security trades for professional money managers who require institutional execution, financing services and stock loan access. PRINCIPAL TRANSACTIONS In the regular course of its business, JEFCO takes securities positions as a market maker to facilitate customer transactions and for investment purposes. In making markets and when trading for its own account, JEFCO exposes its own capital to the risk of fluctuations in market value. Trading profits (or losses) depend primarily upon the skills of the employees engaged in market making and position taking, the amount of capital allocated to positions in securities and the general trend of prices in the securities markets. JEFCO monitors its risk by maintaining its securities positions at or below certain pre-established levels. These levels reduce certain opportunities to realize profits in the event that the value of such securities increases. However, they also reduce the risk of loss in the event of a decrease in such value and result in controlled interest costs incurred on funds provided to maintain such positions. Equities. The Equities Division of JEFCO makes markets in over 1,000 over-the-counter equity and ADR securities, and trades securities for its own account, as well as to accommodate customer transactions. The Equities and International Divisions engage in hedged trading involving securities listed or traded in both domestic and foreign markets. High Yield. The High Yield Division of Jefferies trades high grade and non-investment grade public and private debt securities. The Division specializes in trading and making markets in over 400 unrated or less than investment grade corporate debt securities and accounts for these positions at market value. At December 31, 2000, the aggregate long and short market value of these positions was $107.5 million and $6.2 million, respectively. Risk of loss upon default by the borrower is significantly greater with respect to unrated or less than investment grade corporate debt securities than with other corporate debt securities. These securities are generally unsecured and are often subordinated to other creditors of the issuer. These issuers usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than are investment grade issuers. There is a limited market for some of these securities and market quotes are generally available from a small number of dealers. Convertible Securities and Warrants. JEFCO also trades domestic and international convertible securities and warrants and assists corporate and institutional clients in identifying attractive investments in these securities and warrants. 3 6 Other Proprietary Trading. JEFCO has investments in partnerships and mutual funds as well as other relationships with independent management firms, which contribute to revenues from principal transactions. CORPORATE FINANCE JEFCO's Corporate Finance Division offers corporations (primarily middle market growth companies) a full range of financial advisory services as well as debt, equity, and convertible financing services. Products include acquisition financing, bridge and senior loan financing, private placements and public offerings of debt and equity securities, debt refinancings, restructuring, merger and acquisition and exclusive sales advice, structured financings and securitizations, consent and waiver solicitations, and company and bondholder representations in corporate restructurings. Investment banking activity involves both economic and regulatory risks. An underwriter may incur losses if it is unable to sell the securities it is committed to purchase or if it is forced to liquidate its commitments at less than the agreed upon purchase price. In addition, under the Securities Act and other laws and court decisions with respect to underwriters' liability and limitations on indemnification of underwriters by issuers, an underwriter is subject to substantial potential liability for material misstatements or omissions in prospectuses and other communications with respect to underwritten offerings. Further, underwriting commitments constitute a charge against net capital and JEFCO's underwriting commitments may be limited by the requirement that it must, at all times, be in compliance with the Uniform Net Capital Rule 15c3-1 of the Commission. JEFCO intends to continue to pursue opportunities for its corporate customers, which may require it to finance and/or underwrite the issuance of securities. Under circumstances where JEFCO is required to act as an underwriter or to trade on a proprietary basis with its customers, JEFCO may assume greater risk than would normally be assumed in certain other principal transactions. INTEREST JEFCO derives a substantial portion of its interest revenues, and incurs a substantial portion of its interest expenses, in connection with its securities borrowed/securities loaned activity. JEFCO also earns interest on its securities portfolio, on its operating and segregated balances, on its margin lending activity and on certain of its investments. Securities Borrowed/Securities Loaned. In connection with both its trading and brokerage activities, JEFCO borrows securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date, and lends securities to other brokers and dealers for similar purposes. JEFCO has an active securities borrowed and lending matched book business ("Matched Book"), in which JEFCO borrows securities from one party and lends them to another party. When JEFCO borrows securities, JEFCO provides cash to the lender as collateral, which is reflected in the Company's financial statements as receivable from brokers and dealers. JEFCO earns interest revenues on this cash collateral. Similarly, when JEFCO lends securities to another party, that party provides cash to JEFCO as collateral, which is reflected in the Company's financial statements as payable to brokers and dealers. JEFCO pays interest expense on the cash collateral received from the party borrowing the securities. A substantial portion of JEFCO's interest revenues and interest expense results from the Matched Book activity. The initial collateral advanced or received approximates or is greater than, the fair value of the securities borrowed or loaned. JEFCO monitors the fair value of the securities borrowed and loaned on a daily basis and requests additional collateral or returns excess collateral, as appropriate. Margin Lending. Customers' transactions are executed on either a cash or margin basis. In a margin transaction, JEFCO extends credit to the customer, collateralized by securities and cash in the customer's account, for a portion of the purchase price, and receives income from interest charged on such extensions of credit. In permitting a customer to purchase securities on margin, JEFCO is subject to the risk that a market decline could reduce the value of its collateral below the amount of the customer's indebtedness and that the customer might otherwise be unable to repay the indebtedness. 4 7 In addition to monitoring the creditworthiness of its customers, JEFCO also considers the trading liquidity and volatility of the securities it accepts as collateral for its margin loans. Trading liquidity and volatility may be dependent, in part, upon the market on which the security is traded, the number of outstanding shares of the issuer, events affecting the issuer and/or securities markets in general, and whether or not there are any legal restrictions on the sale of the securities. Certain types of securities have historical trading patterns, which may assist JEFCO in making its evaluation. Historical trading patterns, however, may not be good indicators over relatively short time periods or in markets which are affected by unusual or unexpected developments. JEFCO considers all of these factors at the time it agrees to extend credit to customers and continues to review its extensions of credit on an ongoing basis. The majority of JEFCO's margin loans are made to United States citizens or to corporations which are domiciled in the United States. JEFCO may extend credit to investors or corporations who are citizens of foreign countries or who may reside outside the United States. JEFCO believes that should such foreign investors default upon their loans and should the collateral for those loans be insufficient to satisfy the investors' obligations, it may be more difficult to collect such investors' outstanding indebtedness than would be the case if investors were citizens or residents of the United States. Although JEFCO attempts to minimize the risk associated with the extension of credit in margin accounts, there is no assurance that the assumptions on which JEFCO bases its decisions will be correct or that it is in a position to predict factors or events which will have an adverse impact on any individual customer or issuer, or the securities markets in general. ASSET MANAGEMENT The Company receives asset management fees from its management of five funds domestically and twelve funds internationally. The domestic funds (three high yield funds, a fund of funds and a venture capital fund) began activities in 2000. COMPETITION All aspects of the business of the Company are intensely competitive. The Company competes directly with numerous other brokers and dealers, investment banking firms and banks. In addition to competition from firms currently in the securities business, there has been increasing competition from others offering financial services. These developments and others have resulted, and may continue to result, in significant additional competition for the Company. REGULATION The securities industry in the United States is subject to extensive regulation under both federal and state laws. The Commission is the federal agency responsible for the administration of federal securities laws. In addition, self-regulatory organizations, principally the NASDR and the securities exchanges, 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 Commission. Securities firms are also subject to regulation by state securities commissions in those states in which they do business. JEFCO is registered as a broker-dealer in 50 states, the District of Columbia and Puerto Rico. W & D is registered as a broker-dealer in 3 states. Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customers' funds and securities, capital structure of securities firms, record-keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the Commission and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the mode of operation and profitability of broker-dealers. The Commission, self-regulatory organizations and state securities commissions 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 5 8 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, JEFCO and W & D 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. Net Capital Requirements. Every U.S. registered broker-dealer doing business with the public is subject to the Commission's Uniform Net Capital Rule (the "Rule"), which specifies minimum net capital requirements. Jefferies Group, Inc. is not a registered broker-dealer and is therefore not subject to the Rule; however, its United States broker-dealer subsidiaries are subject thereto. The Rule provides that a broker-dealer doing business with the public shall not permit its aggregate indebtedness to exceed 15 times its adjusted net capital (the "basic method") or, alternatively, that it not permit its adjusted net capital to be less than 2% of its aggregate debit balances (primarily receivables from customers and broker-dealers) computed in accordance with such Rule (the "alternative method"). JEFCO and W & D use the alternative method of calculation. Compliance with applicable net capital rules could limit operations of JEFCO, such as underwriting and trading activities, that require use of significant amounts of capital, and may also restrict loans, advances, dividends and other payments by JEFCO or W & D to the Company. As of December 31, 2000, JEFCO's and W & D's net capital was $190.1 million and $2.2 million, respectively, which exceeded minimum net capital requirements by $182.6 million and $2.0 million, respectively. See note 15 of Notes to Consolidated Financial Statements. RISK MANAGEMENT As an international investment bank, risk is an inherent part of the Company's business. Global markets, by their nature, are prone to uncertainty and subject participants to a variety of risks. The Company has developed policies and procedures to identify, measure and monitor each of the risks involved in its trading, brokerage and corporate finance activities on an international basis. Risk management is considered to be of paramount importance. The Company devotes significant resources across all of its worldwide trading operations to the measurement, management and analysis of risk, including investments in personnel, information technology infrastructure and systems. ITEM 2. PROPERTIES. The Company maintains sales offices in Austin, Atlanta, Boston, Chicago, Dallas, Hong Kong, Houston, London, Los Angeles, Nashville, New Brighton, New Orleans, New York, Richmond, Paris, San Francisco, Short Hills, Stamford, Tokyo and Zurich. In addition, the Company maintains operations offices in Los Angeles and Jersey City. The Company leases all of its office space which management believes is adequate for its business. For information concerning leasehold improvements and rental expense, see notes 1, 6 and 12 of Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS. Many aspects of the Company's business involve substantial risks of liability. In the normal course of business, the Company and its subsidiaries have been named as defendants or co-defendants in lawsuits involving primarily claims for damages. The Company's management believes that pending litigation will not have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 6 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock began trading on the NYSE on March 15, 1996, under the symbol JEF. Previously, the Common Stock traded in the Nasdaq National Market System under the symbol JEFG. The following table sets forth for the periods indicated, the range of high and low prices per share for the Common Stock as reported by the NYSE. Stock prices prior to April 27, 1999 are not presented, due to the nature and extent of the spin-off of ITGI and the related ITGI special dividend and their effect on the comparability of the Company's stock price.

HIGH LOW ------ ------ 2000 First Quarter............................................ $24.94 $19.00 Second Quarter........................................... 24.25 19.50 Third Quarter............................................ 32.38 20.25 Fourth Quarter........................................... 33.13 24.19 1999 Second Quarter........................................... $27.63 $22.00 Third Quarter............................................ 30.38 20.13 Fourth Quarter........................................... 23.94 18.50

There were approximately 364 holders of record of the Company's Common Stock at March 1, 2001. In 1988, the Company instituted a policy of paying regular quarterly cash dividends. There are no restrictions on the Company's present ability to pay dividends on Common Stock, other than the applicable provisions of the Delaware General Corporation Law. Dividends per Common Share (declared and paid):

FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 2000..................................... $ .05 $ .05 $ .05 $ .05 1999..................................... $ .05 $ .05 $ .05 $ .05

During August and September of 2000, the Company issued 168,306 shares of restricted common stock and 3,160,889 Euros aggregate principal amount of Zero Coupon Unsecured Convertible Notes as partial consideration for the Company's acquisition of The Europe Company Ltd. The securities were issued in a transaction not involving a public offering and were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. 7 10 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, 2000, are derived from the consolidated financial statements of Jefferies Group, Inc. and its subsidiaries, which financial statements have been audited by KPMG LLP, independent auditors. Such data should be read in connection with the consolidated financial statements contained on pages 15 through 40. Certain reclassifications have been made to the prior period amounts to conform to the current period's presentation.

YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) EARNINGS STATEMENT DATA Revenues: Commissions.................................... $ 221,471 $ 202,803 $ 190,870 $ 148,940 $ 113,512 Principal transactions....................... 264,130 232,239 177,189 179,081 145,207 Corporate finance............................ 90,743 80,749 126,651 228,640 97,870 Interest..................................... 172,124 115,425 91,024 70,656 47,443 Asset management............................. 9,560 1,973 926 -- -- Other........................................ 3,835 6,958 3,955 3,525 2,991 ---------- ---------- ---------- ---------- ---------- Total revenues............................. 761,863 640,147 590,615 630,842 407,023 Interest expense............................... 144,460 96,496 75,153 61,314 37,840 ---------- ---------- ---------- ---------- ---------- Revenues, net of interest expense.............. 617,403 543,651 515,462 569,528 369,183 ---------- ---------- ---------- ---------- ---------- Non-interest expenses: Compensation and benefits.................... 376,571 329,769 321,943 373,619 234,446 Floor brokerage and clearing fees............ 36,908 33,815 32,425 26,754 21,606 Communications............................... 45,398 42,427 47,210 40,305 24,474 Occupancy and equipment rental............... 19,193 16,003 14,036 15,701 13,003 Travel and promotional....................... 18,432 16,676 17,710 15,300 10,703 Other........................................ 25,508 20,866 22,945 29,159 22,765 ---------- ---------- ---------- ---------- ---------- Total non-interest expenses................ 522,010 459,556 456,269 500,838 326,997 ---------- ---------- ---------- ---------- ---------- Earnings before income taxes................... 95,393 84,095 59,193 68,690 42,186 Income taxes................................... 40,412 35,256 22,992 27,334 17,772 ---------- ---------- ---------- ---------- ---------- Earnings from continuing operations............ 54,981 48,839 36,201 41,356 24,414 Discontinued operations of ITGI, net of tax.... -- 12,888 33,481 22,211 19,146 ---------- ---------- ---------- ---------- ---------- Net earnings................................. $ 54,981 $ 61,727 $ 69,682 $ 63,567 $ 43,560 ========== ========== ========== ========== ========== Earnings per share of Common Stock: Basic: Continuing operations...................... $ 2.30 $ 2.05 $ 1.62 $ 1.92 $ 1.06 Discontinued operations of ITGI, net of tax...................................... -- 0.55 1.50 1.03 0.84 ---------- ---------- ---------- ---------- ---------- Net earnings............................... $ 2.30 $ 2.60 $ 3.12 $ 2.95 $ 1.90 ========== ========== ========== ========== ========== Diluted: Continuing operations...................... $ 2.26 $ 2.04 $ 1.58 $ 1.85 $ 1.04 Discontinued operations of ITGI, net of tax...................................... -- 0.51 1.38 0.95 0.80 ---------- ---------- ---------- ---------- ---------- Net earnings............................... $ 2.26 $ 2.55 $ 2.96 $ 2.80 $ 1.84 ========== ========== ========== ========== ========== Weighted average shares of Common Stock: Basic........................................ 23,912 23,778 22,346 21,552 22,980 Diluted...................................... 24,335 23,992 22,954 22,349 23,410 Cash dividends per common share................ $ 0.200 $ 0.200 $ 0.200 $ 0.125 $ 0.087 SELECTED BALANCE SHEET DATA Total assets................................... $3,957,869 $2,896,252 $2,617,864 $2,058,106 $1,533,906 Long-term debt................................. $ 152,545 $ 149,485 $ 149,387 $ 149,290 $ 52,987 Total stockholders' equity..................... $ 458,447 $ 396,577 $ 334,775 $ 242,756 $ 195,445 Book value per share of Common Stock........... $ 18.57 $ 16.52 $ 15.77 $ 11.97 $ 9.43 Shares outstanding............................. 24,688 24,000 21,230 20,286 20,726

8 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Company's principal activities, securities brokerage and the trading of and market making in securities, are highly competitive. Total assets increased $1,061.6 million from $2,896.3 million at December 31, 1999 to $3,957.9 million at December 31, 2000. The increase is mostly due to a $895.2 million increase in receivable from brokers and dealers related to securities borrowed. The increase in securities borrowed is mostly a result of an increase in payable to brokers and dealers (related to securities loaned). Total liabilities increased $999.7 million from $2,499.7 million at December 31, 1999 to $3,499.4 million at December 31, 2000. The increase is largely due to the before-mentioned increase in payable to brokers and dealers. The earnings of the Company are subject to wide fluctuations since many factors over which the Company has little or no control, particularly the overall volume of trading and the volatility and general level of market prices, may significantly affect its operations. The following provides a summary of revenues by source for the past three years.

YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 2000 1999 1998 -------------------- -------------------- -------------------- % OF % OF % OF TOTAL TOTAL TOTAL AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Commissions and principal transactions: Equities.................. $339,438 45% $282,711 44% $261,664 44% International............. 79,523 10 62,604 10 50,889 9 High Yield................ 36,411 5 45,346 7 40,071 7 Convertible............... 25,030 3 19,367 3 13,011 2 Other Proprietary Trading................ 5,199 1 25,014 4 2,424 -- -------- --- -------- --- -------- --- Total............. 485,601 64 435,042 68 368,059 62 -------- --- -------- --- -------- --- Corporate Finance........... 90,743 12 80,749 13 126,651 22 Interest.................... 172,124 23 115,425 18 91,024 15 Asset Management............ 9,560 1 1,973 -- 926 -- Other....................... 3,835 -- 6,958 1 3,955 1 -------- --- -------- --- -------- --- Total revenues.... $761,863 100% $640,147 100% $590,615 100% ======== === ======== === ======== ===

2000 COMPARED TO 1999 Revenues, net of interest expense, increased $73.8 million, or 14%, in 2000 as compared to 1999. The increase was due primarily to a $31.9 million, or 14%, increase in principal transactions, a $18.7 million, or 9%, increase in commissions, a $10.0 million, or 12%, increase in corporate finance, a $8.7 million, or 46%, increase in net interest income (interest revenues less interest expense), and a $7.6 million, or 385%, increase in asset management, partially offset by a $3.1 million, or 45%, decrease in other income. Commissions and principal transactions revenue increased mostly due to the Equities and International Divisions. Corporate finance revenues increased due mostly to an increase in advisory fees. Net interest income was up largely due to an increase in the securities borrowed/securities loaned finder business and to increased interest income on proprietary securities positions. Asset management increased due to the Jefferies Partners Opportunity family of funds, two of which began trading in January 2000. Other income decreased largely due to a reduction in correspondent income. Total non-interest expenses increased $62.5 million, or 14%, in 2000 as compared to 1999. Compensation and benefits increased $46.8 million, or 14%, mostly due to an increase in incentive based compensation accruals, as well as increased headcount. Other expense increased $4.6 million or 22%, primarily due to an 9 12 increase in legal expense. Occupancy and equipment rental increased $3.2 million, or 20%, mostly due to office expansion. Floor brokerage and clearing fees increased $3.1 million, or 9%, due to increased volume of business executed on the various exchanges. Communications increased $3.0 million, or 7%, due mostly to increased trade volume. Travel and promotional increased $1.8 million, or 11%, primarily due to higher expenses associated with account executive T&Es and customer events. As a result of the above, earnings before income taxes were up $11.3 million, or 13%. The effective tax rate was approximately 42.4% in 2000 and approximately 41.9% in 1999. Earnings from continuing operations were up $6.1 million to $55.0 million, compared to $48.8 million in 1999. Earnings from discontinued operations, net of income taxes, amounted to zero in 2000, due to the cessation of ITGI as a subsidiary of the Company in April 1999. Basic earnings from continuing operations per share were $2.30 in 2000 on 23.9 million shares compared to $2.05 in 1999 on 23.8 million shares. Diluted earnings from continuing operations per share were $2.26 in 2000 on 24.3 million shares compared to $2.04 in 1999 on 24.0 million shares. Basic net earnings per share were $2.30 in 2000 on 23.9 million shares compared to $2.60 in 1999 on 23.8 million shares. Diluted earnings per share were $2.26 in 2000 on 24.3 million shares compared to $2.55 in 1999 on 24.0 million shares. 1999 COMPARED TO 1998 Revenues, net of interest expense, increased $28.2 million, or 5%, in 1999 as compared to 1998. The increase was due to a $55.1 million, or 31%, increase in principal transactions, an $11.9 million, or 6%, increase in commissions, a $3.0 million increase in other revenues and a $3.1 million, or 19% increase in net interest income (interest income less interest expense), partially offset by a $45.9 million, or 36%, decrease in corporate finance. Commission revenues increased, led by the Equities and Convertible Divisions. Revenues from principal transactions increased primarily due to increase trading gains in other proprietary trading (mostly investments in clients or funds of clients), the Equities Division and International Division. Corporate finance revenues declined due to the currently difficult environment for underwritings. Net interest income increased mostly due to interest from investments. Total non-interest expenses increased $3.3 million, or 1%, in 1999 as compared to 1998. Compensation and benefits increased $7.8 million, or 2%, mostly due to an increase in incentive based compensation accruals. Communications decreased $4.8 million, or 10%, primarily due to a reduction in Y2K costs. Other expense decreased $2.1 million, or 9%, mostly due to reductions in printing and postage/courier expense. Occupancy and equipment rental increased $2.0 million, or 14%, due mostly to office space relocation expenses. Floor brokerage and clearing fees increased $1.4 million, or 4%, mostly due to increased volume of business executed on the various exchanges. Travel and promotional expense decreased $1.0 million, or 6%, largely due to a reduction in airfare and hotel rates paid by the Company. The reduction is mostly due to new negotiated agreements with service providers. As a result of the above, earnings before income taxes and discontinued operations were up $24.9 million, or 42%. The effective tax rate was approximately 41.9% in 1999 and approximately 38.8% in 1998. The increase in the tax rate is mostly due to the favorable impact on the 1998 tax rate of a reversal of deferred taxes. The net effect of the increase in earnings before income taxes and the increase in effective tax rate was that earnings from continuing operations were up 35% to $48.8 million, compared to $36.2 million for the prior year. Earnings from discontinued operations of ITGI, net of income taxes, were down $20.6 million, or 62%, mostly due to the cessation of ITGI as a subsidiary of the Company in April 1999. Basic earnings from continuing operations per share were $2.05 in 1999 on 23.8 million shares compared to $1.62 in 1998 on 22.3 million shares. Diluted earnings from continuing operations per share were $2.04 in 1999 on 24.0 million shares compared to $1.58 in 1998 on 23.0 million shares. 10 13 Basic net earnings per share were $2.60 in 1999 on 23.8 million shares compared to $3.12 in 1998 on 22.3 million shares. Diluted earnings per share were $2.55 in 1999 on 24.0 million shares compared to $2.96 in 1998 on 23.0 million shares. LIQUIDITY AND CAPITAL RESOURCES A substantial portion of the Company's assets are liquid, consisting of cash or assets readily convertible into cash. The majority of securities positions (both long and short) in the Company's trading accounts are readily marketable and actively traded. Receivables from brokers and dealers are primarily current open transactions or securities borrowed transactions, which can be settled or closed out within a few days. Receivables from customers, officers and directors include margin balances and amounts due on uncompleted transactions. Most of the Company's receivables are secured by marketable securities. The Company's assets are funded by equity capital, senior debt, subordinated debt, securities loaned, customer free credit balances, bank loans and other payables. Bank loans represent secured and unsecured short-term borrowings (usually overnight) which are generally payable on demand. Secured bank loans are collateralized by a combination of customer, non-customer and firm securities. The Company has always been able to obtain necessary short-term borrowings in the past and believes that it will continue to be able to do so in the future. Additionally, the Company has letters of credit outstanding, which are used in the normal course of business to satisfy various collateral requirements in lieu of depositing cash or securities. JEFCO and W & D are subject to the net capital requirements of the Commission and other regulators, which are designed to measure the general financial soundness and liquidity of broker-dealers. JEFCO and W & D have consistently operated in excess of the minimum requirements. As of December 31, 2000, JEFCO's and W & D's net capital was $190.1 million and $2.2 million, respectively, which exceeded minimum net capital requirements by $182.6 million and $2.0 million, respectively. JEFCO and W & D use the alternative method of calculating their regulatory net capital. During 1999, JEFCO obtained an NASDR-approved $120 million revolving credit facility to be used in connection with underwriting activities. During June 2000, JEFCO terminated the revolving credit facility. There were no borrowings against the revolving credit facility in either 2000 or 1999. EFFECTS OF CHANGES IN FOREIGN CURRENCY RATES The Company maintains a foreign securities business in its foreign offices (Hong Kong, London, Paris, Tokyo and Zurich) as well as in some of its domestic offices. Most of these activities are hedged by related foreign currency liabilities or by forward exchange contracts. However, the Company is still subject to some foreign currency risk. A change in the foreign currency rates could create either a foreign currency transaction gain/loss (recorded in the Company's Consolidated Statements of Earnings) or a foreign currency translation adjustment to the stockholders' equity section of the Company's Consolidated Statements of Financial Condition. NEW ACCOUNTING STANDARD ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. This statement was amended by both SFAS No. 137 and SFAS No. 138 and is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. On January 1, 2001, the Company implemented this statement without a material impact on the Company. 11 14 NEW ACCOUNTING STANDARD ON TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," establishes accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. SFAS No. 140 requires a debtor to (a) reclassify financial assets pledged as collateral and report those assets in its statement of financial condition separately from other assets not so encumbered if the secured party has the right by contract or custom to sell or repledge the collateral and (b) disclose assets pledged as collateral that have not been reclassified and separately reported in the statement of financial condition. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Disclosures about securitizations and collateral accepted need not be reported for periods on or before December 15, 2000, for which financial statements are presented for comparative purposes. On December 31, 2000, the Company implemented this statement without a material impact on the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company maintains equity securities inventories in exchange-listed, Nasdaq and private securities on both a long and short basis as well as various partnership interests. The fair value of these securities at December 31, 2000, was $301 million in long positions and $159 million in short positions. The potential loss in fair value, using a hypothetical 10% decline in prices, is estimated to be approximately $14 million due to the offset of losses in long positions with gains in short positions. In addition, the Company generally enters into exchange-traded option and index futures contracts to hedge against potential losses in inventory positions, thus reducing this potential loss exposure. This hypothetical 10% decline in prices would not be material to the Company's financial condition, results of operations or cash flows. The Company also invests in money market funds, high-yield, corporate and U.S. Government agency debt and mutual bond funds. Money market funds do not have maturity dates and do not present a material market risk. The fair value of the Company's high yield, corporate and U.S. Government agency debt at December 31, 2000 was $148 million in long positions and $12 million in short positions. Mutual bond funds also do not have maturity dates; the Company's position in such funds totaled $5 million at December 31, 2000. The potential loss in fair value of the high-yield, corporate and U.S. Government agency debt and the mutual bond funds, using a hypothetical 5% decline in value, is estimated to be approximately $7 million due to the offset of losses in long positions with gains in short positions. This hypothetical 5% decline in value would not be material to the Company's financial condition, results of operations or cash flows. At December 31, 2000, the Company had $150 million aggregate principal amount of Senior Notes outstanding, with fixed interest rates. The Company has no cash flow exposure regarding these Notes due to the fixed rate of interest. In addition, at December 31, 2000, the Company had $3.0 million aggregate principal amount of zero coupon Euro denominated Convertible Loan Notes. The Company has no cash flow exposure regarding these Notes because of the zero coupon. 12 15 The table below provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, exchange rates and stock price movements (in thousands of dollars.) For debt obligations and reverse repurchase agreements, the table presents principal cash flows with expected maturity dates. For foreign exchange forward contracts, index futures contracts and option contracts, the table presents notional amounts with expected maturity dates.

EXPECTED MATURITY DATE --------------------------------- 2001 2004 AFTER 2004 TOTAL FAIR VALUE -------- ------- ---------- -------- ---------- INTEREST RATE SENSITIVITY 8.875% Senior Notes.................. $50,000 $ 50,000 $ 47,750 7.5% Senior Notes.................... $100,000 $100,000 $ 87,500 Reverse repurchase agreements(1), weighted average interest rate of 6.11%.............................. $170,042 $170,042 $170,042 Repurchase agreements, weighted average interest rate of 2.00%..... $ 541 $ 541 $ 541 EXCHANGE RATE SENSITIVITY Foreign exchange forward contracts Purchase........................... $ 21,027 $ 21,027 $ 21,027 Sale............................... $ 25,339 $ 25,339 $ 25,339 STOCK PRICE SENSITIVITY Index futures contracts Sale............................... $ 1,734 $ 1,734 $ 65 Option contracts Purchase........................... $ 24,325 $ 24,325 $ 2,610 Sale............................... $ 858 $ 858 $ 98

--------------- (1) Includes reverse repurchase agreements of $169.5 million included in cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations. 13 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS

PAGE ---- Consolidated Financial Statements of Jefferies Group, Inc. and Subsidiaries Independent Auditors' Report............. 15 Consolidated Statements of Financial Condition as of December 31, 2000 and 1999................................ 16 Consolidated Statements of Earnings for the Three Years Ended December 31, 2000................................... 17 Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 2000............... 18 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2000................................... 19 Notes to Consolidated Financial Statements.................. 20

14 17 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders JEFFERIES GROUP, INC.: We have audited the accompanying consolidated statements of financial condition of Jefferies Group, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jefferies Group, Inc. and subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Los Angeles, California January 17, 2001 15 18 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2000 AND 1999 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2000 1999 ---------- ---------- ASSETS Cash and cash equivalents................................... $ 24,996 $ 77,197 Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations............................................. 206,444 18,317 Receivable from brokers and dealers......................... 2,860,677 1,965,469 Receivable from customers, officers and directors........... 254,562 226,449 Securities owned............................................ 224,738 376,506 Securities pledged to creditors............................. 96,324 -- Investments................................................. 136,047 119,100 Premises and equipment...................................... 43,635 39,117 Other assets................................................ 110,446 74,097 ---------- ---------- $3,957,869 $2,896,252 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Payable to brokers and dealers.............................. $2,423,488 $1,663,955 Payable to customers........................................ 501,786 271,811 Securities sold, not yet purchased.......................... 171,685 186,420 Accrued expenses and other liabilities...................... 249,918 228,004 ---------- ---------- 3,346,877 2,350,190 Long-term convertible debt.................................. 2,963 -- Long-term debt.............................................. 149,582 149,485 ---------- ---------- Total long-term debt................................... 152,545 149,485 ---------- ---------- 3,499,422 2,499,675 ---------- ---------- Stockholders' equity: Preferred stock, $.0001 par value. Authorized 10,000,000 shares; none issued............................................ -- -- Common stock, $.0001 par value. Authorized 100,000,000 shares; issued 25,177,419 shares in 2000 and 24,027,899 shares in 1999......................................... 3 2 Additional paid-in capital................................ 86,004 62,367 Retained earnings......................................... 384,846 334,742 Less: Treasury stock, at cost; 489,039 shares in 2000 and 28,012 shares in 1999................................. (10,383) (587) Accumulated other comprehensive income (loss): Currency translation adjustments....................... (885) 236 Additional minimum pension liability adjustment........ (1,138) (183) ---------- ---------- Total accumulated other comprehensive income (loss).... (2,023) 53 ---------- ---------- Net stockholders' equity............................. 458,447 396,577 ---------- ---------- $3,957,869 $2,896,252 ========== ==========

See accompanying notes to consolidated financial statements. 16 19 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS THREE YEARS ENDED DECEMBER 31, 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2000 1999 1998 -------- -------- -------- REVENUES: Commissions.............................................. $221,471 $202,803 $190,870 Principal transactions................................... 264,130 232,239 177,189 Corporate finance........................................ 90,743 80,749 126,651 Interest................................................. 172,124 115,425 91,024 Asset management......................................... 9,560 1,973 926 Other.................................................... 3,835 6,958 3,955 -------- -------- -------- Total revenues........................................ 761,863 640,147 590,615 Interest expense......................................... 144,460 96,496 75,153 -------- -------- -------- Revenues, net of interest expense..................... 617,403 543,651 515,462 -------- -------- -------- NON-INTEREST EXPENSES: Compensation and benefits................................ 376,571 329,769 321,943 Floor brokerage and clearing fees........................ 36,908 33,815 32,425 Communications........................................... 45,398 42,427 47,210 Occupancy and equipment rental........................... 19,193 16,003 14,036 Travel and promotional................................... 18,432 16,676 17,710 Other.................................................... 25,508 20,866 22,945 -------- -------- -------- Total non-interest expenses........................... 522,010 459,556 456,269 -------- -------- -------- Earnings before income taxes............................... 95,393 84,095 59,193 Income taxes............................................... 40,412 35,256 22,992 -------- -------- -------- Earnings from continuing operations........................ 54,981 48,839 36,201 Discontinued operations of ITGI, net of tax................ -- 12,888 33,481 -------- -------- -------- Net earnings............................................... $ 54,981 $ 61,727 $ 69,682 ======== ======== ======== EARNINGS PER SHARE: Basic: Continuing operations.................................... $ 2.30 $ 2.05 $ 1.62 Discontinued operations of ITGI, net of tax.............. -- 0.55 1.50 -------- -------- -------- Net earnings............................................. $ 2.30 $ 2.60 $ 3.12 ======== ======== ======== Diluted: Continuing operations.................................... $ 2.26 $ 2.04 $ 1.58 Discontinued operations of ITGI, net of tax.............. -- 0.51 1.38 -------- -------- -------- Net earnings............................................. $ 2.26 $ 2.55 $ 2.96 ======== ======== ======== WEIGHTED AVERAGE SHARES OF COMMON STOCK: Basic.................................................... 23,912 23,778 22,346 Diluted.................................................. 24,335 23,992 22,954

See accompanying notes to consolidated financial statements. 17 20 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 2000 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

ACCUMULATED OTHER ADDITIONAL COMPREHENSIVE NET COMMON PAID-IN RETAINED TREASURY INCOME STOCKHOLDERS' STOCK CAPITAL EARNINGS STOCK (LOSS) EQUITY ------ ---------- -------- -------- ------------- ------------- Balance, December 31, 1997...................... $ 224 $ 39 $271,589 $(26,954) $(2,142) $242,756 Exercise of stock options, including tax benefits (737,125 shares)..................... 7 15,144 -- -- -- 15,151 Purchase of 334,234 shares of treasury stock.... -- -- -- (13,815) -- (13,815) Issuance of common stock (53,286 shares)........ 1 2,180 -- -- -- 2,181 Issuance of restricted stock, including tax benefits and additional vesting (182,095 shares)....................................... 2 8,170 -- (22) -- 8,150 Capital Accumulation Plan distributions, including tax benefits (305,690 shares)....... -- 3,410 -- 3,666 -- 7,076 Net decrease in proportionate share of subsidiary's equity........................... -- -- 7,337 -- -- 7,337 Comprehensive income: Net earnings.................................. -- -- 69,682 -- -- 69,682 Other comprehensive income (loss), net of tax: Currency translation adjustment............... -- -- -- -- 573 573 Additional minimum pension liability adjustment.................................. -- -- -- -- (149) (149) ------- -------- Other comprehensive income (loss)............. 424 424 -------- Comprehensive income............................ 70,106 Dividends paid ($.20 per share)................. -- -- (4,167) -- -- (4,167) ----- -------- -------- -------- ------- -------- Balance, December 31, 1998...................... 234 28,943 344,441 (37,125) (1,718) 334,775 Exercise of stock options, including tax benefits (1,108,880 shares)................... 10 28,957 -- -- -- 28,967 Purchase of 375,601 shares of treasury stock.... -- -- -- (17,587) -- (17,587) Issuance of restricted stock, net of forfeitures, including tax benefits and additional vesting (324,029 shares)........... 3 9,862 -- -- -- 9,865 Capital Accumulation Plan distributions, including tax benefits (1,712,549 shares)..... -- 24,335 -- 30,737 -- 55,072 Change in proportionate share of subsidiary's equity related to stock issuances/purchases at the subsidiary................................ -- -- 1,121 -- -- 1,121 Spin-off of ITGI, net of $60,000 cash dividend...................................... (245) (23,143) (67,806) 23,388 -- (67,806) Employee stock ownership plan purchases......... -- (6,587) -- -- -- (6,587) Comprehensive income: Net earnings.................................. -- -- 61,727 -- -- 61,727 Other comprehensive income (loss), net of tax: Currency translation adjustment............... -- -- -- -- 285 285 Additional minimum pension liability adjustment.................................. -- -- -- -- 1,486 1,486 ------- -------- Other comprehensive income (loss)............. 1,771 1,771 -------- Comprehensive income............................ 63,498 Dividends paid ($.20 per share)................. -- -- (4,741) -- -- (4,741) ----- -------- -------- -------- ------- -------- Balance, December 31, 1999...................... 2 62,367 334,742 (587) 53 396,577 Exercise of stock options, including tax benefits (76,793 shares)...................... -- 1,410 -- -- -- 1,410 Purchase of 442,987 shares of treasury stock.... -- -- -- (9,544) -- (9,544) Issuance of common stock (313,075 shares)....... -- 5,678 -- -- -- 5,678 Issuance of restricted stock, net of forfeitures, including tax benefits and additional vesting (741,612 shares)........... 1 14,421 -- (252) -- 14,170 Employee stock ownership plan amortization and purchases, net................................ -- 2,128 -- -- -- 2,128 Comprehensive income: Net earnings.................................. -- -- 54,981 -- -- 54,981 Other comprehensive income (loss), net of tax: Currency translation adjustment............... -- -- -- -- (955) (955) Additional minimum pension liability adjustment.................................. -- -- -- -- (1,121) (1,121) ------- -------- Other comprehensive income (loss)............. (2,076) (2,076) -------- Comprehensive income............................ 52,905 Dividends paid ($.20 per share)................. -- -- (4,877) -- -- (4,877) ----- -------- -------- -------- ------- -------- Balance, December 31, 2000...................... $ 3 $ 86,004 $384,846 $(10,383) $(2,023) $458,447 ===== ======== ======== ======== ======= ========

See accompanying notes to consolidated financial statements. 18 21 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 2000 (DOLLARS IN THOUSANDS)

2000 1999 1998 --------- --------- --------- Cash flows from operating activities: Net earnings.............................................. $ 54,981 $ 61,727 $ 69,682 --------- --------- --------- Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................... 13,039 9,181 10,027 Deferred income taxes................................... (16,545) 24,537 (5,285) (Increase) decrease in cash and securities segregated... (188,127) 44,201 (31,541) (Increase) decrease in receivables: Brokers and dealers................................... (895,208) 52,621 (748,426) Customers, officers and directors..................... (28,113) (132,923) 72,758 (Increase) decrease in securities owned................. 151,768 (275,709) 144,258 Increase in securities pledged to creditors............. (96,324) -- -- (Increase) decrease in investments...................... (16,947) (25,637) 41,373 (Increase) decrease in investment in discontinued operations of ITGI.................................... -- 40,527 (43,276) Increase in other assets................................ (36,911) (9,065) (535) Increase in payables: Brokers and dealers................................... 759,533 61,049 621,201 Customers............................................. 229,975 45,037 24,519 Increase (decrease) in securities sold, not yet purchased............................................. (14,735) 147,055 (149,335) Increase (decrease) in accrued expenses and other liabilities........................................... 37,504 16,368 (37,531) --------- --------- --------- Net cash provided by (used in) operating activities... (46,110) 58,969 (32,111) --------- --------- --------- Cash flows from financing activities: Net proceeds from (payments on) bank loans................ -- (21,000) 21,000 Issuance of long term debt................................ 2,963 -- -- Net payments on: Repurchase of treasury stock............................ (9,544) (17,587) (13,815) Dividends paid.......................................... (4,877) (4,741) (4,167) Proceeds from exercise of stock options................... 1,410 28,967 15,151 Net decrease (increase) in proportionate share of subsidiary's equity..................................... -- 1,121 7,337 Employee Stock Ownership Plan purchases................... (349) (6,587) -- Issuance of restricted shares............................. 14,170 9,865 8,150 Issuance of common shares................................. 5,678 -- 2,181 --------- --------- --------- Net cash provided by (used in) financing activities... 9,451 (9,962) 35,837 --------- --------- --------- Cash flows from investing activities -- purchase of premises and equipment............................................. (14,421) (27,676) (6,943) --------- --------- --------- Effect of currency translation on cash...................... (1,121) 285 573 --------- --------- --------- Net (decrease) increase in cash and cash equivalents......................................... (52,201) 21,616 (2,644) Cash and cash equivalents at beginning of year.............. 77,197 55,581 58,225 --------- --------- --------- Cash and cash equivalents at end of year.................... $ 24,996 $ 77,197 $ 55,581 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest................................................ $ 139,438 $ 93,221 $ 73,757 Income taxes............................................ 23,377 19,364 50,018

Supplemental disclosure of non-cash financing activities: In 1998, the additional minimum pension liability included in stockholders' equity of $1,669 resulted from an increase of $149 to accrued expenses and other liabilities and an offsetting decrease in stockholders' equity. In 1999, the additional minimum pension liability included in stockholders' equity of $183 resulted from a decrease of $1,486 to accrued expenses and other liabilities and an offsetting increase in stockholders' equity. In 2000, the additional minimum pension liability included in stockholders' equity of $1,138 resulted from a increase of $955 to accrued expenses and other liabilities and an offsetting decrease in stockholders' equity. In April 1999, Jefferies Group, Inc. spun-off its investment in Investment Technology Group, Inc., which resulted in a $67,806 reduction in stockholders' equity. See accompanying notes to consolidated financial statements. 19 22 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Jefferies Group, Inc. and all its subsidiaries ("Company"), including Jefferies & Company, Inc. ("JEFCO"). The accounts of Investment Technology Group, Inc. and all its subsidiaries ("ITGI"), including its wholly owned subsidiary, ITG Inc. are included in the consolidated financial statements through April 27, 1999 as discontinued operations. The accounts of W & D Securities, Inc. ("W & D") are consolidated because of the nature and extent of the Company's ownership interest in W & D. The Company and its subsidiaries operate and are managed as a single business segment, that of a securities broker-dealer, which includes several types of financial services, such as principal and agency transactions in equity, convertible debt and high yield, as well as corporate finance activities. Since the Company's services are provided using the same distribution channels, support services and facilities and all are provided to meet client needs, the Company does not identify assets or allocate all expenses to any service, or class of service as a separate business segment. The Company was originally incorporated in 1998 as a holding company under the name JEF Holding Company, Inc. At the time of its incorporation, JEF Holding Company, Inc. was a wholly owned subsidiary of a predecessor company also named Jefferies Group, Inc. ("Old Group"). On April 20, 1999, the stockholders of Old Group approved and adopted the Agreement and Plan of Merger (the "Merger Agreement") between Old Group and Old Group's approximately 80.5% owned subsidiary, Investment Technology Group, Inc. ("ITGI"). The Merger Agreement provided for the merger (the "Merger") of ITGI with and into Old Group and for the issuance of shares of the common stock of Old Group to all stockholders of ITGI other than Old Group. Prior to the effective date of the Merger, Old Group distributed all of the outstanding common stock of JEF Holding Company, Inc. to Old Group stockholders in a spin-off transaction (the "Spin-Off"). Prior to the Spin-Off, Old Group transferred all of the assets of Old Group, except for the common stock of ITGI, and all of Old Group's liabilities other than liabilities related to ITGI to JEF Holding Company, Inc. (the "Transfer" and, together with the Spin-Off, the "Transactions"). Coincident with the Merger, Old Group, as the surviving corporation in the Merger, changed its name to Investment Technology Group, Inc. and JEF Holding Company, Inc. changed its name to Jefferies Group, Inc. All significant intercompany accounts and transactions are eliminated in consolidation. DISCONTINUED OPERATIONS OF ITGI On April 27, 1999, Old Group and ITGI consummated the Transactions that resulted in the separation of ITGI from the other Old Group businesses. On April 22, 1999, Old Group transferred all non-ITGI assets and liabilities to JEF Holding Company, Inc., a holding company. Old Group then distributed all of the common stock of JEF Holding Company, Inc. to Old Group stockholders through a tax-free Spin-Off. After the transfers, Old Group's 15 million shares of ITGI became its only asset. The Spin-Off was immediately followed by a tax-free Merger of ITGI with and into Old Group. Following the Merger, Old Group was renamed Investment Technology Group, Inc. and JEF Holding Company, Inc. was renamed Jefferies Group, Inc., the Registrant in this annual report. The Transactions were treated for financial reporting purposes as if Old Group had spun-off its entire 80.5% stake in ITGI to Old Group stockholders. Accordingly, since the results of ITGI were previously consolidated with Old Group, all financial information for the periods prior to April 27, 1999 have been restated to reflect the results of ITGI as a discontinued operation. The net assets of ITGI have been 20 23 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 segregated for prior periods from the other assets and liabilities of Old Group. For financial reporting purposes, the net assets of ITGI as of April 27, 1999 have been treated as a distribution to Old Group stockholders. SECURITIES TRANSACTIONS All transactions in securities, commission revenues and related expenses are recorded on a trade-date basis. Securities owned, securities pledged to creditors, and securities sold, not yet purchased, are valued at market, and unrealized gains or losses are reflected in revenues from principal transactions. INVESTMENTS Partnership interests are recorded at their initial cost. The carrying values of these investments are adjusted when the adjustment can be supported by quoted market prices, adjusted for liquidity and other relevant factors. In addition, the carrying values are reduced when the Company determines that the estimated realizable value is less than the carrying value based on relevant financial and market information. Debt and equity investments consist primarily of mutual funds, which are valued at market, based on available quoted prices. Equity and debt interests in affiliates are recorded under either the equity or cost method depending on the Company's level of ownership and control. RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS Receivable from, and payable to, customers includes amounts receivable and payable on cash and margin transactions. Securities owned by customers and held as collateral for these receivables are not reflected in the accompanying consolidated financial statements. Receivable from officers and directors represents balances arising from their individual security transactions. Such transactions are subject to the same regulations as customer transactions. FAIR VALUE OF FINANCIAL INSTRUMENTS Substantially all of the Company's financial instruments are carried at fair value or amounts approximating fair value. Assets, including cash and cash equivalents, securities borrowed or purchased under agreements to sell, and certain receivables, are carried at fair value or contracted amounts, which approximate fair value due to the short period to maturity. Similarly, liabilities, including bank loans, securities loaned or sold under agreements to repurchase and certain payables, are carried at amounts approximating fair value. Long-term debt is carried at face value less unamortized discount. Securities owned and securities sold, not yet purchased, are valued at quoted market prices, if available. For securities without quoted prices, the reported fair value is estimated using various sources of information, including quoted prices for comparable securities. The Company has derivative financial instrument positions in option contracts, foreign exchange forward contracts and index futures contracts, which are measured at fair value with gains and losses recognized in earnings. The gross contracted or notional amount of these contracts is not reflected in the consolidated statements of financial condition (see note 13 of the notes to consolidated financial statements.) 21 24 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 PREMISES AND EQUIPMENT Premises and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to ten years). Leasehold improvements are amortized using the straight-line method over the term of related leases or the estimated useful lives of the assets, whichever is shorter. GOODWILL Goodwill, which represents the excess of cost over net assets acquired, is amortized on a straight-line basis over ten years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through future operating cash flows of the acquired business. INCOME TAXES The Company files a consolidated U.S. Federal income tax return, which includes all qualifying subsidiaries. Amounts provided for income taxes are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income taxes are provided for temporary differences in reporting certain items, principally state income taxes, depreciation, deferred compensation and unrealized gains and losses on securities owned. Tax credits are recorded as a reduction of income taxes when realized. CASH EQUIVALENTS The Company generally invests its excess cash in money market funds and other short-term investments. At December 31, 2000 and 1999, such cash equivalents amounted to $2,966,000 and $54,105,000, respectively. Cash equivalents are part of the cash management activities of the Company and generally mature within 90 days. SECURITIES BORROWED AND SECURITIES LOANED In connection with both its trading and brokerage activities, JEFCO borrows securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date, and lends securities to other brokers and dealers for similar purposes. JEFCO has an active securities borrowed and lending matched book business ("Matched Book"), in which JEFCO borrows securities from one party and lends them to another party. When JEFCO borrows securities, JEFCO provides cash to the lender as collateral, which is reflected in the Company's consolidated financial statements as receivable from brokers and dealers. JEFCO earns interest revenues on this cash collateral. Similarly, when JEFCO lends securities to another party, that party provides cash to JEFCO as collateral, which is reflected in the Company's consolidated financial statements as payable to brokers and dealers. JEFCO pays interest expense on the cash collateral received from the party borrowing the securities. A substantial portion of JEFCO's interest revenues and interest expense results from the Matched Book activity. The initial collateral advanced or received approximates or is greater than, the fair value of the securities borrowed or loaned. JEFCO monitors the fair value of the securities borrowed and loaned on a daily basis and requests additional collateral or returns excess collateral, as appropriate. 22 25 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 REPURCHASE AND REVERSE REPURCHASE AGREEMENTS Repurchase agreements consist of sales of U.S. Treasury notes under agreements to repurchase. They are treated as collateralized financing transactions and are recorded at their contracted repurchase amount. Reverse repurchase agreements consist of purchases of U.S. Treasury notes under agreements to re-sell. They are treated as collateralized financing transactions and are recorded at their contracted re-sale amount. The Company monitors the fair value of the securities purchased and sold under these agreements daily versus the related receivable or payable balances. Should the fair value of the securities purchased decline or the fair value of the securities sold increase, additional collateral is requested or excess collateral is returned, as appropriate. STOCK OPTIONS The Company applies APB Opinion No. 25 in accounting for its stock options. Accordingly, no compensation cost is recognized for fixed stock option grants, unless the exercise price of the option is below the market price of the common stock on the date of grant. However, the Company provides pro forma net earnings and earnings per share disclosures as if the fair value of all stock options as of the grant date were recognized as expense over the vesting period. EARNINGS PER COMMON SHARE Basic earnings per share of common stock are computed by dividing net earnings by the average number of shares outstanding and certain other shares committed to be, but not yet issued. Diluted earnings per share of common stock are computed by dividing net earnings by the average number of shares outstanding of common stock and all dilutive common stock equivalents outstanding during the period. COMMON STOCK In conjunction with the spin-off of ITGI, the stated par value per share of both the Company's common and preferred stock was changed from $0.01 to $.0001 and 774,278 shares of treasury stock were retired. A total of $245,000 was reclassified to the Company's additional paid-in capital account from the Company's common stock account. NEW ACCOUNTING STANDARD ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. This statement was amended by both SFAS No. 137 and SFAS No. 138 and is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. On January 1, 2001, the Company implemented this statement without a material impact on the Company. NEW ACCOUNTING STANDARD ON TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," establishes accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components 23 26 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 approach that focuses on control. SFAS No. 140 requires a debtor to (a) reclassify financial assets pledged as collateral and report those assets in its statement of financial condition separately from other assets not so encumbered if the secured party has the right by contract or custom to sell or repledge the collateral and (b) disclose assets pledged as collateral that have not been reclassified and separately reported in the statement of financial condition. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Disclosures about securitizations and collateral accepted need not be reported for periods on or before December 15, 2000, for which financial statements are presented for comparative purposes. On December 31, 2000, the Company implemented this statement without a material impact on the Company. FOREIGN CURRENCY TRANSLATION The Company's foreign revenues and expenses are translated at average current rates during each reporting period. Foreign currency transaction gains and losses are included in the consolidated statement of earnings. Gains and losses resulting from translation of financial statements are excluded from the consolidated statement of earnings and are recorded directly to a separate component of stockholders' equity. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' amounts to conform to the current year's presentation. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 24 27 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 (2) RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS The following is a summary of the major categories of receivable from, and payable to, brokers and dealers as of December 31, 2000 and 1999 (in thousands of dollars):

2000 1999 ---------- ---------- Receivable from brokers and dealers: Securities borrowed....................................... $2,643,185 $1,842,888 Reverse repurchase agreements............................. 541 2,370 Other..................................................... 216,951 120,211 ---------- ---------- $2,860,677 $1,965,469 ========== ========== Payable to brokers and dealers: Securities loaned......................................... $2,402,528 $1,616,493 Repurchase agreement...................................... 541 31,685 Other..................................................... 20,419 15,777 ---------- ---------- $2,423,488 $1,663,955 ========== ==========

The Company has a securities borrowed versus securities loaned business with other brokers. The Company also borrows securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date, and lends securities to other brokers and dealers for similar purposes. From these activities, the Company derives interest revenue and interest expense. (3) RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS The following is a summary of the major categories of receivables from customers, officers and directors as of December 31, 2000 and 1999 (in thousands of dollars):

2000 1999 -------- -------- Customers (net of allowance for uncollectible accounts of $4,600 in 2000 and $4,505 in 1999)........................ $250,655 $218,334 Officers and directors...................................... 3,907 8,115 -------- -------- $254,562 $226,449 ======== ========

Interest is paid on free credit balances in accounts of customers who have indicated that the funds will be used for investment at a future date. The rate of interest paid on such free credit balances varies between the thirteen-week treasury bill rate and 1% below that rate, depending upon the size of the customers' free credit balances. 25 28 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 (4) SECURITIES OWNED, SECURITIES PLEDGED TO CREDITORS AND SECURITIES SOLD, NOT YET PURCHASED The following is a summary of the market value of major categories of securities owned and securities sold, not yet purchased, as of December 31, 2000 and 1999 (in thousands of dollars):

2000 1999 ------------------------ ------------------------ SECURITIES SECURITIES SOLD, SOLD, SECURITIES NOT YET SECURITIES NOT YET OWNED PURCHASED OWNED PURCHASED ---------- ---------- ---------- ---------- Corporate equity securities..................... $146,482 $159,303 $162,958 $166,443 High yield securities........................... 68,474 6,172 114,223 15,037 Corporate debt securities....................... 6,419 6,112 65,443 4,264 U.S. Government and agency obligations.......... 753 -- 30,835 -- Other........................................... 2,610 98 3,047 676 -------- -------- -------- -------- $224,738 $171,685 $376,506 $186,420 ======== ======== ======== ========

The following is a summary of the market value of major categories of securities pledged to creditors as of December 31, 2000 (in thousands of dollars):

SECURITIES PLEDGED TO CREDITORS ------------ Corporate equity securities................................. $23,557 High yield securities....................................... 39,065 Corporate debt securities................................... 33,702 ------- $96,324 =======

(5) INVESTMENTS The following is a summary of the major categories of investments, as of December 31, 2000 and 1999 (in thousands of dollars):

2000 1999 -------- -------- Partnership interests....................................... $ 52,356 $ 74,124 Debt and equity investments................................. 17,691 35,709 Equity and debt interests in affiliates..................... 66,000 9,267 -------- -------- $136,047 $119,100 ======== ========

26 29 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 (6) PREMISES AND EQUIPMENT The following is a summary of premises and equipment as of December 31, 2000 and 1999 (in thousands of dollars):

2000 1999 ------- ------- Furniture, fixtures and equipment........................... $66,816 $56,370 Leasehold improvements...................................... 30,999 27,028 ------- ------- Total............................................. 97,815 83,398 Less accumulated depreciation and amortization.............. 54,180 44,281 ------- ------- $43,635 $39,117 ======= =======

Depreciation and amortization expense amounted to $9,903,000, $9,083,000 and $9,741,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Depreciation and amortization expense included in discontinued operations of ITGI amounted to $2,515,000 and $7,503,000 for the years ended December 31, 1999 and 1998, respectively. (7) BANK LOANS Bank loans represent short-term borrowings that are payable on demand and generally bear interest at the brokers' call loan rate. At December 31, 2000 and 1999 there were no bank loans. (8) LONG TERM CONVERTIBLE DEBT AND LONG TERM DEBT The following summarizes long term debt outstanding at December 31, 2000 and 1999 (in thousands of dollars):

2000 1999 -------- -------- LONG-TERM CONVERTIBLE DEBT Zero coupon, unsecured Euro denominated Convertible Loan Notes..................................................... $ 2,963 $ -- ======== ======== LONG-TERM DEBT 8 7/8% Series B Senior Notes, due 2004, less unamortized discount of $233 and $302 in 2000 and 1999, respectively, effective rate of 9%...................................... $ 49,767 $ 49,698 7 1/2% Senior Notes, due 2007, less unamortized discount of $185 and $213 in 2000 and 1999, respectively, effective rate of 8%................................................ 99,815 99,787 -------- -------- $149,582 $149,485 ======== ========

To expand its European capabilities, the Company acquired The Europe Company Ltd. in the third quarter of 2000, with a combination of restricted stock, zero coupon unsecured Euro denominated convertible loan notes and cash totaling approximately $18.0 million. The acquisition was accounted for as a purchase and resulted in approximately $13.6 million in goodwill. The approximately $3.0 million in zero coupon unsecured Euro denominated convertible loan notes mature in 2010 and have been classified on the consolidated statement of financial condition as long-term convertible debt. The conversion price for the notes is approximately 28.80 Euros (as of December 31, 2000, this was equivalent to approximately $27.00) per common share until August 4, 2003 and the closing stock price on the date of conversion subsequent to that date. 27 30 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 During 1999, JEFCO obtained an NASDR-approved $120,000,000 revolving credit facility to be used in connection with underwriting activities. During June 2000, JEFCO terminated the revolving credit facility. There were no borrowings against the revolving credit facility in either 2000 or 1999. (9) INCOME TAXES Total income taxes for the years ended December 31, 2000, 1999 and 1998 were allocated as follows (in thousands of dollars):

2000 1999 1998 ------- -------- -------- Continuing operations....................................... $40,412 $ 35,256 $ 22,992 Discontinued operations of ITGI............................. -- (5,952) 37,541 Stockholders' equity, for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes........................................ (525) (37,588) (12,804) ------- -------- -------- $39,887 $ (8,284) $ 47,729 ======= ======== ========

Income taxes (benefits) on continuing operations for the years ended December 31, 2000, 1999 and 1998 consist of the following (in thousands of dollars):

2000 1999 1998 -------- ------- ------- CURRENT: Federal................................................... $ 45,745 $ 8,027 $22,650 State and city............................................ 11,212 2,692 5,627 -------- ------- ------- 56,957 10,719 28,277 -------- ------- ------- DEFERRED: Federal................................................... (13,454) 20,495 (3,921) State and city............................................ (3,091) 4,042 (1,364) -------- ------- ------- (16,545) 24,537 (5,285) -------- ------- ------- $ 40,412 $35,256 $22,992 ======== ======= =======

Income taxes differed from the amounts computed by applying the Federal income tax rate of 35% for 2000, 1999 and 1998 as a result of the following (in thousands of dollars):

2000 1999 1998 --------------- --------------- --------------- AMOUNT % AMOUNT % AMOUNT % ------- ---- ------- ---- ------- ---- Computed expected income taxes.......... $33,388 35.0% $29,433 35.0% $20,718 35.0% Increase (decrease) in income taxes resulting from: State and city income taxes, net of Federal income tax benefit............ 5,279 5.5 4,377 5.2 2,770 4.7 Limited deductibility of meals and entertainment......................... 1,259 1.3 946 1.1 1,142 1.9 Foreign income.......................... 1,563 1.7 369 0.4 654 1.1 Non-taxable interest income............. (116) (0.1) (416) (0.5) (304) (0.5) Research and development tax credits.... (264) (0.3) (264) (0.3) (264) (0.5) Other, net.............................. (697) (0.7) 811 1.0 (1,724) (2.9) ------- ---- ------- ---- ------- ---- Total income taxes............ $40,412 42.4% $35,256 41.9% $22,992 38.8% ======= ==== ======= ==== ======= ====

28 31 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 The cumulative tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2000 and 1999 are presented below (in thousands of dollars):

2000 1999 ------- ------- Deferred tax assets: Long-term compensation.................................... $18,757 $ 8,270 Accounts receivable....................................... 3,419 4,538 State income taxes........................................ 2,392 (998) Premises and equipment.................................... 2,988 -- Investments............................................... 1,114 -- Other..................................................... -- 315 ------- ------- Total gross deferred tax assets................... 28,670 12,125 Valuation allowance....................................... -- -- ------- ------- Net deferred tax asset, included in other assets........................................... $28,670 $12,125 ======= =======

There was no valuation allowance for deferred tax assets as of December 31, 2000, 1999 and 1998. Management believes it is more likely than not that the Company will realize the deferred tax asset. (10) BENEFIT PLANS PENSION PLAN The Company has a defined benefit pension plan which covers certain employees of the Company and its subsidiaries. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. Benefits are based on years of service and the employee's career average pay. The Company's funding policy is to contribute to the plan at least the minimum amount that can be deducted for Federal income tax purposes. The following tables set forth the plan's funded status and amounts recognized in the Company's accompanying consolidated statements of financial condition and consolidated statements of earnings (in thousands of dollars):

DECEMBER 31 ------------------ 2000 1999 ------- ------- Projected benefit obligation for service rendered to date... $24,208 $20,889 Plan assets, at fair market value........................... 19,093 17,037 ------- ------- Excess of the projected benefit obligation over plan assets................................................. 5,115 3,852 Unamortized prior service cost.............................. (167) 208 Unrecognized net transition obligation being recognized over 15 years.................................................. (30) (63) Unrecognized net loss....................................... (4,996) (2,645) Adjustment to recognize minimum liability................... 1,979 313 ------- ------- Pension liability included in other liabilities........... $ 1,901 $ 1,665 ======= =======

29 32 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999

YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------- ------- ------- Net pension cost included the following components: Service cost -- benefits earned during the period......... $ 1,266 $ 1,773 $ 1,895 Interest cost on projected benefit obligation............. 1,786 1,592 1,551 Expected return on plan assets............................ (1,709) (1,438) (1,310) Settlement loss/(gain).................................... 653 -- -- Curtailment loss/(gain)................................... -- (51) -- Net amortization.......................................... 48 305 363 ------- ------- ------- Net periodic pension cost......................... $ 2,044 $ 2,181 $ 2,499 ======= ======= =======

YEAR ENDED DECEMBER 31, ------------------ 2000 1999 ------- ------- Fair value of assets, beginning of year..................... $17,037 $17,203 Employer contributions...................................... 3,140 1,914 Benefit payments made....................................... (95) (1,127) Settlements................................................. (3,165) -- Total investment return..................................... 2,176 (953) ------- ------- Fair value of assets, end of year........................... $19,093 $17,037 ======= =======

YEAR ENDED DECEMBER 31, ------------------ 2000 1999 ------- ------- Projected benefit obligation, beginning of year............. $20,889 $24,837 Service cost................................................ 1,266 1,773 Interest cost............................................... 1,786 1,592 Actuarial gains and losses.................................. 3,527 (4,934) Benefits paid............................................... (95) (1,127) Settlements................................................. (3,165) -- Recognized curtailment loss/(gain).......................... -- (1,338) Plan amendments............................................. -- 86 ------- ------- Projected benefit obligation, end of year................... $24,208 $20,889 ======= =======

The net periodic pension costs above include the costs related to discontinued operations of ITGI of $385,000 in 1998. The plan assets consist of approximately 60% equities and 40% fixed income securities. The weighted average discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.50% and 4.00%, respectively, in 2000, 7.75% and 5.00%, respectively, in 1999 and 6.75% and 5.00%, respectively, in 1998. The expected long-term rate of return on assets was 8.40% in 2000, 1999 and 1998. STOCK COMPENSATION PLANS At December 31, 2000, the Company had five stock-based compensation plans, which are described below. The Company applied APB Opinion No. 25 in accounting for its plans. Accordingly, no compensation 30 33 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 cost has been recognized for fixed stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands of dollars, except per share amounts):

2000 1999 1998 -------------------- -------------------- -------------------- REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA -------- --------- -------- --------- -------- --------- EARNINGS: Earnings from continuing operations...................... $54,981 $51,215 $48,839 $46,553 $36,201 $33,131 Earnings from discontinued operations...................... -- -- 12,888 12,446 33,481 32,109 ------- ------- ------- ------- ------- ------- Net earnings...................... $54,981 $51,215 $61,727 $58,999 $69,682 $65,240 ======= ======= ======= ======= ======= ======= BASIC EARNINGS PER SHARE: Earnings from continuing operations...................... $ 2.30 $ 2.14 $ 2.05 $ 1.96 $ 1.62 $ 1.48 Earnings from discontinued operations...................... -- -- 0.55 0.52 1.50 1.44 ------- ------- ------- ------- ------- ------- Net earnings...................... $ 2.30 $ 2.14 $ 2.60 $ 2.48 $ 3.12 $ 2.92 ======= ======= ======= ======= ======= ======= DILUTED EARNINGS PER SHARE: Earnings from continuing operations...................... $ 2.26 $ 2.10 $ 2.04 $ 1.94 $ 1.58 $ 1.44 Earnings from discontinued operations...................... -- -- 0.51 0.50 1.38 1.33 ------- ------- ------- ------- ------- ------- Net earnings...................... $ 2.26 $ 2.10 $ 2.55 $ 2.44 $ 2.96 $ 2.77 ======= ======= ======= ======= ======= =======

INCENTIVE PLAN The Company has an Incentive Compensation Plan ("Incentive Plan") which allows awards in the form of incentive stock options (within the meaning of Section 422 of the Internal Revenue code), nonqualified stock options, stock appreciation rights, restricted stock, unrestricted stock, performance awards, dividend equivalents or other stock based awards. The plan imposes a limit on the number of shares of common stock of the Company that may be subject to awards. An award relating to shares may be granted if the aggregate number of shares subject to then-outstanding awards plus the number of shares subject to the award being granted do not exceed 25% of the number of shares issued and outstanding immediately prior to the grant. Under the Incentive Plan, the exercise price of each option is generally not less than the market price of the Company's stock on the date of grant and the option's maximum term is ten years. Restricted Stock. The Incentive Plan allows for grants of restricted stock awards, whereby certain key employees are granted restricted shares of common stock subject to forfeiture until the restrictions lapse or terminate. With certain exceptions, the employee must remain with the Company for a period of years after the date of grant to receive the full number of shares granted. During 2000, 1999 and 1998, there were restricted stock awards of 676,223 shares, 400,000 shares and 183,947 shares, respectively, with a corresponding market value of $15,781,000, $15,791,000 and $6,488,000, respectively. Grants are expensed over their vesting periods, generally one to four years. The compensation cost charged against earnings was $12,269,000, $10,354,000 and $5,183,000 in 2000, 1999 and 1998, respectively. As of December 31, 2000, 1999 and 1998, restricted stock shares outstanding were 1,042,299 shares, 507,905 shares and 381,585 shares, respectively. Performance-based Stock Options. While the Incentive Plan allows for the granting of performance-based stock options, no such options were granted during 2000, 1999 and 1998, and no such options were outstanding at December 31, 2000, 1999 and 1998. 31 34 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 DIRECTOR PLAN The Company also has a Directors' Stock Compensation Plan ("Directors' Plan") which provides for an annual grant to each non-employee director of an option to purchase 4,000 shares of the Company's common stock. Such grants will be made automatically on the date directors are elected or reelected at the Company's annual meeting. In addition, the Directors' Plan provides for the automatic grant to a non-employee director, at the time he or she is first elected or appointed, of an option to purchase 5,000 shares of the Company's common stock. Additionally, the Directors' Plan permits each non-employee director to elect to be paid annual retainer fees and annual fees for service as chairman of a Board committee in the form of stock options and to defer receipt of any director fees in an interest-bearing cash account or as deferred shares in a deferred share account. A total number of 500,000 shares of the Company's common stock are reserved under the Directors' Plan. Under the Directors' Plan, the exercise price of each option equals the market price of the Company's stock on the date of grant and the option's maximum term is ten years. EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase Plan ("ESPP") which qualifies under Section 423 of the U.S. Internal Revenue Code. All regular full-time employees and employees who work part-time over 20 hours per week are eligible for the ESPP. Employee contributions are voluntary and are made via payroll deduction. The employee contributions are used to purchase the Company's common stock. The stock purchase price is based on the lower of 85 percent of the stock price at the beginning or end of the period. The stock price used is the Volume Weighted Average Price ("VWAP") for the particular day. The difference between the employees' stock purchase price and the market value of the stock is considered a Company contribution. The Company's contribution vests after a minimum of one year. The Company does not recognize compensation cost related to its ESPP contributions. In addition, the Company has a Supplemental Stock Purchase Plan ("SSPP") which is a non-qualified plan that is similar to the Company's ESPP. The Company recognizes compensation cost related to its SSPP contributions. In the past, the Company's stock purchase plan matched employee contributions at a rate of 15% (more, if profits exceeded targets set by the Company's Board of Directors). The Company recognized compensation cost related to its matching. The compensation cost charged against continuing operations was $84,000, $34,000 and $293,000 in 2000, 1999 and 1998, respectively. The charge against discontinued operations of ITGI was $4,000 in 1998. CAPITAL ACCUMULATION PLAN The Company had a Capital Accumulation Plan (CAP) for certain officers and key employees of the Company. Participation in the plan was optional, with those who elected to participate agreeing to defer graduated percentages of their compensation. The plan allowed selected employees to acquire the Company's common stock at a 15% discount with 50% of the amount deferred. The remaining 50% of the amount deferred was placed in a Profit-Based Deferred Compensation Account that earned interest at a rate based on the performance of the Company. In January 1999, the Company liquidated its CAP plan. The Company had recognized compensation cost related to the 15% discount and interest on Profit-Based Deferred Compensation Accounts. The compensation 32 35 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 cost charged against continuing operations was $4,115,000 in 1998. The charge against discontinued operations of ITGI was $219,000 in 1998. EMPLOYEE STOCK OWNERSHIP PLAN The Company has an Employee Stock Ownership Plan ("ESOP") which was established in 1988. In 1999, the Company re-established annual contributions to the ESOP. In 1999, 278,744 shares of common stock were purchased for $6,487,000, which was funded by a loan from the Company. The loan is being repaid over 4 years at an annual interest rate of 5.22%. The Company makes contributions to the ESOP sufficient to fund principal and interest payments and may make additional contributions at the discretion of the Board of Directors. As of December 31, 2000, the loan balance was $4,579,000 relating to 196,744 shares of common stock. Additionally, during 2000 and 1999, 18,000 and 100,000 shares of common stock, respectively, were purchased for $349,000 and $2,441,000, respectively. These shares were paid for substantially through a Company contribution. The compensation cost charged against continuing operations was $2,478,000 and $2,341,000 in 2000 and 1999, respectively. PROFIT SHARING PLAN The Company has a profit sharing plan, covering substantially all employees, which includes a salary reduction feature designed to qualify under Section 401(k) of the Internal Revenue Code. Expenses of this plan related to continuing operations amounted to $2,640,000, $2,954,000 and $6,778,000 in 2000, 1999 and 1998, respectively. Expenses of this plan related to discontinued operations of ITGI amounted to $43,000 and $2,362,000 in 1999 and 1998, respectively. OPTIONS ISSUED UNDER ALL PLANS The fair value of all option grants for all the Company's plans are estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for all fixed option grants in 2000, 1999 and 1998, respectively: dividend yield of 0.9%, 0.9%, and 0.6%; expected volatility of 42.0%, 42.0%, and 32.6%; risk-free interest rates of 6.4%, 5.2%, and 5.5%; and expected lives of 5.1 years, 5.0 years, and 5.0 years. A summary of the status of Company stock options in all its stock-based plans as of December 31, 2000 and 1999 and changes during the year then ended is presented below:

2000 1999 ----------------------------- ------------------------------ WEIGHTED AVERAGE WEIGHTED AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE --------- ---------------- ---------- ---------------- Outstanding at beginning of year.... 2,277,165 $20.04 1,442,817 $21.12 Granted............................. 574,694 21.49 2,389,213 20.01 Exercised........................... (76,793) 15.08 (1,108,882) 15.07 Exchanged for cash.................. -- -- (111,444) 40.00 Exchanged for options............... -- -- (283,494) 36.47 Forfeited........................... (523,307) 22.22 (51,045) 22.56 --------- ---------- Outstanding at end of year.......... 2,251,759 $20.08 2,227,165 $20.04 ========= ========== Options exercisable at year-end..... 1,172,964 $17.85 1,279,235 $17.71 Weighted-average fair value of options granted during the year... $ 9.17 $ 8.51

33 36 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 The following table summarizes information about stock options outstanding at December 31, 2000:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- ------------------------ NUMBER WEIGHTED NUMBER OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED AT REMAINING AVERAGE AT AVERAGE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE RANGE OF EXERCISE PRICES 2000 LIFE (YEARS) PRICE 2000 PRICE ------------------------ ------------ ------------ -------- ------------ -------- $ 6.20 to 9.99.................. 91,925 3.0 $ 7.65 91,925 $ 7.65 $10.00 to 19.99.................. 690,488 2.4 16.19 688,692 16.18 $20.00 to 29.63.................. 1,469,346 3.7 22.68 392,347 23.16 --------- --------- $ 6.20 to 29.63.................. 2,251,759 3.2 $20.08 1,172,964 $17.85 ========= =========

(11) EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years 2000, 1999 and 1998 (in thousands, except per share amounts):

YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------- ------- ------- Earnings from continuing operations......................... $54,981 $48,839 $36,201 Discontinued operations of ITGI, net of tax................. -- 12,888 33,481 ------- ------- ------- Net earnings for basic earnings per share................... 54,981 61,727 69,682 Earnings adjustment -- stock options on subsidiary........ -- (475) (1,672) ------- ------- ------- Adjusted earnings for diluted earnings per share.......... $54,981 $61,252 $68,010 ======= ======= ======= Shares of common stock and common stock equivalents: Average shares used in basic computation.................. 23,912 23,778 22,346 Stock options............................................. 240 191 508 Other unissued common shares.............................. 183 23 100 ------- ------- ------- Average shares used in diluted computation................ 24,335 23,992 22,954 ======= ======= ======= Earnings per share: Basic: Earnings from continuing operations....................... $ 2.30 $ 2.05 $ 1.62 Discontinued operations of ITGI, net of tax............... -- 0.55 1.50 ------- ------- ------- Net earnings.............................................. $ 2.30 $ 2.60 $ 3.12 ======= ======= ======= Diluted: Earnings from continuing operations....................... $ 2.26 $ 2.04 $ 1.58 Discontinued operations of ITGI, net of tax............... -- 0.51 1.38 ------- ------- ------- Net earnings.............................................. $ 2.26 $ 2.55 $ 2.96 ======= ======= =======

The Company had no anti-dilutive securities during 2000, 1999 and 1998. 34 37 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 (12) LEASES As lessee, the Company leases certain premises and equipment under noncancelable agreements expiring at various dates through 2013. Future minimum lease payments for all noncancelable operating leases at December 31, 2000 are as follows (in thousands of dollars):

GROSS SUB-LEASES NET ------- ---------- ------- 2001........................................................ $14,275 $1,385 $12,890 2002........................................................ 12,805 572 12,233 2003........................................................ 12,040 304 11,736 2004........................................................ 11,691 228 11,463 2005........................................................ 11,325 57 11,268 Thereafter.................................................. 47,368 -- 47,368

Rental expense related to continuing operations amounted to $12,535,000, $9,326,000 and $7,295,000, in 2000, 1999 and 1998, respectively. Rental expense related to discontinued operations of ITGI amounted to $0, $873,000 and $2,556,000, in 2000, 1999 and 1998, respectively. (13) FINANCIAL INSTRUMENTS OFF-BALANCE SHEET RISK The Company has contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to sell, securities sold but not yet purchased, repurchase agreements, future purchases and sales of foreign currencies, securities transactions on a when-issued basis, options contracts, futures index contracts, and underwriting. Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the market values of the securities underlying the financial instruments may be in excess of, or less than, the contract amount. The settlement of these transactions is not expected to have a material effect upon the Company's consolidated financial statements. In the normal course of business, the Company had letters of credit outstanding aggregating $33,005,000 at December 31, 2000 to satisfy various collateral requirements in lieu of depositing cash or securities. The Company has derivative financial instrument positions in foreign exchange forward contracts, option contracts, and index futures contracts, all of which are measured at fair value with realized and unrealized gains and losses recognized in earnings. The foreign exchange forward contract positions are generally taken to lock in the dollar cost or proceeds of foreign currency commitments associated with unsettled foreign denominated securities purchases or sales. The average maturity of the forward contracts is generally less than two weeks. The option positions taken are generally part of a strategy in which offsetting equity positions are taken. The index futures positions are taken as a hedge against securities positions. The gross contracted or notional amount of index futures contracts, commodities futures contracts, options contracts, and foreign exchange forward contracts, which are not reflected in the consolidated statement of financial condition, is set forth in the table below (in thousands of dollars) and provide only a measure of the Company's involvement in these contracts at December 31, 2000 and 1999. They do not 35 38 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 represent amounts subject to market risk and, in many cases, serve to reduce the Company's overall exposure to market and other risks.

NOTIONAL OR CONTRACTED AMOUNT ----------------------------------------- 2000 1999 ------------------- ------------------ PURCHASE SALE PURCHASE SALE -------- ------- -------- ------ Index futures contracts.............................. $ -- $ 1,734 $ -- $1,792 Option contracts..................................... 24,325 858 18,260 7,953 Foreign exchange forward contracts................... 21,027 25,339 4,089 5,588

FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS The following is an aggregate summary of the average 2000 and 1999 and December 31, 2000 and 1999 fair values of derivative financial instruments (in thousands of dollars):

2000 1999 ------------------------ ------------------------ AVERAGE END OF PERIOD AVERAGE END OF PERIOD ------- ------------- ------- ------------- Index futures contracts: In a favorable position...................... $ 100 $ 65 $ 42 $ -- In an unfavorable position................... 22 -- 50 63 Option contracts: Purchase..................................... 2,144 2,610 1,249 3,047 Sale......................................... 1,342 98 830 676 Foreign exchange forward contracts: Purchase..................................... 21,904 21,027 7,013 4,089 Sale......................................... 17,451 25,339 7,079 5,588

CREDIT RISK In the normal course of business, the Company is involved in the execution, settlement and financing of various customer and principal securities transactions. Customer activities are transacted on a cash, margin or delivery-versus-payment basis. Securities transactions are subject to the risk of counterparty or customer nonperformance. However, transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through settlement date or to the extent of margin balances. The Company seeks to control the risk associated with these transactions by establishing and monitoring credit limits and by monitoring collateral and transaction levels daily. The Company may require counterparties to deposit additional collateral or return collateral pledged. In the case of aged securities failed to receive, the Company may, under industry regulations, purchase the underlying securities in the market and seek reimbursement for any losses from the counterparty. CONCENTRATION OF CREDIT RISK As a major securities firm, the Company's activities are executed primarily with and on behalf of other financial institutions, including brokers and dealers, banks and other institutional customers. Concentrations of credit risk can be affected by changes in economic, industry or geographical factors. The Company seeks to control its credit risk and the potential risk concentration through a variety of reporting and control procedures, including those described in the preceding discussion of credit risk. 36 39 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 (14) OTHER COMPREHENSIVE INCOME The following summarizes other comprehensive income and accumulated other comprehensive income at December 31, 2000 and for the year then ended (in thousands of dollars):

BEFORE-TAX INCOME TAX NET-OF-TAX AMOUNT OR BENEFIT AMOUNT ---------- ---------- ---------- Currency translation adjustments.......................... $(1,121) $ -- $(1,121) Minimum pension liability adjustment...................... (1,666) 711 (955) ------- ---- ------- Other comprehensive income (loss)......................... $(2,787) $711 $(2,076) ======= ==== =======

ACCUMULATED MINIMUM OTHER CURRENCY PENSION COMPREHENSIVE TRANSLATION LIABILITY INCOME ADJUSTMENTS ADJUSTMENT (LOSS) ----------- ---------- ------------- Beginning balance...................................... $ 236 $ (183) $ 53 Change in 2000......................................... (1,121) (955) (2,076) ------- ------- ------- Ending balance......................................... $ (885) $(1,138) $(2,023) ======= ======= =======

The following summarizes other comprehensive income and accumulated other comprehensive income at December 31, 1999 and for the year then ended (in thousands of dollars):

BEFORE-TAX INCOME TAX NET-OF-TAX AMOUNT OR BENEFIT AMOUNT ---------- ---------- ---------- Currency translation adjustments.......................... $ 285 $ -- $ 285 Minimum pension liability adjustment...................... 2,540 (1,054) 1,486 ------ ------- ------ Other comprehensive income (loss)......................... $2,825 $(1,054) $1,771 ====== ======= ======

ACCUMULATED MINIMUM OTHER CURRENCY PENSION COMPREHENSIVE TRANSLATION LIABILITY INCOME ADJUSTMENTS ADJUSTMENT (LOSS) ----------- ---------- ------------- Beginning balance...................................... $(49) $(1,669) $(1,718) Change in 1999......................................... 285 1,486 1,771 ---- ------- ------- Ending balance......................................... $236 $ (183) $ 53 ==== ======= =======

The following summarizes other comprehensive income and accumulated other comprehensive income at December 31, 1998 and for the year then ended (in thousands of dollars):

BEFORE-TAX INCOME TAX NET-OF-TAX AMOUNT OR BENEFIT AMOUNT ---------- ---------- ---------- Currency translation adjustments.......................... $ 573 $ -- $ 573 Minimum pension liability adjustment...................... (254) 105 (149) ----- ---- ----- Other comprehensive income (loss)......................... $ 319 $105 $ 424 ===== ==== =====

37 40 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999

ACCUMULATED MINIMUM OTHER CURRENCY PENSION COMPREHENSIVE TRANSLATION LIABILITY INCOME ADJUSTMENTS ADJUSTMENT (LOSS) ----------- ---------- ------------- Beginning balance...................................... $(622) $(1,520) $(2,142) Change in 1998......................................... 573 (149) 424 ----- ------- ------- Ending balance......................................... $ (49) $(1,669) $(1,718) ===== ======= =======

(15) NET CAPITAL REQUIREMENTS As registered broker-dealers, JEFCO and W & D are subject to the Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. JEFCO and W & D have elected to use the alternative method permitted by the Rule, which requires that they each maintain minimum net capital, as defined, equal to the greater of $250,000 or 2% of the aggregate debit balances arising from customer transactions, as defined. At December 31, 2000, JEFCO's and W & D's net capital was $190,130,000 and $2,215,000, respectively, which exceeded minimum net capital requirements by $182,565,000 and $1,965,000, respectively. (16) CONTINGENCIES Many aspects of the Company's business involve substantial risks of liability. In the normal course of business, the Company and its subsidiaries have been named as defendants or co-defendants in lawsuits involving primarily claims for damages. The Company's management believes that pending litigation will not have a material adverse effect on the Company. (17) SEGMENT REPORTING The Company's operations have been classified into a single business segment, a securities broker-dealer, which includes several types of financial services. This segment includes the traditional securities brokerage and investment banking activities of the Company. The Company's business is predominantly in the United States with approximately 10% of revenues and under 2% of assets attributable to international operations. In April 1999, the Company spun-off its only other segment, ITGI, which included the automated equity trading and transaction research activities of ITGI and its subsidiaries. 38 41 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 Financial information for the discontinued business segment is summarized as follows (in thousands of dollars): ITGI CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

PERIOD ENDED YEAR ENDED APRIL 27, DECEMBER 31, 1999 1998 ------------ ------------ Revenues.................................................... $76,180 $212,205 Expenses.................................................... 56,536 131,270 ------- -------- Earnings before income tax expense.......................... 19,644 80,935 Income tax expense.......................................... 9,250 37,541 ------- -------- Net earnings................................................ $10,394 $ 43,394 ======= ======== COMPONENTS OF DISCONTINUED OPERATIONS OF ITGI Net earnings of ITGI........................................ $10,394 $ 43,394 Deferred taxes on ITGI's IPO gain........................... 12,843 -- Less: Write-off of goodwill on JEF related to ITGI.......... 5,208 -- Less: Company's spin-off related expenses................... 3,116 1,936 Less: Minority interest in ITGI............................. 2,025 7,977 ------- -------- Discontinued operations of ITGI............................. $12,888 $ 33,481 ======= ========

CASH PAID FOR INTEREST AND INCOME TAXES The interest paid and income taxes paid amounts included in the Consolidated Statements of Cash Flows included amounts related to discontinued operations of ITGI (in thousands of dollars).

2000 1999 1998 ---- ------ ------- Interest paid............................................... $-- $ 31 $ 20 Income taxes paid to affiliate.............................. -- 6,538 30,296

(18) THE EUROPE COMPANY LIMITED To expand its European capabilities, the Company acquired The Europe Company Ltd. in the third quarter of 2000, with a combination of restricted stock, zero coupon unsecured Euro denominated convertible loan notes and cash totaling approximately $18.0 million. The acquisition was accounted for as a purchase and resulted in approximately $13.6 million in goodwill. At December 31, 2000, excess of purchase price over net assets acquired remaining was $13.0 million, net of accumulated amortization of $0.6 million and is included in other assets. The approximately $3.0 million in zero coupon unsecured Euro denominated convertible loan notes mature in 2010 and have been classified on the consolidated statement of financial condition as long-term convertible debt. The conversion price for the notes is approximately 28.80 Euros (as of December 31, 2000, this was equivalent to approximately $27.00) per common share until August 4, 2003 and the closing stock price on the date of conversion subsequent to that date. The shares and share equivalents related to both the restricted stock and zero coupon unsecured Euro denominated convertible loan notes were included in the denominator of the basic earnings per share calculation. 39 42 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2000 AND 1999 (19) ASSET MANAGEMENT The following summarizes revenues from asset management for the years 2000, 1999 and 1998 (in thousands of dollars):

2000 1999 1998 ------ ------ ---- HIGH YIELD (HY) Performance based................................... $5,919 $ -- $ -- Asset based......................................... 1,514 -- -- NON-HY EMPLOYEE FUNDS Asset based......................................... 143 -- -- INTERNATIONAL............................................ 1,984 1,973 926 ------ ------ ---- Total............................................... $9,560 $1,973 $926 ====== ====== ====

(20) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited quarterly statements of earnings for the years ended December 31, 2000 and 1999 (in thousands of dollars, except per share amounts):

MARCH JUNE SEPTEMBER DECEMBER YEAR -------- -------- --------- -------- -------- 2000 Revenues.................................... $194,760 $182,618 $198,299 $186,186 $761,863 Earnings before income taxes................ 26,201 21,381 25,524 22,287 95,393 Net earnings................................ 15,024 12,372 14,713 12,872 54,981 Net earnings per share: Basic....................................... $ 0.63 $ 0.51 $ 0.62 $ 0.54 $ 2.30 ======== ======== ======== ======== ======== Diluted..................................... $ 0.62 $ 0.51 $ 0.60 $ 0.52 $ 2.26 ======== ======== ======== ======== ======== 1999 Revenues.................................... $148,678 $175,329 $145,808 $170,332 $640,147 Earnings before income taxes................ 20,370 25,047 15,491 23,187 84,095 Earnings from continuing operations......... 11,666 14,777 8,840 13,556 48,839 Earnings from discontinued operations of ITGI...................................... 4,955 6,192 91 1,650 12,888 Net earnings................................ 16,621 20,969 8,931 15,206 61,727 Basic: Earnings from continuing operations per share..................................... $ 0.50 $ 0.62 $ 0.37 $ 0.56 $ 2.05 Earnings from discontinued operations....... 0.22 0.26 -- 0.07 0.55 -------- -------- -------- -------- -------- Net earnings per share...................... $ 0.72 $ 0.88 $ 0.37 $ 0.63 $ 2.60 ======== ======== ======== ======== ======== Diluted: Earnings from continuing operations per share..................................... $ 0.50 $ 0.61 $ 0.36 $ 0.56 $ 2.04 Earnings from discontinued operations....... 0.19 0.26 0.01 0.07 0.51 -------- -------- -------- -------- -------- Net earnings per share...................... $ 0.69 $ 0.87 $ 0.37 $ 0.63 $ 2.55 ======== ======== ======== ======== ========

40 43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information with respect to this item will be contained in the Proxy Statement for the 2001 Annual Meeting of Stockholders, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information with respect to this item will be contained in the Proxy Statement for the 2001 Annual Meeting of Stockholders, which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information with respect to this item will be contained in the Proxy Statement for the 2001 Annual Meeting of Stockholders, which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information with respect to this item will be contained in the Proxy Statement for the 2001 Annual Meeting of Stockholders, which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.

PAGES ----- (a)1.FINANCIAL STATEMENTS Included in Part II of this report: Independent Auditors' Report...................... 15 Consolidated Statements of Financial Condition.... 16 Consolidated Statements of Earnings............... 17 Consolidated Statements of Changes in Stockholders' Equity.............................. 18 Consolidated Statements of Cash Flows............. 19 Notes to Consolidated Financial Statements........ 20

All Schedules are omitted because they are not applicable or because the required information is shown in the financial statements or notes thereto. (a)3. EXHIBITS (3.1) Registrant's Amended and Restated Certificate of Incorporation is incorporated by reference to Exhibit 3.1 of the Registrant's Form 8-K filed on April 30, 1999. (3.2) Registrant's By-Laws are incorporated by reference to Exhibit 3.2 of Registrant's Form 10 filed on April 20, 1999. (4.1) Indenture dated as of August 18, 1997 by and between Jefferies Group, Inc. and The Bank of New York, as Trustee, including form of 7 1/2% Series B Senior Notes due 2007 is incorporated by reference to Exhibit 4.1 to Jefferies Group, Inc.'s Registration Statement on Form S-4 (No. 333-40263) filed on November 14, 1997 including amendments thereto. 41 44 [4.1(a)] First Supplemental Indenture dated as of March 15, 1999 between Jefferies Group, Inc. and The Bank of New York, as Trustee, supplementing the Indenture dated as of August 18, 1997 is incorporated by reference to Exhibit [4.1(a)] of Registrant's Form 10-K filed on March 27, 2000. [4.1(b)] Second Supplemental Indenture dated as of March 17, 1999 between JEF Holding Company, Inc., Jefferies Group, Inc. and The Bank of New York, as Trustee, supplementing the Indenture dated as of August 18, 1997, as amended on March 15, 1999 is incorporated by reference to Exhibit [4.1(b)] of Registrant's Form 10-K filed on March 27, 2000. (4.2) Registration Rights Agreement dated as of August 18, 1997 by and among Jefferies Group, Inc. and the purchasers of Jefferies Group, Inc.'s 7 1/2% Series B Senior Notes due 2007 is incorporated by reference to Exhibit 10.2 to Jefferies Group, Inc.'s Registration Statement on Form S-4 (No. 333-40263) filed on November 14, 1997 including amendments thereto. (4.3) Indenture dated as of April 28, 1994 by and between Jefferies Group, Inc. and The Bank of New York, as Trustee, including form of 8 7/8% Senior Notes due 2004 is incorporated by reference to Exhibit 4.1 of Amendment No. 1 to Jefferies Group, Inc.'s Registration Statement on Form S-4 (No. 333-54265) filed on July 14, 1994. [4.3(a)] Form of first Supplemental Indenture dated as of July 14, 1994 by and between Jefferies Group, Inc. and The Bank of New York, as Trustee, is incorporated by reference to Exhibit 4.2 of Amendment No. 1 to Jefferies Group, Inc.'s Registration Statement on Form S-4 (No. 333-54265) filed on July 14, 1994. [4.3(b)] Second Supplemental Indenture dated as of March 26, 1999 between JEF Holding Company, Inc., Jefferies Group, Inc. and The Bank of New York, as Trustee, supplementing the Indenture dated as of April 28, 1994, as amended on July 14, 1994 is incorporated by reference to Exhibit [4.3(b)] of Registrant's Form 10-K filed on March 27, 2000. [4.3(c)] Third Supplemental Indenture dated as of April 1, 1999 between JEF Holding Company, Inc., Jefferies Group, Inc. and The Bank of New York, as Trustee, supplementing the Indenture dated as of April 28, 1994, as amended on July 14, 1994 and March 26, 1999 is incorporated by reference to Exhibit [4.3(c)] of Registrant's Form 10-K filed on March 27, 2000. (4.4) Registration Rights Agreement dated as of April 28, 1994 by and among Jefferies Group, Inc. and the purchasers of the 8 7/8% Series B Senior Notes due 2004 is incorporated by reference to Exhibit 10.2 of Amendment No. 1 to Jefferies Group, Inc.'s Registration Statement on Form S-4 (No. 333-54265) filed on July 14, 1994. (4.5) Zero Coupon Unsecured Convertible Notes (the "Notes"); Registrant hereby agrees to provide copies of such Notes to the Commission upon request. (10.1) Registrant's 1999 Incentive Compensation Plan is incorporated by reference to Exhibit 10.1 of Registrant's Form 10 filed on April 20, 1999. (10.2) Registrant's 1999 Directors' Stock Compensation Plan is incorporated by reference to Exhibit 10.2 of Registrant's Form 10 filed on April 20, 1999. (10.3) Distribution Agreement, dated as of March 17, 1999, by and between Jefferies Group, Inc. and JEF Holding Company, Inc. is incorporated by reference to Exhibit 10.3 of Registrant's Form 10 filed on April 20, 1999. (10.4) Tax Sharing and Indemnification Agreement, dated as of March 17, 1999, by and among Investment Technology Group, Inc., Jefferies Group, Inc. and the JEF Holding Company, Inc. is incorporated by reference to Exhibit 10.4 of Registrant's Form 10 filed on April 20, 1999. 42 45 (10.5) Amended and Restated Tax Sharing Agreement, dated as of March 17, 1999, by and among Investment Technology Group, Inc., Jefferies Group, Inc. and JEF Holding Company, Inc. is incorporated by reference to Exhibit 10.5 of Registrant's Form 10 filed on April 20, 1999. (10.6) Benefits Agreement, dated as of March 17, 1999, by and between Jefferies Group, Inc. and JEF Holding Company, Inc. is incorporated by reference to Exhibit 10.6 of Registrant's Form 10 filed on April 20, 1999. (10.7)* Jefferies Group, Inc. Deferred Compensation Plan, dated effective January 1, 2001. (21)* List of Subsidiaries of Registrant. (23)* Consent of KPMG LLP. --------------- * Filed herewith. Exhibits 10.1, 10.2 and 10.7 are management contracts or compensatory plans or arrangements. ALL OTHER EXHIBITS ARE OMITTED BECAUSE THEY ARE NOT APPLICABLE. (b) No reports on Form 8-K have been filed by the Registrant during the fourth quarter of 2000. 43 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JEFFERIES GROUP, INC. By: /s/ FRANK E. BAXTER ------------------------------------ Frank E. Baxter Chairman of the Board of Directors Dated: March 30, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.

NAME TITLE DATE ---- ----- ---- /s/ FRANK E. BAXTER Chairman of the Board of March 30, 2001 ----------------------------------------------------- Directors Frank E. Baxter /s/ RICHARD B. HANDLER Director, Chief Executive March 30, 2001 ----------------------------------------------------- Officer Richard B. Handler /s/ JOHN C. SHAW, JR. Director, President and March 30, 2001 ----------------------------------------------------- Chief Operating Officer John C. Shaw, Jr. /s/ JOSEPH A. SCHENK Executive Vice President and March 30, 2001 ----------------------------------------------------- Chief Financial Officer Joseph A. Schenk /s/ W. PATRICK CAMPBELL Director March 30, 2001 ----------------------------------------------------- W. Patrick Campbell /s/ RICHARD G. DOOLEY Director March 30, 2001 ----------------------------------------------------- Richard G. Dooley /s/ SHELDON B. LUBAR Director March 30, 2001 ----------------------------------------------------- Sheldon B. Lubar /s/ FRANK J. MACCHIAROLA Director March 30, 2001 ----------------------------------------------------- Frank J. Macchiarola

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