UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the transition period from                 to               

Commission File Number: 1-14947

JEFFERIES GROUP, INC.

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) 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 o

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

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes x     No o

      State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $1,528,792,701 as of June 25, 2004.

      Indicate the number of shares outstanding of the registrant’s class of common stock, as of the latest practicable date. 57,179,848 shares as of the close of business February 1, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Information from the Registrant’s Definitive Proxy Statement with respect to the 2005 Annual Meeting of Stockholders to be held on May 23, 2005 to be filed with the Commission 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 72.

JEFFERIES GROUP, INC.

2004 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

Exhibit Index located on page 72 of this report.

PART I

      Jefferies Group, Inc. and its subsidiaries (the “Company” or “we”) operate as a full-service investment bank and institutional securities firm focused on growing and mid-sized companies and their investors. We offer capital raising, mergers and acquisitions, restructuring and other financial advisory services to small and mid-sized companies and provide trade execution in equity, high yield, investment grade fixed income, convertible and international securities, as well as fundamental research and asset management capabilities, to institutional investors. We also offer correspondent clearing, prime brokerage, private client and securities lending services.

      As of December 31, 2004, we had 1,783 employees. We maintain offices throughout the world and have our executive offices located at 520 Madison Avenue, New York, New York 10022. Our telephone number is (212) 284-2550 and our Internet address is www.jefco.com.

      We make available free of charge on our Internet website the following documents and reports, including amendments (the reports are made available as soon as reasonably practicable after such materials are filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934):

      Shareholders may also obtain a printed copy of any of these documents or reports by sending a request to Investor Relations, Jefferies & Company, Inc., 520 Madison Avenue, 12th Floor, New York, NY 10022, by calling 203-708-5975 or by sending an email to info@jefco.com.

Our Major Operating Companies

Jefferies & Company, Inc.

      Jefferies & Company, Inc. (“Jefferies”) is our principal operating subsidiary. Founded in 1962, Jefferies provides clients with investment banking services, sales and trading, research, asset management as well as correspondent clearing, prime brokerage and securities lending services. The firm is a leading provider of trade execution in equity, high yield, investment grade fixed income, convertible and international securities serving institutional investors and high net worth individuals.

Jefferies International Limited

      Jefferies International Limited (“JIL”) is an investment bank and institutional securities firm offering investment banking, sales and trading, securities research and investment management to mid-sized and growing companies, and their investors, primarily in Europe. Established in 1985, Jefferies is a leader in the global convertible securities markets, providing a variety of leading-edge solutions in sales, trading, analysis and investment management. The firm also offers extensive client service in the trading of US, European and Japanese equities, as well as high yield and distressed securities. The investment banking team offers

European clients advisory capabilities in M&A, private placements, high yield capital markets origination and corporate restructuring. JIL is incorporated in the UK.

Jefferies Execution Services, Inc.

      Jefferies Execution Services, Inc. (“Jefferies Execution”), formerly Helfant Group, Inc., provides agency-only execution services for stocks and options listed on the NYSE, AMEX, and all other major exchanges, as well as OTC. In 2004, the firm traded over 36 billion shares utilizing its execution platform which includes floor brokerage, electronic connectivity, direct access and listed options trading. Jefferies Execution is one of the largest execution services providers on the New York Stock Exchange. With 15 seats and operating from 40 booths on the floor, the firm executes approximately 10 percent of the average daily reported volume of the NYSE. Jefferies Execution operates as a separate broker-dealer serving over 150 institutional clients and other broker-dealers.

Jefferies Asset Management, LLC

      Jefferies Asset Management, LLC (“JAM”) acts as investment manager to various private investment funds. JAM’s private fund products include two long-short equity funds and a real asset fund. These funds are not registered under federal or state securities laws, are made available only to certain sophisticated investors and are not offered or sold to the general public. In 2004, JAM continued to build the infrastructure for a substantial asset management business. JAM added a number of experienced portfolio managers in 2004. In addition, JAM is using proprietary capital to incubate new portfolio managers and quantitative strategies, with the goal of making these strategies available to outside investors in the future. In recognition that a solid control infrastructure is crucial for a successful asset management business, in 2004 JAM added experienced legal, compliance, operations and accounting personnel.

Jefferies Financial Products LLC

      Jefferies Financial Products, LLC (“JFP”) offers swaps, options and other derivatives linked to major publicly available commodity indexes and is a significant provider of liquidity in exchange-traded commodity index contracts. Our seasoned professionals have extensive experience in the field of commodities as an asset class and created the proprietary Jefferies Commodity Performance Index (“JCPI”). The JCPI was designed to address the needs of institutional investors seeking diversified commodity exposure (either long or short). The JCPI is a unique investment vehicle for commodities as an asset class, incorporating proprietary index weightings, rebalancing and rollover schedules.

Our Sources of Revenues

Commissions

      A substantial portion of our revenues is derived from customer commissions and commission equivalents. We charge fees for assisting our domestic and international clients with purchasing and selling equity, debt and convertible securities as well as ADRs, options, preferred stocks, financial futures and other similar products.

Principal Transactions

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

Investment Banking

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

Interest

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

Asset Management Fees and Investment Income from Managed Funds

      Asset management fees and investment income from managed funds include revenues the Company receives from asset management and performance fees from funds managed by us, revenues from asset management and performance fees the Company receives from third-party managed funds, and investment income from our investments in these funds. We receive fees in connection with management and investment advisory services we perform for various domestic and international funds and managed accounts. These fees are based on the value of assets under management and may include performance fees based upon the performance of the funds.

Other

      We also receive revenues from other sources which may include revenues from correspondent clearing and stock lending related activities as well as non-core revenues from other sources.

Our Business Divisions and Units

Equities

      Equity sales and trading remains one of the primary foundations of our platform. Our clients include domestic and international investors such as investment advisors, banks, mutual funds, insurance companies, hedge funds, and pension and profit sharing plans. These investors normally purchase and sell securities in block transactions, the execution of which requires special marketing and trading expertise. We are one of the leading firms in the execution of equity block transactions and believe that our institutional customers are attracted by the quality of our execution (with respect to considerations of quantity, timing and price) and our competitive commission rates, which are negotiated on the basis of market conditions, the size of the particular transaction and other factors. Our Private Client Services group focuses on transactions with retail customers, including high net worth clients, which typically involve a greater risk of litigation than would normally be assumed in our traditional institutional activities.

      All of our institutional equity account executives are electronically interconnected through systems permitting simultaneous verbal and graphic communication of trading and order information by all participants. We believe that our execution capability is significantly enhanced by these systems, which permit our account executives to respond to each other and to negotiate order indications directly with customers rather than through a separate trading department.

      Our Equity division is a major source of liquidity for institutional investors with a forty-year history in equity trading and one of the largest, most experienced institutional sales forces on Wall Street. Our equity sales representatives connect a network of more than 2,000 institutional investors around the globe and excel at providing seamless execution with a focus on minimal market impact. Our Equity division specializes in listed block trades, NASDAQ market making, bulletin board trading, and portfolio and electronic trading. We consistently rank highly as a trader of equity securities and are often the No. 1 trader of the stocks in which we make a market.

High Yield

      We are a recognized leader in high yield securities, with a team of more than 50 professionals encompassing integrated sales, trading, research, and capital markets. We are a top trader in the secondary high yield and distressed markets, trading in more than 1000 issues with over 300 institutions globally. Our

high yield professionals have long term relationships with institutional high yield and distressed investors with a focus on secondary trading and new issues.

      At December 31, 2004, the aggregate long and short market values of our holdings of high yield securities were $118.3 million and $20.3 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 may be 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 available only from a small number of dealers.

      In January 2000, the Company created three broker-dealer entities that employ a trading and investment strategy substantially similar to that historically employed by Jefferies High Yield department. Although we often refer to these three broker-dealer entities as funds, they are registered with the Commission as broker-dealers. Two of these funds, the Jefferies Partners Opportunity Funds, are principally capitalized with equity contributions from institutional and high net worth investors. The third fund, Jefferies Employees Opportunity Fund (and collectively with the two Jefferies Partners Opportunity Funds, the “High Yield Funds”), is principally capitalized with equity investments from our employees and is therefore consolidated into our consolidated financial statements. Our senior management (including our Chief Executive Officer, President and Chief Financial Officer) and certain of our employees have direct investments in these funds on terms identical to other fund participants. We have a 16% aggregate interest in the funds, senior management has a 3% interest and all employees (exclusive of senior management) have a 7% interest. The High Yield division and each of the funds share gains or losses on trading and investment activities of the High Yield division on the basis of a pre-established sharing arrangement related to the amount of capital each has available for such transactions. The sharing arrangement is modified from time to time to reflect changes in the respective amounts of available capital. As of December 31, 2004, the funds were being allocated an aggregate of 64% of such gains and losses. The funds also reimburse us for their share of allocable trading expenses. At year end 2004, the High Yield division had in excess of $945 million of combined pari passu capital available from the funds (including unfunded commitments and availability under the fund revolving credit facility) and us to deploy and execute the division’s investment and trading strategy. The High Yield Funds are actively managed by Richard Handler, our Chief Executive Officer.

Convertible Securities

      We have extensive experience serving the diverse convertible securities and equity-linked markets. Professionals in New York, Stamford, London, Tokyo, and Zurich offer expertise in the sales, trading and analysis of convertible bonds, convertible preferred shares and closed-end funds, warrants and structured products. The scale of our operations helps us serve clients better by minimizing transaction costs and maximizing liquidity. We trade in more than 1,000 different issues and maintain active relationships with more than 500 institutional and corporate clients, with a focus on providing unparalleled client service and attention.

Jefferies Execution

      Jefferies Execution provides agency-only execution services for stocks and options listed on the NYSE, AMEX, and all other major exchanges, as well as OTC. In 2004, the firm traded over 36 billion shares utilizing its execution platform which includes floor brokerage, electronic connectivity, direct access and listed options trading. Jefferies Execution is one of the largest execution services providers on the New York Stock Exchange. Jefferies Execution operates as a separate broker-dealer serving over 150 institutional clients and other broker-dealers.

Bonds Direct

      We provide investment grade fixed income transaction execution for institutions acting as principal, through a combination of professional sales and trading coverage, and a technology platform that enables true

on-line real-time trading. Our Bonds Direct division has more than 50 fixed income professionals and is headquartered in New York with offices in Atlanta, Boston, Chapel Hill, Chicago, Los Angeles and San Francisco.

Investment Banking

      Our Investment Banking division offers our clients (primarily growing and mid-sized companies) a full range of financial advisory services, as well as debt, equity, and convertible financing services. Services 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. Our nearly 300 banking professionals have particular expertise in a range of industry groups including aerospace & defense, consumer/retail, energy, gaming, general industrials, maritime/shipping, media & entertainment, services (financial, business and knowledge), technology and telecommunications as well as a group dedicated to the coverage of financial sponsors.

     Jefferies Quarterdeck

      Within our investment banking division is Jefferies Quarterdeck, a specialized group of investment bankers focused on providing services to global aerospace, defense and federal IT companies. Jefferies Quarterdeck is a result of our December 2002 acquisition of Quarterdeck Investment Partners, LLC and its subsequent integration into our investment banking operations.

     Broadview International

      Also included within our investment banking operations is Broadview International. Broadview’s group of over 90 investment banking professionals is focused on serving IT, communications, healthcare technology and digital media companies. Our focused group of Broadview bankers is a result of our acquisition of Broadview International in December 2003 and its integration into our investment banking operations.

Asset Management

      Jefferies has considerably expanded its capabilities in asset management over the past four years. Our experienced fund and portfolio managers leverage the extensive relationships and resources of our trading, research and investment banking operations. We seek to manage risk effectively and in accordance with client risk tolerances, and to consistently deliver favorable returns in all markets. Assets under our management include the assets held by the High Yield Funds as described above, other fixed income securities, equity/equity-linked securities and commodities, and total nearly $3 billion. In 2003, we began the development of a broadly based asset management infrastructure which will support the continued development of various investment strategies including those focused on long-short equity, real assets, fixed income and foreign exchange through a variety of pooled investment vehicles. We expect to continue to support and make investments in these various vehicles.

Securities Lending

      In connection with both our trading and brokerage activities, we borrow securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date, and lend securities to other brokers and dealers for similar purposes. We have an active securities borrowed and lending matched book business in which we borrow securities from one party and lend them to another party. When we borrow securities, we provide cash to the lender as collateral, which is reflected in our financial statements as receivable from brokers and dealers. We earn interest revenues on this cash collateral. Similarly, when we lend securities to another party, that party provides cash to us as collateral, which is reflected in our financial statements as payable to brokers and dealers. We pay interest expense on the cash collateral received from the party borrowing the securities. A substantial portion of our interest revenues and interest expenses results from our matched book activities. The initial collateral advanced or received

approximates or is greater than, the fair value of the securities borrowed or loaned. We monitor the fair value of the securities borrowed and loaned on a daily basis and request additional collateral or return excess collateral, as appropriate.

International

      Our international operations include sales and trading, asset management, research and investment banking. We maintain our global presence with international offices including offices located in London, Paris, Tokyo and Zurich.

Research

      Our research coverage includes aerospace & defense, consumer (apparel, food, home improvement and speciality retailers), energy (electric utilities, drilling, exploration & production and services) gaming & leisure, healthcare (biotechnology, devices & diagnostics, distributors, facilities, services and technology), industrial, media, packaging & paper products, restaurants, services (business, financial and knowledge), special situations, technology (communications equipment, enterprise applications software, infrastructure software, government & commercial IT services, internet & new media and semiconductors), telecommunications and transportation.

Competition

      As a global investment bank and securities firm, all aspects of our business are intensely competitive. We compete directly with numerous domestic and international competitors, including firms included on the AMEX Securities Broker/ Dealer Index and with other brokers and dealers, investment banking firms, investment advisors, mutual funds, hedge funds and commercial banks. Many of our competitors have substantially greater capital and resources than we do and offer a broader range of financial products. 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 us. We believe that the principal factors affecting competition involve market focus, reputation, the abilities of professional personnel, the relative price of the service and products being offered and the quality of service.

Regulation

      The securities industry in the United States is subject to extensive regulation under both federal and state laws. The Commission is the federal agency responsible for the administration of federal securities laws. In addition, self-regulatory organizations, principally NASD and the securities exchanges, are actively involved in the regulation of broker-dealers. 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 foreign regulatory bodies, state securities commissions and state attorneys general in those jurisdictions and states in which they do business.

      Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure of securities firms, anti-money laundering, 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. Broker-dealers that engage in commodities and futures transactions are also subject to regulation by the Commodity Futures Trading Commission (“CFTC”) and the National Futures Association (“NFA”). The Commission, self-regulatory organizations, state securities commissions, state attorneys general, the CFTC and the NFA may conduct administrative proceedings which can result in censure, fine, suspension, expulsion of a broker-dealer, its officers or employees, or revocation of broker-dealer licenses. The principal purpose of regulation and discipline of

broker-dealers is the protection of customers and the securities markets, rather than protection of creditors and stockholders of broker-dealers.

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

      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 registered and are subject to the Rule.

      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”). Jefferies and Jefferies Execution use the alternative method of calculation.

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

      As of December 31, 2004, Jefferies’, and Jefferies Execution’s net capital and excess net capital were as follows:

      NYSE Regulations. Our common stock is listed on the New York Stock Exchange. As a listed company, we are required to comply with the NYSE’s rules and regulations, including rules pertaining to corporate governance matters. As required by the NYSE on an annual basis, in 2004 our Chief Executive Officer, Richard Handler, certified to the NYSE that he was not aware of any violation by us of the NYSE’s corporate governance listing standards.

Risk Management

      As a global investment bank and securities firm, risk is an inherent part of our businesses. Capital markets, by their nature, are prone to uncertainty and subject participants to a variety of risks. We have developed policies and procedures designed to identify, measure and monitor each of the risks involved in our trading, brokerage and investment banking activities on a global basis. Our principal risks are market, credit, legal and operational risks. Risk management is considered to be of paramount importance to our day-to-day operations. Consequently, we devote significant resources (including investments in personnel and technology) to the measurement, analysis and management of risk. Since 1997, we have retained the services of Ernst & Young LLP (“E&Y”) to perform internal audit and related procedures on an outsource basis for the benefit of our management and Audit Committee. In this capacity, E&Y coordinates the scope and results of internal audit procedures with our management and Audit Committee.

      We seek to reduce risk through the diversification of our businesses, counterparties and activities. We accomplish this objective by allocating the usage of capital to each of our businesses, establishing trading limits and setting credit limits for individual counterparties. We seek to achieve adequate returns from each of our businesses commensurate with the risks assumed. Nonetheless, the effectiveness of our policies and procedures for managing risk exposure can never be completely or accurately predicted or fully assured. For example, unexpectedly large or rapid movements or disruptions in one or more markets or other unforeseen

developments can have an adverse effect on our results of operations and financial condition. The consequences of these developments can include losses due to adverse changes in inventory values, decreases in the liquidity of trading positions, higher volatility in our earnings, increases in our credit exposure to customers and counterparties and increases in general systemic risk. If any of our strategies used to hedge or otherwise mitigate exposures to the various types of risks described above are not effective, we could incur losses.

Margin Risk

      Customers’ transactions are executed on either a cash or margin basis. In a margin transaction, we extend credit to the customer, collateralized by securities and cash in the customer’s account, for a portion of the purchase price, and receive income from interest charged on such extensions of credit. In permitting a customer to purchase securities on margin, we are 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.

      In addition to monitoring the creditworthiness of our customers, we also consider the trading liquidity and volatility of the securities we accept as collateral for margin loans. Trading liquidity and volatility may be dependent, in part, upon the market in 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 us in making this 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. We consider all of these factors at the time we agree to extend credit to customers and continue to review extensions of credit on an ongoing basis.

      The majority of our margin loans are made to United States citizens or to corporations which are domiciled in the United States. We may extend credit to investors or corporations who are citizens of foreign countries or who may reside outside the United States. We believe 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 we attempt to minimize the risk associated with the extension of credit in margin accounts, there is no assurance that the assumptions on which we base our decisions will be correct or that we are 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.

Underwriting Risk

      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 federal securities laws 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 our underwriting commitments may be limited by the requirement that our broker-dealers must, at all times, be in compliance with the Uniform Net Capital Rule 15c3-1 of the Securities and Exchange Commission (the “Commission”). We intend to continue to pursue opportunities for our corporate customers, which may require us to finance and/or underwrite the issuance of securities. Under circumstances where we are required to act as an underwriter or to take a position in the securities of our customers, we may assume greater risk than would normally be assumed in our normal trading activity.

      We maintain offices throughout the world including New York, Atlanta, Boston, Chicago, Dallas, Houston, Jersey City, London, Los Angeles, Nashville, New Orleans, Richmond, Silicon Valley, Paris, San Francisco, Short Hills, Stamford, Tokyo, Washington, D.C. and Zurich. In addition, we maintain back-up facilities with redundant technologies in Dallas. We lease all of our office space which management believes is adequate for our business. For information concerning leasehold improvements and rental expense, see notes 1, 5 and 11 of Notes to Consolidated Financial Statements.

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

      The NASD, SEC and Department of Justice are conducting investigations into possible violations of law and regulations relating to travel and entertainment expenses and the giving of gifts to employees of a mutual fund complex, as well as trading with and for the mutual fund complex, which involve Jefferies and other NASD member firms. We are cooperating fully with these investigations.

      None.

PART II

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

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

      There were approximately 597 holders of record of our common stock at March 1, 2005.

      In 1988, we instituted a policy of paying regular quarterly cash dividends. There are no restrictions on our present ability to pay dividends on our common stock, other than the applicable provisions of the Delaware General Corporation Law.

      During 2004, we increased our quarterly dividend to $0.10 per share. During the first quarter of 2005, we announced a 20% increase in our quarterly dividend to $0.12 per share.

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

Recent Unregistered Sales of Equity Securities

      On October 7, 2004, we issued 311,842 shares of common stock as partial consideration for the purchase of securities of Bonds Direct Securities LLC not already owned by us. The shares of common stock were issued in a transaction not involving a public offering and the transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. We may issue additional shares of common stock if additional consideration becomes payable by us pursuant to the earn-out provisions of the acquisition agreement.

      On February 1, 2005, we issued 456,442 shares of common stock to Randall & Dewey Partners, LP as partial consideration for the purchase of substantially all of its assets and business. The shares of common stock were issued in a transaction not involving a public offering and the transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

Issuer Purchases of Equity Securities

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, 2004, are derived from the consolidated financial statements of Jefferies Group, Inc. and its subsidiaries, which financial statements have been audited by KPMG LLP, our independent registered public accounting firm. The data should be read in connection with the consolidated financial statements including the related notes contained on pages 32 through 69. On July 14, 2003, we declared a 2-for-1 split of all outstanding shares of common stock, payable August 15, 2003 to stockholders of record as of July 31, 2003. The stock split was effected as a stock dividend of one share for each one share outstanding on the record date. All share, share price and per share information has been restated to retroactively reflect the effect of the two-for-one stock split. Certain reclassifications have been made to the prior period amounts to conform to the current period’s presentation.

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

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

Critical Accounting Policies

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

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

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

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

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

Subsequent Events

Acquisition of Randall & Dewey

      In February 2005 we acquired the assets and business of Randall & Dewey Partners, LP, a leading M&A advisor in the global oil and gas industries for approximately $42.4 million in stock and cash. There is also a five-year contingency for additional cash consideration, based on future revenues. Founded in 1989, Randall & Dewey serves an international client base that includes multinationals and major integrated enterprises, national oil companies and public and private independent exploration and production companies. With offices in Houston, London and Calgary, Randall & Dewey’s team of more than 100 M&A specialists, finance professionals, geoscientists and engineers is among the largest, most experienced advisory groups dedicated to the energy sector. The combined firm’s oil and gas business will operate initially as the Randall & Dewey Division of Jefferies & Company, Inc.

Formation of a Joint Venture with Peak6 Investments, LP

      In February 2005 we and PEAK6 Investments, L.P formed a new broker-dealer named Jefferies Options Execution LLC (“JOE”). Owned equally by us and PEAK6, JOE will be based in Chicago and began market making operations as a member of the Chicago Board Options Exchange in February 2005. We will account for JOE under the equity method of accounting. The establishment of JOE enables us to provide institutional clients with enhanced product coverage in equity options trading, with a particular emphasis in the segment of mid-cap companies that are the focus of our trading, research and investment banking efforts. To maximize the sales and distribution of this enhanced offering, we plan to expand our sales force to realize stronger product coverage in options trading.

Analysis of Financial Condition

      Total assets increased $2,832.3 million, or 26%, from $10,992.3 million at December 31, 2003 to $13,824.6 million at December 31, 2004. Securities borrowed increased $1,864.6 million, cash and securities segregated increased $371.1 million and securities owned and securities pledged increased $337.9 million. Total liabilities increased $2,631.6 million, or 26% from $10,153.9 million at December 31, 2003 to $12,785.5 million at December 31, 2004. Securities loaned increased $1,244.4 million, securities sold, not yet purchased increased $447.0 and long-term debt increased $345.9 million. The increases in securities borrowed and securities loaned are mostly related to our matched book business. Long-term debt increased due to our issuance of $350 million aggregate principal amount of unsecured 5¹/2% senior notes due March  15, 2016. The increases in securities owned and securities pledged and securities sold, not yet purchased mostly relate to Bonds Direct.

      A substantial portion of our total assets consists of highly liquid marketable securities and short-term receivables, arising principally from traditional securities brokerage and investment banking activity. The highly liquid nature of these assets provides us with flexibility in financing and managing our business.

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

      Tangible stockholders’ equity, pro forma book value per share, tangible book value per share and pro forma tangible book value per share are “non-GAAP financial measures.” A “non-GAAP financial measure” is a numerical measure of financial performance that includes adjustments to the most directly comparable measure calculated and presented in accordance with GAAP, or for which there is no specific GAAP guidance. We calculate tangible stockholders’ equity as stockholders’ equity less intangible assets. We calculate pro forma book value per share as stockholders’ equity plus the projected deferred tax benefit on the vested portion of restricted stock and RSUs divided by common shares outstanding adjusted for shares not yet

issued to the extent of the related expense amortization and shares issued to the extent the related expense has not been amortized. We calculate tangible book value per share by dividing tangible stockholders’ equity by common stock outstanding. We calculate pro forma tangible book value per share by dividing tangible stockholders’ equity plus the projected deferred tax benefit on the vested portion of restricted stock and RSUs by common shares outstanding adjusted for shares not yet issued to the extent of the related expense amortization and shares issued to the extent the related expense has not been amortized. We consider these ratios as meaningful measurements of our financial condition and believe they provide investors with additional metrics to comparatively assess the fair market value of our stock.

Revenues by Source

      Our earnings are subject to wide fluctuations since many factors over which we have little or no control, particularly the overall volume of trading and the volatility and general level of market prices, may significantly affect our operations. The following provides a summary of revenues by source for the past three years.

2004 Compared to 2003

Overview

      Revenues, net of interest expense, increased $228.6 million, or 28%, to $1,058.2 million, compared to $829.6 million for 2003. The increase was primarily due to an $123.2 million, or 54%, increase in investment banking, a $65.6 million, or 12%, increase in trading revenues (commissions and principal transactions), and a $48.4 million, or 148%, increase in asset management fees and investment income from managed funds

partially offset by a $11.2 million decrease in net interest revenues (interest income less interest expense) over last year.

      Our overall financial results continue to be highly and directly correlated to the diversification of our platform. While the equity markets were strong for most of fiscal 2004, we also achieved record revenues and earnings as a result of new product offerings, acquisitions of strategic investment banking businesses, strategic hirings and operational improvements.

      There were several factors which depressed investor activity during 2004. The anticipation of rising interest rates dampened the demand for fixed income products, and the Federal Reserve commenced a series of rate hikes during the year. The demanding regulatory environment remained in the spotlight and focused on the financial services industry, resulting in an increase in the cost of compliance and an impact on public trust and confidence. Finally, there was uncertainty over the Presidential election, the war in Iraq and the various economic policies that might be endorsed.

Equity Revenue

      Equity revenue is composed of commissions and principal transaction trading revenues, net of soft dollar expenses. Despite downturns in industry block trading volumes, which were down 10% for the NYSE trading and down nearly 14% in NASDAQ trading on a year-over-year basis, equity revenue for 2004 was $383.0 million, up 15% over last year. Equity revenue increased for the following reasons: (i) we engaged in several large block-trading opportunities generated from investment banking relationships that are not necessarily repeatable and (ii) we experienced continued growth in strategic efforts, including sector trading, private client services, and equity research sales.

International Revenue

      International revenue of $83.1 million was down slightly from last year. International revenue decreased due to weaker market conditions. Lower volumes in ADR and U.S.-based European equity trading were offset by gains in asset management in both London and Zurich and secondary trading volume in Japanese equities. Secondary convertible trading was flat for the year, a significant achievement in light of the difficult conditions caused by reduced volatility, and thus trading activity, in convertible securities during the year.

High Yield Revenue

      High yield revenue, not including new issuance revenues, was $44.9 million, up 11% over last year. The increase in high yield revenue was primarily a result of an increase in new issues and tight spreads versus comparable investment grade securities.

Convertible Revenue

      Convertible revenue, not including new issuance revenues, was $25.4 million, down 12% from last year. The decrease relates to a reduction in trading volume caused by overall reduced volatility in the convertible market.

Execution Revenue

      Execution revenue was nearly $32.5 million, up over 37% over last year. The increase in execution revenue was due to the expansion of direct access execution services to a limited number of institutional customers. For the full year 2004, we executed over 36 billion shares as compared to 37 billion for the comparable period in 2003.

Bonds Direct Revenue

      Bonds Direct revenue was $41.0 million, up 51% over last year. The growth was driven by the fixed income business acquired from Mellon Securities LLC in 2003 and the expansion of products offered,

including the trading of government agencies, treasuries and mortgage-backed securities on an agency basis. The client base grew from 1,000 institutions at December 31, 2003 to over 1,300 at December 31, 2004.

Investment Banking Revenue

      Capital markets revenues which consist primarily of debt, equity and convertible financing services were $171.7 million, an increase of 39% from the prior year. The increase reflected higher industry-wide new issuance activity compared to 2003. The higher volume of offerings in 2004 was across several sectors, including energy, consumer, gaming, financial services and aerospace and defense.

      Revenues from advisory activities were $181.2 million, an increase of 70% from 2003. The increase reflected a higher level of merger and acquisition activity generated primarily by Broadview in the information technology sector.

Asset Management Revenue

      Asset management revenue includes revenues we receive from management and performance fees from funds managed by us, revenues from asset management and performance fees we receive from third-party managed funds, and investment revenue from our investments in these funds. Some of our revenues from asset management and performance fees are derived from our own investments in these funds. Asset management revenues were $81.2 million for 2004, up 148% over last year. The increase in asset management revenue was a result of management and performance fees on a higher base of assets under management (up 102% versus the 2003 assets under management) and solid performance on our increased investments in managed funds (our investments in managed funds were 121% higher than last year).

Interest Income and Expense

      Interest income increased $32.0 million primarily as a result of increased stock lending activity, and interest expense increased by $43.0 million primarily as a result of increased stock borrowing activity and additional interest expense associated with the issuance of the $350 million in long-term debt in March of 2004.

Compensation and Benefits

      Compensation and benefits expense was $596 million and $475 million in 2004 and 2003, respectively. Compensation and benefits expense as a percentage of net revenues was 56% in 2004 and 57% in 2003. Compensation and benefits expense includes the cost of salaries, bonuses, the amortization of restricted stock awards and employee benefit plans. The decrease in compensation and benefits as a percentage of net revenues is attributable primarily to two factors:

Issuance of Stock-Based Compensation to Employees

      We use restricted stock and restricted stock unit awards as incentives for employees to focus on long-term value creation and heighten their sensitivity to overall costs and risks as well as to reduce employee turnover. We issue these awards in lieu of cash compensation. These awards may be granted to specific individuals in different amounts and subject to different terms and conditions, enabling us to tailor the arrangements to meet specific objectives. Restricted stock and restricted stock units are awarded to employees subject to risk of forfeiture. Typically the vesting of restricted stock and restricted stock units occurs over a prescribed period of time and requires continued service and employment by the recipient. Restricted stock and restricted stock unit awards are valued at the date of grant and are amortized over the vesting period which is typically three to five years.

      We also have a voluntary deferred compensation plan (“DCP”) whereby our employees may defer cash compensation and elect to receive an amount of deferred shares (“DCP deferred shares”) which are exchangeable into shares of our common stock at a future date. The DCP provides for DCP deferred shares to be credited to an employee based on a discount to the current market price of our common stock. In 2004, 2003 and 2002, the discounts were 10%, 10%, and 15%, respectively, to the then current market prices of our common stock. The compensation deferred is expensed when earned and the discount on the DCP deferred shares is generally expensed immediately.

      In addition, shares of our common stock may be purchased by employees pursuant to our Employee Stock Purchase Plan and Supplemental Stock Purchase Plan, and we may award shares of our common stock to our employees pursuant to our Employee Stock Ownership Plan (“ESOP”).

      The following table summarizes certain selected financial ratios related to the issuance of stock-based compensation to our employees (dollars in thousands):

Selected Financial Ratios

      The 19% increase in stock based compensation from 2003 to 2004 is consistent with the increase in average employees for the comparable period. Stock based compensation/net revenues, stock based compensation/compensation and benefits and average stock based compensation/employee are comparable for the periods ending 2004 and 2003.

      Additional information relating to issuances pursuant to our employee stock-based compensation plans is contained in Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) on page 38, Stock-Based Compensation included in note 1 of the Notes to the Consolidated Financial Statements, and Benefit Plans included in note 9 of the Notes to the Consolidated Financial Statements.

Non-Personnel Expenses

      Technology and communications increased $6.0 million, or 10%, mostly due to increased headcount and the addition of Broadview. Floor brokerage and clearing fees increased $4.7 million, or 10%, primarily due to increased trade volumes. Other expenses decreased $1.2 million, or 3%, mostly due to lower litigation related costs. Occupancy and equipment rental expense increased $7.0 million. Our occupancy costs in 2003 included a one-time $1.9 million expense attributable to the write-down of our San Francisco lease. The increase in 2004 versus 2003 was attributable to higher costs associated with the addition of Broadview combined with increased headcount throughout the firm. Business development expenses increased $8.5 million, or 32%, due to increased headcount, related travel and expanded marketing costs.

Earnings before Income Taxes and Minority Interest

      Earnings before income taxes and minority interest were up $82.5 million, or 57%, to $227.0 million, compared to $144.5 million for 2003. The effective tax rate was approximately 37% for both 2004 and 2003.

Minority Interest

      Minority interest increased $4.0 million to $11.7 million, compared to 2003. The increase in minority interest largely relates to the minority interest in RTS, JEOF, and ACM recorded in the first quarter of 2004. RTS and ACM were de-consolidated in the second quarter of 2004 due to changes in the capital structure of those two entities. We purchased the remainder of Bonds Direct’s minority interest in the fourth quarter of 2004 for approximately $20.6 million.

Earnings per Share

      Basic net earnings per share were $2.29 for 2004 on 57,453,000 shares compared to $1.58 in 2003 on 53,090,000 shares. Diluted net earnings per share were $2.06 for 2004 on 63,908,000 shares compared to $1.42 in 2003 on 59,266,000 shares.

2003 Compared to 2002

      Revenues, net of interest expense, were up $154.9 million, or 23%, to $829.6 million, compared to $674.7 million for 2002. The increase was due primarily to a $54.8 million, or 11%, increase in trading revenues (commissions and principal transactions), an $89.8 million, or 64%, increase in investment banking, a $13.1 million, or 67%, increase in asset management fees and investment income from managed funds, and a $3.8 million, or 58%, increase in other revenues, partially offset by a $6.6 million decrease in net interest income (interest revenues less interest expense). Trading revenues increased mostly due to other proprietary, Bonds Direct, High Yield and International, partially offset by reduced execution revenues. Investment banking revenues increased partly due to various high yield and related financings and advisory fees, including mergers and acquisition and restructuring. During 2003, we participated in 44 public and private debt financings, managed or co-managed 44 public and private equity financings, and the advisory and restructuring business was strong as we worked on many different assignments. During 2002, we participated in 20 public and private debt financings, managed or co-managed 25 public and private equity financings. Asset

management revenues increased primarily related to the international funds. Other revenues increase was substantially due to proceeds from a business interruption insurance settlement. Net interest income was down largely due to decreased interest income on proprietary securities positions.

      Total non-interest expenses were up $114.1 million, or 20%, to $685.1 million, compared to $571.0 million for 2002. Compensation and benefits increased $89.1 million, or 23%, in line with the increase in revenues. Our compensation/net revenues ratio was approximately 57% for both 2003 and 2002. This was possible even with increased headcount, due to the variable nature of our compensation structure. Floor brokerage and clearing fees decreased $6.5 million, or 12%, primarily due to increased trade volumes internally executed by Jefferies Execution. Other expenses increased $15.2 million, or 52%, mostly due to higher litigation, legal and business insurance costs. With more employees, more transactions, and more businesses, we do not expect legal fees to go down. In addition, with increased regulation and new corporate governance initiatives, the securities industry has seen an increase in legal costs, as the business becomes more complicated. Occupancy and equipment rental increased $6.4 million, or 24%, mostly due to office expansion and a $1.9 million charge associated with the sublease of space in the San Francisco office. Technology and communications increased $6.4 million, or 12%, largely due to new services related to program trading, increased headcount and certain one time technology related reversals in the prior year. Business development expenses increased $3.5 million, or 15%, largely due to more business related travel expenses.

      Earnings before income taxes and minority interest were up 39% to $144.5 million, compared to $103.7 million for 2002. The effective tax rate was approximately 37% for 2003 compared to 40% for 2002. The decrease in the tax rate was partially due to reductions in the effective state tax rates and partially due to the effect of increased minority interests in limited liability subsidiaries, which are not subject to tax. Net earnings were up $21.5 million, or 34%, to $84.1 million, compared to $62.6 million for 2002.

      Minority interest (approximately 41% of the earnings of Bonds Direct, 40% of the earnings of RTS, 72% of JEOF, and 50% of the earnings of ACM) was $7.6 million for 2003. The increase in minority interest expense was due to earnings in Bonds Direct, RTS, JEOF, and ACM.

      Basic net earnings per share were $1.58 in 2003 on 53,090,000 shares compared to $1.27 in 2002 on 49,232,000 shares. Diluted net earnings per share were $1.42 in 2003 on 59,266,000 shares compared to $1.14 in 2002 on 55,020,000 shares.

Liquidity and Capital Resources

      Cash or assets generally readily convertible into cash are as follows (in thousands of dollars):

      A substantial portion of our assets is liquid, consisting of cash or assets readily convertible into cash. The majority of securities positions (both long and short) in our trading accounts are readily marketable and actively traded. 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. Receivable from customers includes margin balances and amounts due on uncompleted transactions. Most of our receivables are secured by marketable securities.

      Our assets are funded by equity capital, senior debt, subordinated debt, securities loaned, customer free credit balances, bank loans and other payables. Bank loans represent temporary (usually overnight) secured and unsecured short-term borrowings, which are generally payable on demand. We have arrangements with banks for unsecured financing of $255 million. Secured bank loans are collateralized by a combination of customer, non-customer and firm securities. We have always been able to obtain necessary short-term borrowings in the past and believe that we will continue to be able to do so in the future. Additionally, we have $22.2 million in letters of credit outstanding, which are used in the normal course of business mostly to satisfy various collateral requirements in lieu of depositing cash or securities.

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

      As of December 31, 2004, Jefferies’ and Jefferies Execution’s net capital and excess net capital were as follows (in thousands of dollars):

      In March 2004, we issued $350 million aggregate principal amount of unsecured 5¹/2% senior notes due March 15, 2016, with a yield of 5.6%.

      During 2004, we purchased 1,889,165 shares of our common stock for $59.5 million. During 2003, we purchased 274,330 shares of our common stock for $6.6 million. We typically repurchase our common stock in open market transactions in accordance with Rule 10b-18 and on occasion, in transactions directly with stockholders. We believe that we have sufficient liquidity and capital resources to make these repurchases without any material adverse effect on us.

      As of December 31, 2004, we had outstanding guarantees of $24.0 million relating to undrawn bank credit obligations of two associated investment funds in which we have an interest. Also, we have guaranteed the performance of JIL and JFP to various banks and dealers, which provide clearing and credit services to JIL, JFP and to counterparties of JIL and JFP. In addition, as of December 31, 2004, we had commitments to invest up to $131.9 million in various investments, including $125.0 million related to Jefferies Babson Finance LLC.

      During 2003, approximately $3.6 million in zero coupon unsecured Euro denominated convertible loan notes were converted into 219,472 shares of our common stock. The conversion price for the notes was approximately 14.40 Euros (as of August 4, 2003, this was equivalent to approximately $16.36).

      On October 7, 2004, we announced that we had formed a joint venture with Babson Capital to offer senior loans to growing and mid-sized companies. Jefferies Babson Finance LLC will be capitalized over time with $250 million in equity commitments, provided equally by us and Babson Capital’s parent, MassMutual, and will be leveraged. We expect these commitments will be funded over a three year period beginning in 2005. Loans are expected to be originated primarily through our investment banking efforts, with Babson Capital providing primary credit analytics and portfolio management services.

      The tables below provide information about our commitments related to debt obligations, interest rate swaps, leases, guarantees, letters of credit and investments as of December 31, 2004. For debt obligations,

leases and investments, the table presents principal cash flows with expected maturity dates. For interest rate swaps, guarantees and letters of credit, the table presents notional amounts with expected maturity dates.

Off Balance Sheet Arrangements

      Information concerning our off balance sheet arrangements are included in note 12 of the Notes to the Consolidated Financial Statements. Such information is hereby incorporated by reference.

Effects of Changes in Foreign Currency Rates

      We maintain a foreign securities business in our foreign offices (London, Paris, Tokyo and Zurich) as well as in some of our domestic offices. Most of these activities are hedged by related foreign currency liabilities or by forward exchange contracts. However, we are 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 our Consolidated Statements of Earnings) or a foreign currency translation adjustment to the stockholders’ equity section of our Consolidated Statements of Financial Condition.

Effects of Inflation

      Based on today’s modest inflationary rates and because our assets are primarily monetary in nature, consisting of cash and cash equivalents, securities and receivables, we believe that our assets are not significantly affected by inflation. The rate of inflation, however, can affect various expenses, including employee compensation, communications and technology and occupancy, which may not be readily recoverable in charges for services provided by us.

Risk Management

      Risk is an inherent part of our business and activities. The extent to which we properly and effectively identify, assess, monitor and manage each of the various types of risk involved in our activities is critical to our financial soundness and profitability. We seek to identify, assess, monitor and manage the following principal risks involved in our business activities: market, credit, operational, legal and compliance and new business. Risk management is a multi-faceted process that requires communication, judgment and knowledge of financial products and markets. Senior management takes an active role in the risk management process and requires specific administrative and business functions to assist in the identification, assessment and control of various risks. Our risk management policies, procedures and methodologies are fluid in nature and are subject to ongoing review and modification.

      Market Risk. The potential for changes in the value of the financial instruments we own is referred to as market risk. Our market risk generally represents the risk of loss that may result from a change in the value of a financial instrument as a result of fluctuations in interest rates, credit spreads, equity prices and the

correlation among them, along with the level of volatility. Interest rate risks result primarily from exposure to changes in the yield curve, the volatility of interest rates, and credit spreads. Equity price risks result from exposure to changes in prices and volatilities of individual equities, equity baskets and equity indices. We make dealer markets in equity and debt securities. To facilitate customer order flow, we may be required to own equity and debt securities in our trading and inventory accounts. We attempt to hedge our exposure to market risk by managing our net long or short position. Due to imperfections in correlations, gains and losses can occur even for positions that are hedged. Position limits in trading and inventory accounts are established and monitored on an ongoing basis. Each day, consolidated position and exposure reports are prepared and distributed to various levels of management, which enable management to monitor inventory levels and results of the trading groups.

      Credit Risk. Credit risk represents the loss that we would incur if a client, counterparty or issuer of securities or other instruments held by us fails to perform its contractual obligations. We follow industry practices to reduce credit risk related to various investing and financing activities by obtaining and maintaining collateral. We adjust margin requirements if we believe the risk exposure is not appropriate based on market conditions.

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

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

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

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

      Legal and Compliance Risk. Legal and compliance risk includes the risk of non-compliance with applicable legal and regulatory requirements. We are subject to extensive regulation in the different jurisdictions in which we conduct our business. We have various procedures addressing issues such as

regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, anti-money laundering and record keeping.

      New Business Risk. New business risk refers to the risks of entering into a new line of business or offering a new product. By entering a new line of business or offering a new product, we may face risks that we are unaccustomed to dealing with and may increase the magnitude of the risks we currently face. We review proposals for new businesses and new products to determine if we are prepared to handle the additional or increased risks associated with entering into such activities.

      Other Risk. Other risks encountered by us include political, regulatory and tax risks. These risks reflect the potential impact that changes in local and international laws and tax statutes have on the economics and viability of current or future transactions. In an effort to mitigate these risks, we continuously review new and pending regulations and legislation and participate in various industry interest groups.

Recent Accounting Developments

      On October 13, 2004, the Financial Accounting Standards Board (“FASB”) ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on EITF issue 04-10, “Determining Whether to Aggregate Operating Segments that do not meet the Quantitative Thresholds.” The task force concluded that operating segments that do not meet the quantitative thresholds established by Statement of Financial Accounting Standard (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” can be aggregated only if aggregation is consistent with the objective and basic principles of SFAS No. 131, the segments have similar economic characteristics, and the segments share a majority of the aggregation criteria listed in SFAS No. 131. This EITF becomes applicable for fiscal years ending after October 13, 2004. This EITF did not have a material effect on our segment disclosures under SFAS No. 131.

      On March 9, 2004, the SEC issued Staff Accounting Bulletin (“SAB”) No. 105, “Application of Accounting Principles to Loan Commitments.” SAB No. 105 applies to those loan commitments that are accounted for as derivatives in accordance with paragraph three of SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” and contains specific guidance on measuring those loan commitments at fair value. Additionally, it requires registrants to disclose their accounting policies related to loan commitments accounted for as derivatives, including the methods and assumptions used to estimate the fair value of the commitments, as well as any associated hedging strategies. SAB No. 105 is effective for new loan commitments entered into subsequent to March 31, 2004. The adoption of SAB 105 did not have a material impact on our consolidated financial statements.

      On March 31, 2004, the FASB ratified the consensus reached by the EITF in issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” on the guidance to be used in determining when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This consensus ratified by the FASB on March 31, 2004 was effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. However, the guidance contained in paragraphs 10 - 20 of EITF 03-1, related to determining whether an impairment is other-than-temporary and measuring the related impairment loss, has been delayed by FASB Staff Position (“FSP”) EITF Issue 03-1-1, “Effective Date of Paragraphs 10 - 20 of EITF Issue No. 03-1.” We are currently evaluating the impact of adopting the provisions of paragraphs 10 - 20 of this EITF on our consolidated financial statements.

      On March 31, 2004 the FASB ratified the consensus reached by the Emerging Issues Task Force on EITF Issue 03-16, “Accounting for Investments in Limited Liability Companies.” This EITF issue requires “that an investment in a Limited Liability Company (“LLC”) that maintains a “specific ownership account” for each investor — similar to a partnership capital account structure — should be viewed as similar to an investment in a limited partnership for purposes of determining whether a noncontrolling investment in an LLC should be accounted for using the cost method or the equity method.” These requirements are applicable for reporting periods beginning after June 15, 2004. The adoption of EITF 03-16 did not have a material impact on our consolidated financial statements.

      In December 2003, the SEC issued SAB No. 104, “Revenue Recognition.” SAB No. 104 revises or rescinds portions of the interpretative guidance included in SAB No. 101, “Revenue Recognition in Financial Statements,” in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. SAB No. 101, which was issued in December 1999, provides guidance on the recognition, presentation, and disclosure of revenues in the financial statements of SEC registrants. The provisions of SAB No. 104 did not have a material impact on our consolidated financial statements.

      In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. The statement specifies how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement was effective for financial instruments entered into or modified after May 31, 2003 and was effective for pre-existing instruments as of our fourth quarter of 2003. However, the effective date of certain provisions of SFAS No. 150 for certain mandatorily redeemable financial instruments has been deferred by FSP FAS 150-3. Under this FSP, certain mandatorily redeemable shares are subject to the provisions of SFAS No. 150 for the first fiscal period beginning after December 15, 2004. Other mandatorily redeemable shares are deferred indefinitely but may be subject to classification or disclosure provisions of the Statement. Adoption of the applicable provisions of SFAS No. 150 did not have a material effect on our financial condition or results of operations. Additionally, we do not expect that the deferred provisions will have a material effect on our financial condition or results of operations.

      In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which provides guidance on the consolidation of certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. Such entities are referred to as variable interest entities (“VIEs”). FIN 46 requires that a VIE be consolidated by a business enterprise if that enterprise is deemed to be the primary beneficiary of the VIE. FIN 46 was effective January 31, 2003 for us with respect to interest in VIEs that were obtained after that date. With respect to interests in VIEs existing prior to February 1, 2003, the FASB issued Interpretation No. 46 (revised December 2003) (“FIN 46R”), which provides technical corrections and extended the effective date of FIN 46 to the first reporting period that ended after March 15, 2004. We fully adopted FIN 46R in the second quarter of the current year. The provisions of FIN 46R did not have a material impact on our consolidated financial statements.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share Based Payments”, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for us in the first interim or annual reporting period beginning after June 15, 2005, which is the third quarter of fiscal 2005. We have assessed the impact on adopting this new standard and do not believe that the adoption of SFAS No 123(R) will have a material impact on our consolidated financial statements.

Factors Affecting Our Business

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

Changing conditions in financial markets and the economy could result in decreased revenues.

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

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

      A significant portion of our revenues is derived from proprietary trading in which we act as principal. Although the majority of our trading is “riskless principal” in nature, we may incur trading losses relating to the purchase, sale or short sale of high yield, international, convertible, and equity securities and futures and commodities for our own account and from other program or proprietary trading. Additionally, we have made substantial investments of our capital in debt and equity securities, including investments managed by us and investments managed by third parties. In any period, we may experience losses as a result of price declines, lack of trading volume, and illiquidity. From time to time, we may engage in a large block trade in a single security or maintain large position concentrations in a single security, securities of a single issuer, or securities of issuers engaged in a specific industry. Any downward price movement in these securities could result in a reduction of our revenues and profits. In addition, we may engage in hedging transactions that if not successful, could result in losses.

Increased competition may adversely affect our revenues and profitability.

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

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

      Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies, and the transactions we process have become increasingly complex. If any of our financial, accounting or other data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes, people

or systems, we could suffer an impairment to our liquidity, financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our buildings. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses.

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

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

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

Asset Management revenue is subject to variability.

      Asset management revenue includes revenues we receive from management and performance fees from funds managed by us, revenues from asset management and performance fees we receive from third-party managed funds, and investment income from our investments in these funds. Some of our revenues from asset management and performance fees are derived from our own investments in these funds. We experience significant fluctuations in our quarterly operating results due to the nature of our asset management business and therefore may fail to meet revenue expectations. Asset management revenue may not be sustainable as it is highly dependent on performance that is likely to vary.

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

      We expect the growth of our business to come primarily from internal expansion and through acquisitions and strategic partnering. As we expand our business, there can be no assurance that our financial controls, the level and knowledge of our personnel, our operational abilities, our legal and compliance controls and our other corporate support systems will be adequate to manage our business and our growth. The ineffectiveness of any of these controls or systems could adversely affect our business and prospects. In addition, as we acquire new businesses, we face numerous risks and uncertainties integrating their controls and systems into ours, including financial controls, accounting and data processing systems, management controls and other operations. A failure to integrate these systems and controls, and even an inefficient integration of these systems and controls, could adversely affect our business and prospects.

Our business depends on our ability to maintain adequate levels of personnel.

      We have made substantial increases in the number of our personnel. If a significant number of our key personnel leave, or if our business volume increases significantly over current volume, we could be compelled to hire additional personnel. At that time, there could be a shortage of qualified and, in some cases, licensed personnel whom we could hire. This could hinder our ability to expand or cause a backlog in our ability to

conduct our business, including the handling of investment banking transactions and the processing of brokerage orders, all of which could harm our business, financial condition and operating results.

Our business is substantially dependent on our Chief Executive Officer.

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

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

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

Legal liability may harm our business.

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

      We use a number of quantitative tools to manage our exposure to market risk. These tools include:

Value-at-Risk

      In general, value-at-risk measures potential loss of trading revenues at a given confidence level over a specified time horizon. Value-at-risk over a one-day holding period measured at a 95% confidence level implies the potential loss of daily trading revenue is expected to be at least as large as the value-at-risk amount on one out of every 20 trading days.

      Value-at-risk is one measurement of potential loss in trading revenues that may result from adverse market movements over a specified period of time with a selected likelihood of occurrence. As with all measures of value-at-risk, our estimate has substantial limitations due to our reliance on historical performance, which is not necessarily a predictor of the future. Consequently, this value-at-risk estimate is only one of a number of tools we use in our daily risk management activities.

      The VaR data presented below has been scaled down using a one-day holding period. The one-day VaR data below shows the market risk exposures of our trading positions as of December 31, 2004 and 2003. Due to the benefit of diversification, total VaR is less than the sum of the individual components.

Market risk exposures in trading portfolios

      The comparison of daily revenue fluctuations with the daily VaR estimate is the primary method used to test the accuracy of the VaR model. Backtesting is performed at various levels of the trading portfolio, from the holding company level down to specific business lines. A backtesting exception occurs when the daily loss exceeds the daily VaR estimate. Results of the process at the aggregate level demonstrated three exceptions when comparing the 95% one-day VaR with the backtesting profit and loss in 2004. An accurate model for the one-day, 95% VaR should have between zero and twelve backtesting exceptions on an annual basis. Backtesting profit and loss is a subset of actual trading revenue and includes only the profit and loss effects relevant to the VaR model, excluding fees, commissions, certain provisions and any trading subsequent to the previous night’s positions. It is appropriate to compare this measure with VaR for backtesting purposes because VaR assesses only the potential change in position value due to overnight movements in financial market variables such as prices, interest rates and volatilities. The graph below illustrates the relationship between daily backtesting profit and loss and daily VaR for us in 2004.

RELATIONSHIP BETWEEN BACKTESTING P&L AND VAR ESTIMATE DURING 2004

      Trading revenue used in the histogram below entitled “2004 vs. 2003 Distribution of Daily Trading Revenue” is the actual daily trading revenue, which includes not only backtesting profit and loss but also fees, commissions, certain provisions and the profit and loss effects associated with any trading subsequent to the previous night’s positions. The histogram below shows the distribution of daily trading revenue for substantially all of our trading activities.

2004 vs 2003 DISTRIBUTION OF DAILY TRADING REVENUE

$ millions

Maturity Data

      At December 31, 2004, we had $775.0 million aggregate principal amount of senior notes outstanding, with fixed interest rates. We entered into a fair value hedge with no ineffectiveness using interest rate swaps in order to convert $200.0 million aggregate principal amount of unsecured 7³/4% senior notes due March 15, 2012 into floating rates based upon LIBOR. The effective interest rate on the $200.0 million aggregate principal amount of unsecured 7³/4% senior notes, after giving effect to the swaps, is 4.65%. The fair value of the mark to market of the swaps was positive $22.2 million as of December 31, 2004, which was recorded as an increase in the book value of the debt and an increase in other assets.

      The table below provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, exchange rates and price movements. For debt obligations, the table presents principal cash flows with expected maturity dates. For interest rate swaps, foreign exchange forward contracts, futures contracts, commodities related swaps and option contracts, the table presents notional amounts with expected maturity dates.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO FINANCIAL STATEMENTS

Management’s Report on Internal Control over Financial Reporting

      Management of Jefferies Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      Management evaluated the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. As a result of this assessment and based on the criteria in this framework, management has concluded that, as of December 31, 2004, the Company’s internal control over financial reporting was effective.

      The Company’s independent registered public accounting firm, KPMG LLP, audited management’s assessment of the Company’s internal control over financial reporting. Their opinion on management’s assessment and their opinions on the effectiveness of the Company’s internal control over financial reporting and on the Company’s financial statements appear in this annual report.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
     Jefferies Group, Inc.:

      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Jefferies Group, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Jefferies Group, Inc. management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that Jefferies Group, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated in all material respects, based on the COSO criteria. Also, in our opinion, Jefferies Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Jefferies Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of earnings, changes in stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated March 29, 2005 expressed an unqualified opinion on those consolidated financial statements.

Los Angeles, California

March 29, 2005

Report of Independent Registered Public Accounting Firm

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 (the “Company”) as of December 31, 2004 and 2003 and the related consolidated statements of earnings, changes in stockholders’ equity and comprehensive income (loss) and cash flows for each of the years in the three-year period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Jefferies Group, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 29, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

Los Angeles, California

March 29, 2005

JEFFERIES GROUP, INC.

AND SUBSIDIARIES

Consolidated Statements of Financial Condition

December 31, 2004 and 2003

(Dollars in thousands, except per share amounts)

See accompanying notes to consolidated financial statements.

JEFFERIES GROUP, INC.

AND SUBSIDIARIES

Consolidated Statements of Earnings

For each of the years in the three-year period ended December 31, 2004

(In thousands, except per share amounts)

See accompanying notes to consolidated financial statements.

JEFFERIES GROUP, INC.

AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss)

For each of the years in the three-year period ended December 31, 2004

(Dollars in thousands, except per share amounts)