UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

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

Commission file number 1-14947

JEFFERIES GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware		95-4719745
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
520 Madison Avenue, 10th Floor, New York, New York		10022
(Address of principal executive offices)		(Zip Code)

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

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

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

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

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

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

Indicate the number of shares outstanding of the registrant’s class of common stock, as of the latest practicable date. 172,553,249 shares as of the close of business August 2, 2009.

 

 

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

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited)-June 30, 2009 and December 31, 2008			3
Consolidated Statements of Earnings (unaudited)-Three Months and Six Months Ended June 30, 2009 and 2008			5
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)-Six Months Ended June 30, 2009 and Year Ended December 31, 2008			6
Consolidated Statements of Comprehensive Income (unaudited)-Three Months and Six Months Ended June 30, 2009 and 2008			7
Consolidated Statements of Cash Flows (unaudited)-Six Months Ended June 30, 2009 and 2008			8
Notes to Consolidated Financial Statements (unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			50
Item 3. Quantitative and Qualitative Disclosures About Market Risk			80
Item 4. Controls and Procedures			83
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			83
Item 1A. Risk Factors			83
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			84
Item 4. Submission of Matters to a Vote of Security Holders			84
Item 6. Exhibits			85
Signature			86
EX-31.1
EX-31.2
EX-32

PART I. FINANCIAL INFORMATION

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

		June 30,				December 31,
		2009				2008
ASSETS
Cash and cash equivalents		$	964,025			$	1,294,329
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations			1,050,331				1,151,522
Financial instruments owned, at fair value, including securities pledged to creditors of $491,341 and $361,765 in 2009 and 2008, respectively:
Corporate equity securities			1,163,078				945,747
Corporate debt securities			2,115,462				1,851,216
Government, federal agency and other sovereign obligations			1,613,552				447,233
Mortgage- and asset-backed securities			2,721,545				1,035,996
Loans and other receivables			446,733				34,407
Derivatives			220,043				298,144
Investments			73,441				75,059
Total financial instruments owned, at fair vlaue			8,353,854				4,687,802
Investments in managed funds			109,599				100,245
Other investments			162,611				140,012
Securities borrowed			8,874,080				9,011,903
Securities purchased under agreements to resell			3,308,548				1,247,002
Receivable from brokers, dealers and clearing organizations			1,475,719				710,199
Receivable from customers			922,434				499,315
Premises and equipment			138,802				139,390
Goodwill			355,058				358,837
Other assets			548,449				638,129
Total assets		$	26,263,510			$	19,978,685

See accompanying unaudited notes to consolidated financial statements.

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

		June 30,				December 31,
		2009				2008
LIABILITIES AND STOCKHOLDERS’ EQUITY
Financial instruments sold, not yet purchased, at fair value:
Corporate equity securities		$	1,308,676			$	739,166
Corporate debt securities			1,819,590				1,578,395
Government, federal agency and other sovereign obligations			1,240,843				211,045
Derivatives			188,019				220,738
Loans			229,438				—
Other			4,288				223
Total financial instruments sold, not yet purchased, at fair value			4,790,854				2,749,567
Securities loaned			3,676,032				3,259,575
Securities sold under agreements to repurchase			9,152,236				6,727,390
Payable to brokers, dealers and clearing organizations			356,978				291,291
Payable to customers			2,727,812				1,736,971
Accrued expenses and other liabilities			576,192				634,618
			21,280,104				15,399,412
Long-term debt			2,137,483				1,764,274
Mandatorily redeemable convertible preferred stock			125,000				125,000
Mandatorily redeemable preferred interest of consolidated subsidiaries			287,947				280,923
Total liabilities			23,830,534				17,569,609
STOCKHOLDERS’ EQUITY
Common stock, $.0001 par value. Authorized 500,000,000 shares; issued 185,996,760 shares in 2009 and 171,167,666 shares in 2008			19				17
Additional paid-in capital			1,854,085				1,870,120
Retained earnings			518,682				418,445
Less:
Treasury stock, at cost, 14,069,585 shares in 2009 and 7,951,628 shares in 2008			(194,240	)			(115,190	)
Accumulated other comprehensive loss:
Currency translation adjustments			(30,191	)			(43,675	)
Additional minimum pension liability			(8,446	)			(8,446	)
Total accumulated other comprehensive loss			(38,637	)			(52,121	)
Total common stockholders’ equity			2,139,909				2,121,271
Noncontrolling interests			293,067				287,805
Total stockholders’ equity			2,432,976				2,409,076
Total liabilities and stockholders’ equity		$	26,263,510			$	19,978,685

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, except per share amounts)

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2009				2008				2009				2008
Revenues:
Commissions		$	102,527			$	102,521			$	204,378			$	216,172
Principal transactions			283,175				141,679				435,520				141,733
Investment banking			120,831				109,372				157,917				208,579
Asset management fees and investment income (loss) from managed funds			556				13,479				519				(14,317	)
Interest			150,599				210,540				252,686				415,431
Other			9,888				6,434				22,460				12,914
Total revenues			667,576				584,025				1,073,480				980,512
Interest expense			77,383				191,943				141,330				387,234
Net revenues			590,193				392,082				932,150				593,278
Interest on mandatorily redeemable preferred interest of consolidated subsidiaries			12,327				9,002				7,024				(11,949	)
Net revenues, less mandatorily redeemable preferred interest			577,866				383,080				925,126				605,227
Non-interest expenses:
Compensation and benefits			348,207				277,514				561,588				537,465
Floor brokerage and clearing fees			22,280				18,588				37,060				31,536
Technology and communications			37,582				29,478				68,367				60,394
Occupancy and equipment rental			17,751				20,436				34,047				37,693
Business development			9,535				10,978				18,980				23,878
Other			20,183				20,617				33,574				41,098
Total non-interest expenses			455,538				377,611				753,616				732,064
Earnings (loss) before income taxes			122,328				5,469				171,510				(126,837	)
Income tax expense (benefit)			48,333				4,016				65,089				(53,876	)
Net earnings (loss)			73,995				1,453				106,421				(72,961	)
Net earnings (loss) to noncontrolling interests			12,095				5,838				6,184				(8,039	)
Net earnings (loss) to common shareholders		$	61,900			$	(4,385	)		$	100,237			$	(64,922	)
Earnings (loss) per common share:
Basic		$	0.31			$	(0.05	)		$	0.49			$	(0.47	)
Diluted		$	0.30			$	(0.05	)		$	0.49			$	(0.47	)
Weighted average common shares:
Basic			201,902				165,694				202,485				153,739
Diluted			206,027				165,694				202,505				153,739

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts)

		Six Months Ended				Year Ended
		June 30, 2009				December 31, 2008
Common stock, par value $0.0001 per share
Balance, beginning of period		$	17			$	16
Issued			2				1
Balance, end of period			19				17
Additional paid-in capital
Balance, beginning of period			1,870,120				1,115,011
Benefit plan share activity (1)			12,170				52,912
Share-based expense, net of forfeitures and clawbacks			(7,764	)			561,661
Proceeds from exercise of stock options			69				840
Acquisitions and contingent consideration			(2,710	)			5,647
Tax (deficiency) benefit for issuance of share-based awards			(17,800	)			6,233
Issuance of treasury stock			—				90,160
Dividend equivalents on restricted stock units			—				37,656
Balance, end of period			1,854,085				1,870,120
Retained earnings
Balance, beginning of period			418,445				1,031,764
Net earnings (loss) to common shareholders			100,237				(536,128	)
Dividends			—				(76,477	)
Acquisition adjustments			—				(714	)
Balance, end of period			518,682				418,445
Treasury stock, at cost
Balance, beginning of period			(115,190	)			(394,406	)
Purchases			(77,016	)			(21,765	)
Returns / forfeitures			(4,744	)			(42,438	)
Issued			2,710				343,419
Balance, end of period			(194,240	)			(115,190	)
Accumulated other comprehensive (loss) income
Balance, beginning of period			(52,121	)			9,159
Currency adjustment, net of tax			13,484				(54,661	)
Pension adjustment, net of tax			—				(6,619	)
Balance, end of period			(38,637	)			(52,121	)
Total common stockholders’ equity			2,139,909				2,121,271
Noncontrolling interests
Balance, beginning of period			287,805				249,380
Net earnings (loss) to noncontrolling interests			6,184				(53,884	)
Contributions			410				99,725
Distributions			(1,332	)			(11,553	)
Consolidation of asset management entity			—				4,137
Balance, end of period			293,067				287,805
Total stockholders’ equity		$	2,432,976			$	2,409,076

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)

		Three Months Ended								Six Months Ended
		June 30, 2009				June 30, 2008				June 30, 2009				June 30, 2008
Net earnings (loss) to common shareholders		$	61,900			$	(4,385	)		$	100,237			$	(64,922	)
Other comprehensive income (loss):
Currency translation adjustments			16,979				(325	)			13,484				1,925
Total other comprehensive income (loss) (1)			16,979				(325	)			13,484				1,925
Comprehensive income (loss)		$	78,879			$	(4,710	)		$	113,721			$	(62,997	)

See accompanying unaudited notes to consolidated financial statements.

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

		Six Months Ended
		June 30, 2009				June 30, 2008
Cash flows from operating activities:
Net earnings (loss)		$	106,421			$	(72,961	)
Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization			15,635				16,270
Gain on repurchase of long-term debt			(7,673	)			—
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries			7,024				(11,949	)
Accruals related to various benefit plans, stock issuances, net of forfeitures			(336	)			110,911
Decrease (increase) in cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations			101,278				(677,434	)
Decrease (increase) in receivables:
Securities borrowed			134,271				6,690,869
Brokers, dealers and clearing organizations			(744,020	)			(49,082	)
Customers			(403,623	)			(27,534	)
(Increase) decrease in financial instruments owned			(3,629,761	)			72,716
Increase in other investments			(22,432	)			(25,650	)
(Increase) decrease in investments in managed funds			(9,354	)			136,008
Increase in securities purchased under agreements to resell			(2,061,546	)			(1,289,270	)
Decrease (increase) in other assets			100,269				(57,886	)
Increase (decrease) in payables:
Securities loaned			416,457				(1,983,765	)
Brokers, dealers and clearing organizations			62,913				(51,725	)
Customers			973,855				381,374
Increase in financial instruments sold, not yet purchased			2,040,203				554,413
Increase (decrease) in securities sold under agreements to repurchase			2,424,846				(3,556,390	)
Decrease in accrued expenses and other liabilities			(73,216	)			(52,157	)
Net cash (used in) provided by operating activities			(568,789	)			106,758
Cash flows from investing activities:
Purchase of premises and equipment			(13,208	)			(21,816	)
Business acquisition			(38,760	)			—
Cash paid for contingent consideration			(22,829	)			(33,995	)
Net cash used in investing activities			(74,797	)			(55,811	)

Continued on next page.

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

		Six Months Ended
		June 30, 2009				June 30, 2008
Cash flows from financing activities:
Excess tax benefits from the issuance of share-based awards		$	6,918			$	8,173
Net proceeds from (payments on):
Equity financing			—				433,579
Issuance of senior notes, net of issuance costs			392,744				—
Repurchase of long-term debt			(12,796	)			—
Bank loans			—				(264,268	)
Mandatorily redeemable preferred interest of consolidated subsidiaries			—				(4,257	)
Noncontrolling interest			(922	)			(1,453	)
Repurchase of treasury stock			(77,016	)			(9,660	)
Dividends			—				(38,834	)
Exercise of stock options, not including tax benefits			69				679
Net cash provided by financing activities			308,997				123,959
Effect of foreign currency translation on cash and cash equivalents			4,285				418
Net (decrease) increase in cash and cash equivalents			(330,304	)			175,324
Cash and cash equivalents at beginning of year			1,294,329				897,872
Cash and cash equivalents at end of period		$	964,025			$	1,073,196
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest		$	140,577			$	394,688
Income taxes, net			(79,152	)			(28,733	)
Acquisitions:
Fair value of assets acquired, including goodwill			53,104
Liabilities assumed			14,344
Cash paid for acquisition			38,760

See accompanying unaudited notes to consolidated financial statements.

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

Index

		Page
Note 1. Organization and Summary of Significant Accounting Policies			11
Note 2. Cash, Cash Equivalents and Short-Term Investments			21
Note 3. Financial Instruments			21
Note 4. Derivative Financial Instruments			28
Note 5. Securitization Activities and Variable Interest Entities			32
Note 6. Acquisitions			35
Note 7. Short-Term Borrowings			36
Note 8. Long-Term Debt			37
Note 9. Mandatorily Redeemable Convertible Preferred Stock			37
Note 10. Noncontrolling Interest and Mandatorily Redeemable Preferred Interests of Consolidated Subsidiaries			37
Note 11. Benefit Plans			39
Note 12. Compensation Plans			39
Note 13. Income Taxes			43
Note 14. Earnings Per Share			44
Note 15. Segment Reporting			45
Note 16. Commitments, Contingencies and Guarantees			46
Note 17. Net Capital Requirements			48
Note 18. Quarterly Dividends			49
Note 19. Related Party Transactions			49
Note 20. Subsequent Events			49

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

Note 1. Organization and Summary of Significant Accounting Policies

Organization

The accompanying unaudited consolidated financial statements include the accounts of Jefferies Group, Inc. and all its subsidiaries (together, “we” or “us”), including Jefferies & Company, Inc. (“Jefferies”), Jefferies Execution Services, Inc., (“Jefferies Execution”), Jefferies International Limited, Jefferies Asset Management, LLC, Jefferies Financial Products, LLC and all other entities in which we have a controlling financial interest or are the “primary beneficiary, “ including Jefferies High Yield Holdings, LLC (“JHYH”), Jefferies Special Opportunities Partners, LLC (“JSOP”) and Jefferies Employees Special Opportunities Partners, LLC (“JESOP”). The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S generally accepted accounting principles for complete financial statements. All adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. These unaudited consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008.

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

Reclassifications

Certain reclassifications have been made to previously reported balances to conform to the current presentation.

We adopted FASB 160, Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51 (“FASB 160”), on January 1, 2009. Prior to the adoption of FASB 160, we reported minority interest within liabilities on our Consolidated Statements of Financial Condition and in earnings (loss) of consolidated subsidiaries in the determination of net earnings (loss). We now present noncontrolling interests within stockholders’ equity, separately from our own equity. We have recast certain prior financial statements to retrospectively reflect the adoption of FASB 160. See Note 10 for further discussion on the adoption of FASB 160.

In addition, these recast financial statements reflect the retrospective application of FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”), adopted on January 1, 2009. Under FSP EITF 03-6-1, net earnings are allocated among common shareholders and participating securities based on their right to share in earnings. The adoption of FSP EITF 03-6-1 reduced previously reported Diluted EPS. See Note 14 to these financial statements for an explanation of the calculation of earnings per share under FSP EITF 03-6-1.

Summary of Significant Accounting Policies

Principles of Consolidation

Our policy is to consolidate all entities in which we own more than 50% of the outstanding voting stock and have control. In addition, in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), Consolidation of Variable Interest Entities (“FIN 46(R)”), as revised, we consolidate entities which lack characteristics of an operating entity or business for which we are the primary beneficiary. Under FIN 46(R), the primary beneficiary is the party that absorbs a majority of the entity’s expected losses, receives a majority of its

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

expected residual returns, or both, as a result of holding variable interests, direct or implied. In situations where we have significant influence but not control of an entity that does not qualify as a variable interest entity, we apply the equity method of accounting or fair value accounting. We also have formed nonconsolidated investment vehicles with third-party investors that are typically organized as partnerships or limited liability companies. We act as general partner or managing member for these investment vehicles and have generally provided the third-party investors with termination or “kick-out” rights as defined by Emerging Issues Task Force (“EITF”) EITF Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.

All material intercompany accounts and transactions are eliminated in consolidation.

Revenue Recognition

Commissions. All customer securities transactions are reported on the Consolidated Statements of Financial Condition on a settlement date basis with related income reported on a trade-date basis. Under clearing agreements, we clear trades for unaffiliated correspondent brokers and retain a portion of commissions as a fee for our services. Correspondent clearing revenues are included in other revenue. We permit institutional customers to allocate a portion of their gross commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. Soft dollar expenses amounted to $8.0 million and $10.7 million for the three months ended June 30, 2009 and 2008, respectively, and $15.1 million and $20.3 million for the six months ended June 30, 2009 and 2008, respectively. We account for the cost of these arrangements on an accrual basis. Our accounting policy for commission revenues incorporates the guidance contained in Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenues Gross versus Net, because we are not the primary obligor of such arrangements, and accordingly, expenses relating to soft dollars are netted against the commission revenues.

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

Investment Banking. Underwriting revenues and fees from mergers and acquisitions, restructuring and other investment banking advisory assignments are recorded when the services related to the underlying transaction are completed under the terms of the assignment or engagement. Expenses associated with such assignments are deferred until reimbursed by the client, the related revenue is recognized or the engagement is otherwise concluded. Expenses are recorded net of client reimbursements. Revenues are presented net of related unreimbursed expenses. Unreimbursed expenses with no related revenues are included in business development in the Consolidated Statements of Earnings. Reimbursed expenses totaled approximately $1.9 million and $4.3 million for the three months ended June 30, 2009 and 2008, respectively, and approximately $2.7 million and $7.6 million for the six months ended June 30, 2009 and 2008, respectively.

Asset Management Fees and Investment Income (Loss) From Managed Funds. Asset management fees and investment income (loss) from managed funds include revenues we receive from management, administrative and performance fees from funds managed by us, revenues from management and performance fees we receive from third-party managed funds and investment income (loss) from our investments in these funds. We receive fees in connection with management and investment advisory services performed for various funds and managed accounts. These fees are based on the value of assets under management and may include performance fees based upon the performance of the funds. Management and administrative fees are generally recognized over the period that the related service is provided based upon the beginning or ending net asset value of the relevant period. Generally, performance fees are earned when the return on assets under management exceeds certain benchmark returns, “high-

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

water marks” or other performance targets. Performance fees are accrued on a monthly basis and are not subject to adjustment once the measurement period ends (annually) and performance fees have been realized.

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

Cash Equivalents

Cash equivalents include highly liquid investments not held for resale with original maturities of three months or less.

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

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

Foreign Currency Translation

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

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

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

Fair Value Hierarchy

FASB 157, Fair Value Measurements (“FASB 157”), defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and enhances disclosure requirements for fair value measurements. FASB 157 maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or

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liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the transparency of inputs as follows:

Level 1:		Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2:		Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level 3:		Instruments that have little to no pricing observability as of the reported date. These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Valuation Process for Financial Instruments

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

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

Cash products — Where quoted prices are available in an active market, cash products are classified in Level 1 of the fair value hierarchy and valued based on the quoted price, primarily quoted exchange prices. Level 1 cash products are highly liquid instruments and include listed equity and money market securities and G-7 government and agency securities. Cash products classified within Level 2 of the fair value hierarchy are based primarily on broker quotations, pricing service data from external providers and prices for actual executed market transactions. If quoted market prices are not available for the specific security then fair values are estimated by using pricing models, quoted prices of cash products with similar characteristics or discounted cash flow models. Examples of cash products classified within Level 2 of the fair value hierarchy are corporate, convertible and municipal bonds, agency and non-agency mortgage-backed securities and to-be-announced (“TBA”) securities. If there is limited transaction activity or less transparency to observe market-based inputs to valuation models, cash products presented at fair value are

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classified in Level 3 of the fair value hierarchy. Fair values of cash products classified in Level 3 are generally based on an assessment of each underlying investment, cash flow models, market data of any recent comparable company transactions and trading multiples of companies considered comparable to the instrument being valued and incorporate assumptions regarding market outlook, among other factors. Cash products in this category include illiquid equity securities, equity interests in private companies, auction rate securities, commercial loans, private equity and hedge fund investments, distressed debt instruments and Alt-A and subprime non-agency mortgage-backed securities as little external price information is currently available for these products. For distressed debt instruments, commercial loans and loan commitments, loss assumptions must be made based on default scenarios and market liquidity and prepayment assumptions must be made for mortgage-backed securities.

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

Investments in Managed Funds

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

Other Investments

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

Receivable from and Payable to Customers

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

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Securities Borrowed and Securities Loaned

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

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

Securities purchased under agreements to resell and securities sold under agreements to repurchase (collectively “repos”) are accounted for as collateralized financing transactions and are recorded at their contracted repurchase amount. We earn net interest revenues from this activity which is reflected in our Consolidated Statements of Earnings.

We monitor the fair value of the underlying securities daily versus the related receivable or payable balances. Should the fair value of the underlying securities decline or increase, additional collateral is requested or excess collateral is returned, as appropriate.

We carry repos on a net basis when permitted under the provisions of FASB Interpretation No. 41, Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements (“FIN 41”).

Premises and Equipment

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

Goodwill

At least annually, and more frequently if warranted, we assess whether goodwill has been impaired by comparing the estimated fair value, calculated based on earnings and book value multiples, of each reporting unit with its estimated net book value, by estimating the amount of stockholders’ equity required to support each reporting unit. Periodically estimating the fair value of a reporting unit requires significant judgment and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. We have completed our annual assessment of goodwill as of September 30, 2008 and no impairment was identified. We updated our assessment of goodwill for impairment as of December 31, 2008 and no impairment was identified. We do not believe there have been any events or changes in circumstances since our last assessment warranting an update of our evaluation.

Income Taxes

We file a consolidated U.S. federal income tax return, which includes all of our qualifying subsidiaries. We also are subject to income tax in various states and municipalities and those foreign jurisdictions in which we operate.

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

We adopted EITF Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF 06-11”), as of January 1, 2008. EITF 06-11 requires that the tax benefit related to dividends and dividend equivalents paid on nonvested share based payment awards and outstanding equity options should be recognized as an increase to additional paid in capital. Prior to EITF 06-11, such income tax benefit was recognized as a reduction of income tax expense. These amounts are included in tax benefits for issuance of share-based awards on the Consolidated Statement of Changes in Stockholders’ Equity.

Legal Reserves

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

We record reserves related to legal proceedings in accrued expenses and other liabilities. Such reserves are established and maintained in accordance with FASB 5, Accounting for Contingencies, and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss an Interpretation of FASB Statement No. 5. The determination of these reserve amounts requires significant judgment on the part of management. We consider many factors including, but not limited to: the amount of the claim; the basis and validity of the claim; previous results in similar cases; and legal precedents and case law. Each legal proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management.

Share-Based Compensation

We account for share-based compensation under the guidance of FASB 123R, Share-Based Payment (“FASB 123R”). Share-based awards are measured based on the grant-date fair value of the award and recognized over the period from the service inception date through the date the employee is no longer required to provide service to earn the award. Expected forfeitures are included in determining share-based compensation expense.

Earnings per Common Share

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

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We adopted FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1) on January 1, 2009. Under FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and, therefore, are included in the earnings allocation in computing earnings per share under the two-class method described in FASB 128, Earnings per Share. We grant restricted stock and restricted stock units as part of our share-based compensation that contain nonforfeitable rights to dividends and dividend equivalents, respectively, and therefore, prior to the requisite service being rendered for the right to retain the award, restricted stock and restricted stock units meet the definition of a participating security under FSP EITF 03-6-1. As such, we calculate Basic and Diluted earnings per share under the two-class method. FSP EITF 03-6-1 is to be applied retrospectively. All prior-period earnings per share data presented have been adjusted to comply with the provisions of FSP EITF 03-6-1.

Securitization Activities

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

Accounting Developments

FASB 141R. In December 2007, the FASB issued FASB 141 (revised 2007), Business Combinations (“FASB 141R”). Under FASB 141R, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at their fair value at the acquisition date for any business combination consummated after the effective date. It further requires that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, we apply the provisions of FASB 141R to business combinations occurring after January 1, 2009. Adoption of FASB 141R did not affect our financial condition, results of operations or cash flows, but may have an effect on accounting for future business combinations.

FASB 160. In December 2007, the FASB issued FASB 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“FASB 160”). FASB 160 requires an entity to clearly identify and present ownership interests in subsidiaries held by parties other than the entity in the consolidated financial statements within the equity section but separate from the entity’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; changes in ownership interest be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. We adopted FASB 160 on January 1, 2009. Refer to Note 10 for further discussion on the adoption of FASB 160.

FSP FAS 140-3. In February 2008, the FASB issued FSP FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (“FSP FAS 140-3”). FSP FAS 140-3 requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction under FASB 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (“FASB No. 140”) unless certain criteria are met. FSP FAS 140-3 is effective for fiscal years beginning after November 15, 2008. FSP FAS 140-3 is to be applied prospectively for new

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transactions entered into after the adoption date. The adoption of FSP FAS 140-3 did not have a material effect on financial condition, cash flows or results of operations.

FASB 161. In March 2008, the FASB issued FASB 161, Disclosures about Derivative Instruments and Hedging Activities (“FASB 161”). FASB 161 amends and expands the disclosure requirements of FASB 133, Accounting for Derivative Instruments and Hedging Activities, and requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts and disclosures about credit-risk-related contingent features in derivative agreements. FASB 161 is effective for the fiscal years and interim periods beginning after November 15, 2008. Accordingly, we adopted FASB 161 effective January 1, 2009. Since FASB 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of FASB 161 did not affect our financial condition, results of operations or cash flows.

FSP APB 14-1. In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by APB 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants and specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for fiscal years and interim periods beginning after December 31, 2008. The adoption of FSP APB 14-1 did not affect our financial condition, results of operations or cash flows.

FSP EITF 03-6-1. In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, are included in the earnings allocation in computing earnings per share under the two-class method described in FASB 128, Earnings per Share. Under FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years and interim periods beginning after December 31, 2008. Accordingly, we adopted FSP EITF 03-6-1 on January 1, 2009. All prior-period EPS data presented has been adjusted to comply with the provisions of FSP EITF 03-6-1. The adoption of FSP EITF 03-6-1 reduced previously reported Basic and Diluted EPS from a loss of $0.03 to a loss of $0.05 for the three months ended June 30, 2008 and reduced previously reported Basic and Diluted EPS from a loss of $0.42 to a loss of $0.47 for the six months ended June 30, 2008.

FSP FAS 133-1 and FIN 45-4. In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (“FSP FAS 133-1 and FIN 45-4”). FSP FAS 133-1 and FIN 45-4 require enhanced disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument, and require additional disclosure about the current status of the payment/performance risk of a guarantee. We adopted FSP FAS 133-1 and FIN 45-4 for our year end consolidated financial statements as of December 31, 2008. Since FSP FAS 133-1 and FIN 45-4 require only additional disclosures, the adoption did not have an effect on our financial condition, results of operations or cash flows.

FSP FAS 157-4. In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. We adopted FSP FAS 157-4 as of April 1, 2009. The adoption of FSP FAS 157-4 did not have a material effect on our financial condition, results of operations and cash flows.

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FASB 165. In May 2009, the FASB issued FASB 165, Subsequent Events (“FASB 165”). FASB 165 requires that management evaluate events and transactions that may occur for potential recognition or disclosure in the financial statements after the balance sheet date through the date the financial statements are issued and determines the circumstances under which such events or transactions must be recognized in the financial statements. We adopted FASB 165 as of our financial period ended June 30, 2009. The adoption of FASB 165 did not have an effect on our financial condition, results of operations or cash flows.

FASB 166. In June 2009, the FASB issued FASB 166, Accounting for Transfers of Financial Assets (“FASB 166”). FASB 166 amends FASB 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. FASB 166 eliminates the concept of a qualifying special purpose entity, requires that a transferor consider all arrangements made contemporaneously with, or in contemplation of, a transfer of assets when determining whether derecognition of a financial asset is appropriate, clarifies the requirement that a transferred financial asset be legally isolated from the transferor and any of its consolidated affiliates, stipulates that constraints on a transferee’s ability to freely pledge or exchange transferred assets causes the transfer to fail sale accounting, and defines participating interests and provides guidance on derecognizing participating interests. We will adopt FASB 166 as of January 1, 2010. We are currently evaluating the impact of FASB 166 on our consolidated financial statements.

FASB 167. In June 2009, the FASB issued FASB 167, Amendments to FASB Interpretation No. 46(R) (“FASB 167”). FASB 167 amends certain requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, and requires that the party who has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity consolidate the variable interest entity. FASB 167 eliminates the quantitative approach previously applied to assessing the consolidation of a variable interest entity and requires ongoing reassessments for consolidation. We will adopt FASB 167 as of January 1, 2010. We are currently evaluating the impact of FASB 167 on our consolidated financial statements.

Use of Estimates

We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with U.S. generally accepted accounting principles. The most important of these estimates and assumptions relate to fair value measurements and compensation and benefits. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

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

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

		June 30, 2009				December 31, 2008
Cash and cash equivalents:
Cash in banks		$	164,576			$	765,056
Money market investments			799,449				529,273
Total cash and cash equivalents			964,025				1,294,329
Cash and securities segregated (1)			1,050,331				1,151,522
		$	2,014,356			$	2,445,851

Note 3. Financial Instruments

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

		June 30, 2009								December 31, 2008
						Financial								Financial
						Instruments								Instruments
		Financial				Sold,				Financial				Sold,
		Instruments				Not Yet				Instruments				Not Yet
		Owned				Purchased				Owned				Purchased
Corporate equity securities		$	1,163,078			$	1,308,676			$	945,747			$	739,166
Corporate debt securities			2,115,462				1,819,590				1,851,216				1,578,395
Government, federal agency and other sovereign obligations			1,613,552				1,240,843				447,233				211,045
Mortgage- and asset-backed securities			2,721,545				¾				1,035,996				¾
Loans and other receivables			446,733				229,438				34,407				¾
Derivatives			220,043				188,019				298,144				220,738
Investments			73,441				¾				75,059				¾
Other			¾				4,288				¾				223
		$	8,353,854			$	4,790,854			$	4,687,802			$	2,749,567

We elected to apply the fair value option to loans and loan commitments made in connection with our investment banking and senior loan trading activities and certain investments held by subsidiaries that are not registered broker- dealers as defined in the AICPA Audit and Accounting Guide, Brokers and Dealers in Securities. Loans and investments at fair value are included in financial instruments owned and loan commitments are included in financial instruments sold, not yet purchased – derivatives on the Consolidated Statements of Financial Condition. The fair

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value option was elected for loans and loan commitments and investments held by subsidiaries that are not registered broker-dealers because they are risk managed by us on a fair value basis.

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

		June 30, 2009				December 31, 2008
Corporate equity securities		$	489,093			$	360,356
Corporate debt securities			2,248				1,409
		$	491,341			$	361,765

At June 30, 2009 and December 31, 2008, the approximate fair value of collateral received by us that may be sold or repledged by us was $12.6 billion and $9.7 billion, respectively. This collateral was received in connection with resale agreements and securities borrowings. At June 30, 2009 and December 31, 2008, a substantial portion of this collateral received by us had been sold or repledged.

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

		As of June 30, 2009
														Counterparty
														and Cash
														Collateral
		Level 1				Level 2				Level 3				Netting				Total
Assets:
Financial instruments owned:
Corporate equity securities		$	1,133,887			$	8,894			$	20,297			$	—			$	1,163,078
Corporate debt securities			2,360				1,946,517				164,466				—				2,113,343
Collateralized debt obligations			—				—				2,119				—				2,119
U.S. government and federal agency securities			557,384				830,223				—				—				1,387,607
U.S. issued municipal securities			—				151,837				509				—				152,346
Foreign government issued securities			—				73,521				78				—				73,599
Residential mortgage backed securities			—				2,157,348				117,760				—				2,275,108
Commercial mortgage backed securities			—				401,866				—				—				401,866
Other asset backed securities			—				43,149				1,422				—				44,571
Derivatives			191,566				93,184				5,499				(70,206	)			220,043
Loans and other receivables			—				171,039				275,694				—				446,733
Investments at fair value			—				—				73,441				—				73,441
Total financial instruments owned		$	1,885,197			$	5,877,578				661,285			$	(70,206	)		$	8,353,854
Level 3 assets for which the firm does not bear economic exposure (1)											(251,268	)
Level 3 assets for which the firm bears economic exposure										$	410,017
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities		$	1,308,471			$	205			$	—			$	—			$	1,308,676
Corporate debt securities			457				1,814,331				4,802				—				1,819,590
U.S. government and federal agency securities			886,090				286,605				—				—				1,172,695
U.S. issued municipal securities			—				39				—				—				39
Foreign government issued securities			—				68,109				—				—				68,109
Derivatives			165,091				163,502				7,538				(148,112	)			188,019
Loans			—				—				229,438				—				229,438
Residential mortgage backed securities			—				1,078				—				—				1,078
Commercial mortgage backed securities			—				598				—				—				598
Other asset backed securities			—				2,612				—				—				2,612
Total financial instruments sold, not yet purchased		$	2,360,109			$	2,337,079			$	241,778			$	(148,112	)		$	4,790,854

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

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

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

The following is a summary of changes in fair value of our financial assets and liabilities that have been classified as Level 3 for the three months ended June 30, 2009 and 2008 (in thousands of dollars):

		Three Months Ended June 30, 2009
										Purchases,																Change in unrealized
						Total gains/				sales,																gains/ (losses)
		Balance,				(losses)				settlements,				Transfers				Transfers								relating to
		March				(realized and				and				into				out of				Balance, June				instruments still held
		31, 2009				unrealized) (1)				issuances				Level 3				Level 3				30, 2009				at June 30, 2009 (1)
Assets:
Financial instruments owned:
Corporate equity securities		$	22,253			$	(3,304	)		$	207			$	4,205			$	(3,064	)		$	20,297			$	(3,598	)
Corporate debt securities			223,364				(15,864	) (2)			2,860				8,967				(54,861	)			164,466				(16,666	)
Collateralized debt obligations			2,179				(60	)			—				—				—				2,119				(60	)
U.S. issued municipal securities			403				(50	) (2)			156				—				—				509				(50	)
Foreign government issued securities			—				11				—				67								78				11
Residential mortgage backed securities			92,249				9,573				(43,225	)			76,243				(17,080	)			117,760				(2,888	)
Commercial mortgage backed securities			322				—				—				—				(322	)			—				—
Other asset backed securities			1,914				(376	)			1,765				—				(1,881	)			1,422				(343	)
Derivatives			3,087				2,459				(47	)			—				—				5,499				2,459
Loans and other receivables			160,282				2,275				113,137				—				—				275,694				631
Investments at fair value			71,348				2,688				(551	)			—				(44	)			73,441				2,505
		$	577,401			$	(2,648	)		$	74,302			$	89,482			$	(77,252	)		$	661,285			$	(17,999	)
Liabilities:
Financial instruments sold, not yet purchased:
Corporate debt securities		$	—			$	203			$	1,647			$	2,952				—			$	4,802			$	125
Derivatives			3,873				3,645				20				—				—				7,538				3,645
Loans			58,681				(165	)			170,922				—				—				229,438				—
Other			225				—				(225	)			—				—				—				—
		$	62,779			$	3,683			$	172,364			$	2,952				—			$	241,778			$	3,770

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

		Three Months Ended June 30, 2008
		Non-derivative				Non-derivative				Derivative				Derivative
		instruments –				instruments –				instruments –				instruments –
		Assets				Liabilities				Liabilities				Liabilities				Investments
Balance, March 31, 2008		$	288,956			$	(6,583	)		$	—			$	(23,256	)		$	95,332
Total gains/ (losses) (realized and unrealized) (1)			11,164				340				184				(7,516	)			863
Purchases, sales, settlements, and issuances			98,219				(41,815	)			—				(3,149	)			(6,084	)
Transfers into Level 3			11,637				(37	)			543				—				—
Transfers out of Level 3			(4,126	)			291				—				—				—
Balance, June 30, 2008		$	405,850			$	(47,804	)		$	727			$	(33,921	)		$	90,111
Change in unrealized gains/ (losses) relating to instruments still held at June 30, 2008 (1)		$	15,760			$	9			$	184			$	(8,981	)		$	863

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

The following is a summary of changes in fair value of our financial assets and liabilities that have been classified as Level 3 for the six months ended June 30, 2009 and 2008 (in thousands of dollars):

		Six Months Ended June 30, 2009
										Purchases,																Change in unrealized
						Total gains/				sales,																gains/ (losses)
		Balance,				(losses)				settlements,				Transfers				Transfers								relating to
		December				(realized and				and				into				out of				Balance, June				instruments still held
		31, 2009				unrealized) (1)				issuances				Level 3				Level 3				30, 2009				at June 30, 2009 (1)
Assets:
Financial instruments owned:
Corporate equity securities		$	41,351			$	(13,382	)		$	(9,279	)		$	4,810			$	(3,203	)		$	20,297			$	(15,261	)
Corporate debt securities			177,603				(42,902	)			58,927				33,890				(63,052	)			164,466				(42,144	)
Collateralized debt obligations			2,179				(60	)			—				—				—				2,119				(60	)
U.S. issued municipal securities			—				(50	)			559				—				—				509				(50	)
Foreign government issued securities			—				11				—				67				—				78				11
Residential mortgage backed securities			63,065				12,129				(12,377	)			76,243				(21,300	)			117,760				3,989
Commercial mortgage backed securities			—				—				322				—				(322	)			—				—
Other asset backed securities			2,089				(583	)			1,797				—				(1,881	)			1,422				(343	)
Derivatives			—				5,546				(47	)			—				—				5,499				7,932
Loans and other receivables			108,029				(2,254	)			169,919				—				—				275,694				(3,868	)
Investments at fair value			75,059				(3,786	)			2,206				6				(44	)			73,441				(4,308	)
		$	469,375			$	(45,331	)		$	212,027			$	115,016			$	(89,802	)		$	661,285			$	(54,102	)
Liabilities:
Financial instruments sold, not yet purchased:
Corporate debt securities		$	3,515			$	203			$	1,647			$	2,952			$	(3,515	)		$	4,802			$	(295	)
Derivatives			8,197				(679	)			20				—				—				7,538				1,753
Loans			—				—				229,438				—				—				229,438				—
Other			—				225				(225	)			—				—				—				—
		$	11,712			$	(251	)		$	230,880			$	2,952			$	(3,515	)		$	241,778			$	1,458