UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
		EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2007
OR
[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
		EXCHANGE ACT OF 1934
		For the transition period from                     to

Commission file number 1-14947

JEFFERIES GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware		95-4719745
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

520 Madison Avenue, 12th 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 [X]  No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X]                               Accelerated filer [ ]                               Non-accelerated filer [ ]

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

Indicate the number of shares outstanding of the registrant’s class of common stock, as of the latest practicable date. 125,571,015 shares as of the close of business November 5, 2007.

JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2007

		Page
PART I.       FINANCIAL INFORMATION
Item 1.      Financial Statements
Consolidated Statements of Financial Condition (unaudited)- September 30, 2007 and December 31, 2006			3
Consolidated Statements of Earnings (unaudited)- Three Months and Nine Months Ended September 30, 2007 and 2006			4
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)- Nine Months Ended September 30, 2007 and Year Ended December 31, 2006			5
Consolidated Statements of Cash Flows (unaudited)- Nine Months Ended September 30, 2007 and 2006			6
Notes to Consolidated Financial Statements (unaudited)			8
Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations			44
Item 3.      Quantitative and Qualitative Disclosures About Market Risk			58
Item 4.     Controls and Procedures			62
PART II.        OTHER INFORMATION
Item 1.     Legal Proceedings			62
Item 1A. Risk Factors			62
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds			63
Item 6.   Exhibits			64
Signature			65
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I. FINANCIAL INFORMATION

		September 30,				December 31,
		2007				2006
ASSETS
Cash and cash equivalents		$	521,339			$	513,041
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations			613,808				508,303
Investments			163,167				125,533
Investments in managed funds			322,450				372,869
Securities borrowed			19,348,462				9,711,894
Securities purchased under agreements to resell			1,135,511				226,176
Receivable from brokers, dealers and clearing organizations			777,992				254,580
Receivable from customers			751,017				663,552
Financial instruments owned, including securities pledged to creditors of $2,142,995 and $1,481,098 in 2007 and 2006, respectively			6,915,717				4,606,223
Premises and equipment			122,490				91,375
Goodwill			330,694				257,321
Other assets			599,719				494,590
Total Assets		$	31,602,366			$	17,825,457
LIABILITIES AND STOCKHOLDERS’ EQUITY
Bank loans and current portion of long-term debt		$	399,806			$	99,981
Securities loaned			8,861,200				6,794,554
Securities sold under agreements to repurchase			11,073,637				2,092,838
Payable to brokers, dealers and clearing organizations			1,289,104				669,196
Payable to customers			1,083,635				1,010,486
Financial instruments sold, not yet purchased			4,077,429				3,600,869
Accrued expenses and other liabilities			492,076				650,974
			27,276,887				14,918,898
Long-term debt			1,764,560				1,168,562
Mandatorily redeemable convertible preferred stock			125,000				125,000
Minority interest			605,167				31,910
Total Liabilities			29,771,614				16,244,370
STOCKHOLDERS’ EQUITY
Common stock, $.0001 par value. Authorized 500,000,000 shares; issued 154,178,478 shares in 2007 and 145,628,024 shares in 2006			15				14
Additional paid-in capital			1,066,634				876,393
Retained earnings			1,071,659				952,263
Less:
Treasury stock, at cost, 28,521,310 shares in 2007 and 26,081,110 shares in 2006			(320,222	)			(254,437	)
Accumulated other comprehensive gain:
Currency translation adjustments			15,576				9,764
Additional minimum pension liability			(2,910	)			(2,910	)
Total accumulated other comprehensive gain			12,666				6,854
Total stockholders’ equity			1,830,752				1,581,087
Total Liabilities and Stockholders’ Equity		$	31,602,366			$	17,825,457

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		Sept. 30,				Sept. 30,				Sept. 30,				Sept. 30,
		2007				2006				2007				2006
Revenues:
Commissions		$	95,652			$	67,953			$	255,778			$	208,589
Principal transactions			47,325				98,984				320,804				353,088
Investment banking			189,780				144,763				582,988				395,429
Asset management fees and investment income (loss) from managed funds			(6,283	)			16,783				29,586				80,132
Interest			334,056				132,424				845,957				385,035
Other			6,434				7,757				21,480				27,587
Total revenues			666,964				468,664				2,056,593				1,449,860
Interest expense			332,540				128,054				837,900				366,493
Revenues, net of interest expense			334,424				340,610				1,218,693				1,083,367
Non-interest expenses:
Compensation and benefits			183,503				184,421				662,771				593,830
Floor brokerage and clearing fees			19,155				15,496				50,264				46,363
Technology and communications			26,120				21,490				71,980				59,863
Occupancy and equipment rental			20,280				15,819				56,315				44,390
Business development			13,791				12,653				38,980				36,057
Other			16,254				14,394				51,178				48,405
Total non-interest expenses			279,103				264,273				931,488				828,908
Earnings before income taxes, minority interest and cumulative effect of change in accounting principle			55,321				76,337				287,205				254,459
Income taxes			21,608				29,734				107,312				99,523
Earnings before minority interest and cumulative effect of change in accounting principle			33,713				46,603				179,893				154,936
Minority interest in earnings (loss) of consolidated subsidiaries			(5,060	)			663				11,026				6,575
Earnings before cumulative effect of change in accounting principle, net			38,773				45,940				168,867				148,361
Cumulative effect of change in accounting principle, net			¾				¾				¾				1,606
Net earnings		$	38,773			$	45,940			$	168,867			$	149,967
Earnings per share:
Basic-
Earnings before cumulative effect of change in accounting principle, net		$	0.27			$	0.34			$	1.19			$	1.12
Cumulative effect of change in accounting principle, net			¾				¾				¾				0.01
Net earnings		$	0.27			$	0.34			$	1.19			$	1.13
Diluted-
Earnings before cumulative effect of change in accounting principle, net		$	0.26			$	0.32			$	1.12			$	1.03
Cumulative effect of change in accounting principle, net			¾				¾				¾				0.01
Net earnings		$	0.26			$	0.32			$	1.12			$	1.04
Weighted average shares:
Basic			142,822				135,140				141,905				133,048
Diluted			155,480				148,908				153,911				146,502
Fixed charge coverage ratio			2.6X				4.0X				4.2X				4.5X

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

		Nine Months				Year
		Ended				Ended
		September 30,				December 31,
		2007				2006
Common stock, par value $.0001 per share
Balance, beginning of year		$	14			$	7
Issued stock			1				7
Balance, end of period		$	15			$	14
Additional paid in capital
Balance, beginning of year		$	876,393			$	709,447
Benefit plan share activity (1)			30,424				33,360
Share-based amortization expense			107,553				83,137
Proceeds from exercise of stock options			3,652				17,543
Acquisitions and contingent consideration			10,349				—
Tax benefits			38,263				32,906
Balance, end of period		$	1,066,634			$	876,393
Retained earnings
Balance, beginning of year, as previously reported		$	952,263			$	803,262
Cumulative effect of adjustment from adoption of FIN 48			(410	)			—
Net earnings			168,867				205,750
Dividends			(49,061	)			(56,749	)
Balance, end of period		$	1,071,659			$	952,263
Treasury stock, at cost
Balance, beginning of year		$	(254,437	)		$	(220,703	)
Purchases			(61,766	)			(23,972	)
Returns / forfeitures			(4,019	)			(9,762	)
Balance, end of period		$	(320,222	)		$	(254,437	)
Accumulated other comprehensive income (loss)
Balance, beginning of year		$	6,854			$	(5,163	)
Currency adjustment			5,812				8,802
Pension adjustment			—				3,215
Balance, end of period		$	12,666			$	6,854
Total stockholders’ equity		$	1,830,752			$	1,581,087
Comprehensive income
Net earnings		$	168,867			$	205,750
Other comprehensive income			5,812				12,017
Total comprehensive income		$	174,679			$	217,767

(1) Includes grants related to the Incentive Plan, Deferred Compensation Plan, and Director Plan.

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

		Nine Months Ended
		Sept. 30,				Sept. 30,
		2007				2006
Cash flows from operating activities:
Net earnings		$	168,867			$	149,967
Adjustments to reconcile net earnings to net cash used in operating activities:
Cumulative effect of accounting change, net			¾				1,606
Depreciation and amortization			21,123				14,478
Accruals related to various benefit plans, stock issuances, net of forfeitures			133,959				75,510
(Increase) in cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations			(104,169	)			(138,744	)
(Increase) decrease in receivables:
Securities borrowed			(9,636,234	)			115,658
Brokers, dealers and clearing organizations			(563,124	)			(137,169	)
Customers			(87,043	)			(118,512	)
Increase in financial instruments owned			(2,006,785	)			(2,277,946	)
Increase in investments			(35,417	)			(19,196	)
Increase in investments in managed funds			(8,274	)			(13,588	)
Increase in securities purchased under agreements to resell			(909,335	)			¾
Increase in other assets			(111,017	)			(15,935	)
Increase (decrease) in operating payables:
Securities loaned			2,100,026				(537,375	)
Securities sold under agreements to repurchase			8,980,799				65,125
Brokers, dealers and clearing organizations			695,432				213,445
Customers			73,283				117,025
Increase in financial instruments sold, not yet purchased			406,253				1,785,692
(Decrease) increase in accrued expenses and other liabilities			(176,154	)			238,015
Increase (decrease) in minority interest			11,026				(5,227	)
Net cash used in operating activities			(1,046,784	)			(487,171	)
Cash flows from investing activities:
Decrease in short term bond funds			¾				7,037
Business acquisitions, net of cash received			(33,446	)			¾
Cash paid for contingent consideration			(25,720	)			(19,944	)
Purchase of premises and equipment			(50,393	)			(20,104	)
Net cash used in investing activities			(109,559	)			(33,011	)

Continued on next page.

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

		Nine Months Ended
		Sept. 30,				Sept. 30,
		2007				2006
Cash flows from financing activities
Tax benefit from the issuance of stock based awards			38,263				17,681
Proceeds from reorganization of high yield secondary market trading			354,256				¾
Redemption of capital units related to our reorganization of high yield secondary market trading			(25,780	)			¾
Repayment of long-term debt			(100,000	)			¾
Net proceeds from (payments on):
Bank loans			399,806				¾
Issuance of senior notes			593,176				492,155
Termination of interest rate swaps			8,452
Issuance of mandatorily redeemable convertible preferred stock			¾				125,000
Minority interest holders of consolidated subsidiaries related to asset management activities			3,586				¾
Repurchase of treasury stock			(61,766	)			(16,638	)
Dividends			(49,061	)			(40,948	)
Exercise of stock options, not including tax benefits			3,652				12,852
Net cash provided by financing activities			1,164,584				590,102
Effect of foreign currency translation on cash and cash equivalents			57				656
Net increase in cash and cash equivalents			8,298				70,576
Cash and cash equivalents — beginning of period			513,041				255,933
Cash and cash equivalents — end of period		$	521,339			$	326,509
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	828,671			$	374,388
Income taxes		$	34,722			$	140,472
Non-cash proceeds from reorganization of high yield secondary market trading		$	230,169			$	¾
Putnam Acquisition:
Fair value of assets acquired, including goodwill			14,664				¾
Liabilities assumed			¾				¾
Stock issued			¾				¾
Cash paid for acquisition			14,664				¾
LongAcre Acquisition:
Fair value of assets acquired, including goodwill			32,828				¾
Liabilities assumed			(6,150	)			¾
Stock issued (311,831 shares)			(7,896	)			¾
Cash paid for acquisition			18,782				¾

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

Index

				Page
Note 1.		Organization and Summary of Significant Accounting Policies			9
Note 2.		Asset Management Fees and Investment Income From Managed Funds			18
Note 3.		Cash, Cash Equivalents, and Short-Term Investments			21
Note 4.		Financial Instruments			21
Note 5.		Short-Term Borrowings			24
Note 6.		Long-Term Debt			24
Note 7.		Mandatorily Redeemable Convertible Preferred Stock			24
Note 8.		Income Taxes			25
Note 9.		Benefit Plans			25
Note 10.		Minority Interest			26
Note 11.		Earnings Per Share			27
Note 12.		Derivative Financial Instruments			28
Note 13.		Other Comprehensive Gain (Loss)			31
Note 14.		Net Capital Requirements			32
Note 15.		Commitments, Contingencies and Guarantees			33
Note 16.		Segment Reporting			35
Note 17.		Goodwill			36
Note 18.		Quarterly Dividends			37
Note 19.		Variable Interest Entities (“VIEs”)			37
Note 20.		High Yield Secondary Market Trading (“HYSMT”)			38
Note 21.		Stock Based Compensation			39
Note 22.		Subsequent Event			43

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 accounting principles generally accepted in the U.S. for complete financial statements. All adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. These unaudited consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2006.

Starting in the third quarter of 2007, we include investments and investments in managed funds as a component of cash flows from operating activities rather than cash flows from investing activities and accordingly have reclassed the prior period to be consistent with the current presentation. We believe that a change in classification of a cash flow item represents a reclassification of information and not a change in accounting principle. The amounts involved are immaterial to the Consolidated Financial Statements. In addition, the change only affects the presentation within the Consolidated Statements of Cash Flows and does not impact the Consolidated Statements of Financial Condition or the Consolidated Statements of Earnings, debt balances or compliance with debt covenants.

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

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 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 limited partnerships. We act as general partner for these investment vehicles and have generally provided the third-party investors with termination or “kick-out” rights as defined by EITF 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.

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

Revenue Recognition Policies

Commissions. All customer securities transactions are reported on the Consolidated Statement 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 $11.1 million and $7.2 million for the three month periods ended September 30, 2007 and 2006, respectively. Soft dollar expenses amounted to $27.7 million and $24.3 million for the nine month periods ended September 30, 2007 and 2006, respectively. We are accounting for the cost of these arrangements on an accrual basis. Our accounting for commission revenues includes 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) and certain investments are carried at fair value, as appropriate, with unrealized gains and losses reflected in principal transactions in the Consolidated Statement of Earnings on a trade date basis.

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 transactions 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 Statement of Earnings. Reimbursed expenses totaled approximately $2.0 million and $2.0 million for the three month periods ended September 30, 2007 and 2006, respectively, and totaled approximately $7.8 million and $8.7 million for the nine month periods ended September 30, 2007 and 2006, respectively.

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

Interest Revenue and Expense. We recognize contractual interest on financial instruments owned and financial instruments sold, but not yet purchased, on an accrual basis as a component of interest revenue. Interest flows on derivative trading transactions and dividends are included as part of the mark-to-market 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 and long-term borrowings on an accrual basis with related interest recorded as interest expense. In addition, we recognize interest revenue related to our securities borrowed activities and interest expense related to our securities loaned activities. See accounting policies related to securities borrowed and securities loaned for further explanation.

Cash Equivalents

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

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 accumulated other comprehensive income, a component of stockholders’ equity. Gains or losses resulting from foreign currency transactions are included in the principal transactions in the Consolidated Statements of Earnings.

Investments

Investments include our strategic investment in Jefferies Finance, LLC, as well as, direct investments in limited liability companies and partnerships that make investments in private equity companies, strategic investments in financial service entities and other investments. With the adoption of FASB No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“FASB 159”), we apply fair value accounting on investments that are risk-managed on a fair value basis. Factors considered in valuing investments at fair value 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 of the issuer and other pertinent information. For our strategic investment in Jefferies Finance, LLC we apply the equity method of accounting. Investment gains and losses are included in principal transactions in the Consolidated Statements of Earnings.

Investments in Managed Funds

Investments in managed funds includes our investments in non-consolidated 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 managed funds are accounted for on the equity method.

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.

Fair Value of Financial Instruments

Substantially all of our financial instruments are carried at fair value or amounts approximating fair value. Assets, including cash and cash equivalents, securities borrowed or purchased under agreements to sell, and certain receivables, are carried at fair value or contracted amounts, which approximate fair value due to the short period to

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

maturity. Similarly, liabilities, including bank loans, securities loaned or sold under agreements to repurchase and certain payables, are carried at amounts approximating fair value. Debt is carried at face value less unamortized discount. 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). Financial instruments owned and financial instruments sold, not yet purchased, 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.

We have derivative financial instrument positions in exchange traded and over-the-counter option contracts, credit default swaps, foreign exchange forward contracts, index futures contracts, commodities swap and option contracts and commodities futures contracts, which are measured at fair value with gains and losses recognized in principal transactions. The gross contracted or notional amount of these contracts is not reflected in the Consolidated Statements of Financial Condition. We follow FIN No. 39, Offsetting Amounts Related to Certain Contracts (“FIN 39”) and offset assets and liabilities in the Consolidated Statements of Financial Condition provided that the legal right of offset exists under a master netting agreement and that other requirements of FIN 39 are met. We also offset payables or receivables relating to the fair value of cash collateral received or paid associated with its derivative inventory, on a counterparty basis.

Prior to the adoption of FASB No. 157, Fair Value Measurements (“FASB 157”), we followed Emerging Issues Task Force Statement No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities (“EITF 02-3”). This guidance generally prohibited recognizing profit at the inception of a derivative contract unless the fair value of the derivative was obtained from a quoted market price in an active market or was otherwise evidenced by comparison to other observable current market transactions or based on a valuation technique that incorporates observable market data. Subsequent to the transaction date, we recognized trading profits deferred at inception of the derivative transaction in the period in which the valuation of an instrument became observable. With the adoption of FASB 157, we are no longer applying the revenue recognition criteria of EITF 02-3. However, FASB 157 requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based on the best information available, which includes the transaction exit price.

Securities Borrowed and Securities Loaned

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 (“repos”) are treated as collateralized financing transactions and are recorded at their contracted repurchase amount.

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We monitor the fair value of the repos daily versus the related receivable or payable balances. Should the fair value of the repos 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 related leases or the estimated useful lives of the assets, whichever is shorter.

Goodwill

In accordance with FASB No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized; instead, it is reviewed, on at least an annual basis, for impairment. Goodwill is impaired when the carrying amount of the reporting unit exceeds the implied fair value of the reporting unit. While goodwill is no longer amortized, it is tested for impairment annually as of the third quarter or at the time of a triggering event requiring re-evaluation, if one were to occur. Goodwill was tested for impairment as of September 30, 2007 and based on this impairment test/analysis no reporting units were considered impaired.

Income Taxes

We file a consolidated U.S. Federal income tax return, which includes all of our qualifying subsidiaries. Amounts provided for income taxes are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income taxes are provided for temporary differences in reporting certain items, principally deferred compensation, unrealized gains and losses on investments, and tax amortization on intangible assets. Tax credits are recorded as a reduction of income taxes when realized.

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 No. 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. Our management considers 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.

Stock Based Compensation

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Under FASB No. 123, Accounting for Stock-Based Compensation, we defined the service period (over which compensation cost should be recognized) to generally include the year prior to the grant and the subsequent vesting period. With the adoption of FASB 123R on January 1, 2006, our policy regarding the timing of expense recognition for non-retirement eligible employees changed to recognize compensation cost over the period from the service inception date, which is the grant date, through the date the employee is no longer required to provide service to earn the award.

In addition, with the adoption of FASB 123R on January 1, 2006, the awards granted to retirement eligible employees where the award does not contain future service requirements must be either expensed on the date of grant or, in certain circumstances, may be accrued in the periods prior to the grant date. Subsequent to the adoption of FASB 123R, we made certain changes to the terms of certain new grants which effectively eliminated accelerated expense recognition upon retirement and/or increased the retirement eligibility age and years of service from those generally provided for in prior grants. During the three month period ended September 30, 2007, we did not grant stock-based awards which require accelerated expense recognition upon retirement under FASB 123R. During the nine month period ended September 30, 2007, we granted stock-based awards with a fair value of $9.2 million, which require accelerated expense recognition upon retirement under FASB 123R.

Earnings per Common Share

Basic earnings per share of common stock are computed by dividing net earnings by the average number of shares outstanding and certain other shares committed to be, but not yet issued. Basic earnings per share include restricted stock and RSUs for which no future service is required. Diluted earnings per share of common stock are computed by dividing net earnings plus dividends on mandatorily redeemable convertible preferred stock divided by the average number of shares outstanding of common stock and all dilutive common stock equivalents outstanding during the period. Diluted earnings per share include the dilutive effects of restricted stock and RSUs for which future service is required.

Accounting and Regulatory Developments

FASB Interpretation No. 48. In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The transition adjustment to beginning retained earnings was a reduction of approximately $0.4 million.

FASB No. 157. In September 2006, the FASB issued FASB No. 157, Fair Value Measurements (“FASB 157”). FASB 157 clarifies that fair value is the amount that would be exchanged to sell an asset or transfer a liability, in an orderly transaction between market participants. FASB 157 reverses the consensus reached in EITF Issue No. 02-3 prohibiting the recognition of day one gain or loss on derivative contracts where we cannot verify all of the significant model inputs to observable market data and verify the model to market transactions. However, FASB 157 requires that a fair value measurement technique include an adjustment for risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model, if market participants would also include such an adjustment. In addition, FASB 157 prohibits the recognition of “block discounts” for large holdings of unrestricted financial instruments where quoted prices are readily and regularly available in an active market. The provisions of FASB 157 are to be applied prospectively, except for changes in fair value measurements that result from the initial application of FASB 157 to existing derivative financial instruments measured under EITF Issue No. 02-3 and block discounts, which are to be recorded as an adjustment to opening retained earnings in the year of adoption. FASB 157 is effective for fiscal years beginning after November 15, 2007. We adopted FASB No. 157 as of the beginning of 2007. To determine the transition adjustment to opening retained earnings, we performed an analysis of existing derivative instruments measured under EITF Issue 02-3 and block discounts, and determined that there was no transition adjustment to opening retained earnings as of January 1, 2007.

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FASB No. 158. In September 2006, the FASB issued Statement No. 158, Accounting for Uncertainty in Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“FASB 158”). FASB 158 improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. On December 31, 2006, we adopted the recognition and disclosure provisions of FASB 158. FASB 158 required us to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of our benefit plan on our December 31, 2006 Consolidated Statement of Financial Condition, with a corresponding adjustment to accumulated other comprehensive income, net of tax. As a result of the pension plan being frozen, the projected benefit obligation was equal to the accumulated benefit obligation. Consequently, no additional adjustment to accumulated other comprehensive income was necessary.

FASB No. 159. In February 2007, the FASB issued FASB No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“FASB 159”). This standard permits an entity to measure financial instruments and certain other items at estimated fair value. Most of the provisions of FASB No. 159 are elective; however, the amendment to FASB No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities that own trading and available-for-sale securities. The fair value option created by FASB 159 permits an entity to measure eligible items at fair value as of specified election dates. The fair value option (a) may generally be applied instrument by instrument, (b) is irrevocable unless a new election date occurs, and (c) must be applied to the entire instrument and not to only a portion of the instrument. FASB 159 allows for a one-time election for existing positions upon adoption, with the transition adjustment recorded to opening retained earnings. FASB 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity (i) makes that choice in the first 120 days of that year, (ii) has not yet issued financial statements for any interim period of such year, and (iii) elects to apply the provisions of FASB 157. We adopted FASB 159 as of the beginning of 2007. We elected to apply the fair value option on loans and loan commitments made in connection with our investment banking activities (“loans and loan commitments”). Loans and loan commitments are included in financial instruments owned on the Consolidated Statement of Financial Condition. At the time of adoption, we did not have such loans and loan commitments outstanding, therefore there was no transition adjustment recorded to opening retained earnings. In addition, we elected to apply the fair value option on 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. These investments had been accounted for by us at fair value prior to the adoption of FASB 159; therefore, there was no transition adjustment recorded to opening retained earnings related to these investments. The fair value option was elected for loans and loan commitments and investments held by subsidiaries that are not registered broker-dealers because they are risk managed by us on a fair value basis.

FSP FIN 39-1. In April 2007, the FASB issued a Staff Position (“FSP”) FIN No. 39-1, Amendment of FASB Interpretation No. 39. FSP FIN No. 39-1 defines “right of setoff” and specifies what conditions must be met for a derivative contract to qualify for this right of setoff. It also addresses the applicability of a right of setoff to derivative instruments and clarifies the circumstances in which it is appropriate to offset amounts recognized for those instruments in the statement of financial position. In addition, this FSP permits offsetting of fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments. The provisions of this FSP are consistent with our current accounting practice. This interpretation is effective for

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fiscal years beginning after November 15, 2007, with early application permitted. The adoption of FSP FIN No. 39-1 will not have a material impact on our Consolidated Financial Statements.

EITF Issue No. 06-11. In June 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF 06-11”). EITF 06-11 requires that the tax benefit related to dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified nonvested equity shares, nonvested equity share units, and outstanding equity share options be recorded as an increase in additional paid-in capital. We currently account for this tax benefit as a reduction to income tax expense. EITF 06-11 is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2007. We intend to adopt EITF 06-11 in the first quarter of 2008. We are currently evaluating the impact of EITF 06-11 on our results of operations for the first quarter of 2008.

SOP No. 07-1. In June 2007, the American Institute of Certified Public Accountants issued Statement of Position No. 07-1, Clarification of the Scope of the Audit and Accounting Guide ‘Audits of Investment Companies’ and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies (“SOP 07-1”). SOP 07-1 clarifies the scope of when an entity may apply the provisions of the AICPA Audit and Accounting Guide Investment Companies (“the Guide”). SOP 07-1 also provides guidance for determining whether the specialized industry accounting principles of the Guide should be retained in the financial statements of a parent company of an investment company or an equity method investor in an investment company, and includes certain disclosure requirements. In October 2007 the FASB delayed the effective date of SOP 07-1 indefinitely primarily because of concerns over implementation issues arising from the interaction between SOP 07-1 and Statements 157 and 159 and because of the short implementation period between its issuance on June 11, 2007 and its effective date. A new effective date will be determined after the FASB addresses implementation issues and potential amendments. We are currently evaluating the impact of SOP 07-1 on our Consolidated Financial Statements.

SAB 109. On November 5, 2007, SEC Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings (“SAB 109”), was issued. SAB 109 provides the staff’s views on the accounting for written loan commitments recorded at fair value under generally accepted accounting principles. To make the staff’s views consistent with current authoritative accounting guidance, SAB 109 revises and rescinds portions of SAB 105, Application of Accounting Principles to Loan Commitments. Specifically, SAB 109 states that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The provisions of SAB 109 are applicable to written loan commitments issued or modified beginning on January 1, 2008. We are currently evaluating the impact, if any, that SAB 109 may have on our Consolidated Financial Statements.

Use of Estimates

Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with 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. Asset Management Fees and Investment Income (Loss) From Managed Funds

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

		September 30,				September 30,
		2007				2006
Assets under management:
Fixed Income (1)		$	1,832			$	1,420
Equities			277				517
Convertibles			2,802				2,221
			4,911				4,158
Assets under management by third parties (2):
Equities, Convertibles and Fixed Income			235				260
Private Equity			600				600
			835				860
Total		$	5,746			$	5,018

	(1)		With the reorganization of our high yield secondary market trading activities, we no longer include high yield assets as assets under management as of April 2, 2007. Prior period amounts include $439 million in assets under management from our high yield funds.
	(2)		Third party managed funds in which we have a 50% or less interest in the entities that manage these assets or otherwise receive a portion of the management fees.

The following summarizes revenues from asset management fees and investment income (loss) from managed funds relating to funds managed by us and funds managed by third parties for the three and nine-month periods ended September 30, 2007 and 2006 (in thousands of dollars):

		Three Months Ended								Nine Months Ended
		Sept. 30,				Sept. 30,				Sept. 30,				Sept. 30,
		2007				2006				2007				2006
Asset management fees:
Fixed Income (1)		$	1,987			$	3,868			$	9,589			$	19,978
Equities			349				(823	)			3,494				11,060
Convertibles			3,033				3,300				9,030				7,997
Real Assets			¾				¾				¾				2,237
			5,369				6,345				22,113				41,272
Investment income (loss) from managed funds (1)			(11,652	)			10,438				7,473				38,860
Total		$	(6,283	)		$	16,783			$	29,586			$	80,132

(1)

With the reorganization of our high yield secondary market trading activities, we no longer record asset management fees and investment income from managed funds related to these activities. For the three month and nine month period ending September 30, 2006 asset management fees and investment income from managed funds related to our high yield funds amounted to $5.4 million and $34.6 million, respectively.

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The following tables detail our average investment in managed funds, investment income from managed funds, investment income from managed funds — minority interest portion and net investment income from managed funds relating to funds managed by us and funds managed by third parties for the three months ended September 30, 2007 and 2006 (in millions of dollars):

Three Months Ended September 30, 2007

														Net
						Investment				Investment				Investment
						Income (Loss)				Income from				Income (Loss)
						from				Managed Funds –				from
		Average				Managed				Minority Interest				Managed
		Investment (2)				Funds				Portion				Funds
Fixed Income (1)		$	220.3			$	(10.3	)		$	¾			$	(10.3	)
Equities			174.1				(1.7	)			¾				(1.7	)
Convertibles			34.4				0.3				¾				0.3
Total		$	428.8			$	(11.7	)		$	¾			$	(11.7	)

(1)    Excludes high yield secondary market trading activities.
(2)    Includes consolidated asset management entities of $123.5 million.

Three Months Ended September 30, 2006

										Investment				Net
						Investment				Income from				Investment
						Income from				Managed Funds –				Income from
		Average				Managed				Minority Interest				Managed
		Investment (1)				Funds				Portion				Funds
Fixed Income		$	217.0			$	8.1			$	0.4			$	7.7
Equities			85.4				2.3				¾				2.3
Convertibles			12.9				¾				¾				¾
Total		$	315.3			$	10.4			$	0.4			$	10.0

(1)

Includes consolidated asset management entities of $77.0 million and non-consolidated high yield funds of $54.4 million.

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The following tables detail our average investment in managed funds, investment income from managed funds, investment income from managed funds — minority interest portion and net investment income from managed funds relating to funds managed by us and funds managed by third parties for the nine months ended September 30, 2007 and 2006 (in millions of dollars):

Nine Months Ended September 30, 2007

										Investment				Net
						Investment				Income from				Investment
						Income from				Managed Funds –				Income from
		Average				Managed				Minority Interest				Managed
		Investment (2)				Funds				Portion				Funds
Fixed Income (1)		$	239.0			$	2.1			$	0.4			$	1.7
Equities			168.2				3.9				0.4				3.5
Convertibles			34.0				1.5				¾				1.5
Total		$	441.2			$	7.5			$	0.8			$	6.7

(1)   Excludes high yield secondary market trading activities for the six month period ended September 30, 2007.
(2)   Includes consolidated asset management entities of $101.1 million.

Nine Months Ended September 30, 2006

										Investment				Net
						Investment				Income from				Investment
						Income from				Managed Funds –				Income from
		Average				Managed				Minority Interest				Managed
		Investment (1)				Funds				Portion				Funds
Fixed Income		$	187.0			$	28.9			$	6.3			$	22.6
Equities			77.8				8.2				¾				8.2
Convertibles			12.7				1.1				¾				1.1
Real Assets			4.7				0.7				¾				0.7
Total		$	282.2			$	38.9			$	6.3			$	32.6

(1)

Includes consolidated asset management entities of $40.9 million and non-consolidated high yield funds of $51.3 million.

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Note 3. 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 our management to be generally readily convertible into cash as of September 30, 2007 and December 31, 2006 (in thousands of dollars):

		September 30, 2007				December 31, 2006
Cash and cash equivalents:
Cash in banks		$	223,528			$	107,488
Money market investments			297,811				405,553
Total cash and cash equivalents			521,339				513,041
Cash and securities segregated (1)			613,808				508,303
Other (2)			2,251				71,160
		$	1,137,398			$	1,092,504

	(1)		In accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, Jefferies, 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.
	(2)		Items are financial instruments utilized in our overall cash management activities and are readily convertible to cash, marginable or accessible for liquidity purposes.

Note 4. Financial Instruments

The following is a summary of the fair value of major categories of financial instruments owned and financial instruments sold, not yet purchased, as of September 30, 2007 and December 31, 2006 (in thousands of dollars):

		September 30, 2007								December 31, 2006
						Financial								Financial
						Instruments								Instruments
		Financial				Sold,				Financial				Sold,
		Instruments				Not Yet				Instruments				Not Yet
		Owned				Purchased				Owned				Purchased
Corporate equity securities		$	2,868,873			$	1,918,672			$	1,737,174			$	1,835,046
Corporate debt securities			2,517,960				1,499,497				1,918,829				1,185,400
U.S. Government and agency obligations			625,019				313,214				592,374				339,891
Mortgage-backed securities (1)			48,305				¾				85,040				¾
Asset-backed securities			4,325				¾				28,009				¾
Loans and loan commitments			148,100				¾				¾				¾
Derivatives			697,663				345,738				234,646				240,231
Other			5,472				308				10,151				301
		$	6,915,717			$	4,077,429			$	4,606,223			$	3,600,869

(1)

Represents non-agency mortgage-backed securities. As of September 30, 2007, these securities had a rating of AA or higher.

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Financial instruments owned includes securities pledged to creditors. The following is a summary of the fair value of major categories of securities pledged to creditors as of September 30, 2007 and December 31, 2006 (in thousands of dollars):

		September 30, 2007				December 31, 2006
Corporate equity securities		$	1,766,909			$	1,068,498
Corporate debt securities			376,086				412,600
		$	2,142,995			$	1,481,098

At September 30, 2007 and December 31, 2006, the approximate fair value of collateral received by us that may be sold or repledged by us was $20.2 billion and $9.8 billion, respectively. This collateral was received in connection with resale agreements and securities borrowings. At September 30, 2007 and December 31, 2006, a substantial portion of this collateral received by us had been sold or repledged.

FASB 157 establishes a fair value hierarchy to prioritize the inputs used in valuation techniques. The three broad levels to the fair value hierarchy of inputs are:

		Level 1:		Inputs that reflect unadjusted quoted prices at the measurement date for identical assets or liabilities in active markets;
		Level 2:		Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable for the asset or liability at the measurement date;
		Level 3:		Inputs that are unobservable at the measurement date.

The following is a summary of our financial assets and liabilities that are accounted for at fair value as of September 30, 2007 by level within the fair value hierarchy (in thousands of dollars):

														Counterparty
														and Cash
														Collateral
		Level 1				Level 2				Level 3				Netting				Total
Assets:
Financial instruments owned:
Securities		$	2,717,556			$	3,086,127			$	266,271			$	¾			$	6,069,954
Loans and loan commitments (1)			¾				¾				148,100				¾				148,100
Derivative instruments			841,303				129,807				¾				(273,447	)			697,663
Total financial instruments owned			3,558,859				3,215,934				414,371				(273,447	)			6,915,717
Investments (2)			¾				¾				105,550				¾				105,550
Liabilities:
Financial instruments sold, not yet purchased:
Securities			2,180,301				1,529,313				22,077				¾				3,731,691
Derivative instruments			416,970				717,618				¾				(788,850	)			345,738
Total financial instruments sold, not yet purchased			2,597,271				2,246,931				22,077				(788,850	)			4,077,429

	(1)		We elected the fair value option in accordance with FASB 159 for loans and loan commitments. The fair value of these loans approximates the contractual principal amounts. No gains or losses were recorded for the three and nine month periods ended September 30, 2007.
	(2)		Our $57.6 million strategic equity method investment in Jefferies Finance LLC as of September 30, 2007 is excluded from this table.

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 and nine months ended September 30, 2007 (in thousands of dollars):

Three Months Ended

		Non-derivative				Non-derivative
		instruments –				instruments –
		Assets				Liabilities				Investments
Balance, June 30, 2007		$	252,695			$	2,835			$	92,923
Total gains/ (losses) (realized and unrealized) (1)			8,358				45				12,854
Purchases, sales, settlements, and Issuances			170,659				(803	)			(227	)
Net transfers in and/or out of Level 3			(17,341	)			20,000				¾
Balance, September 30, 2007		$	414,371			$	22,077			$	105,550
Change in unrealized gains/ (losses) relating to instruments still held at September 30, 2007 (1)		$	10,072			$	(5	)			12,854

(1)

Realized and unrealized gains/ losses are reported in principal transactions in the Consolidated Statements of Earnings.

Nine Months Ended

						Non-
		Non-derivative				derivative
		instruments –				instruments –
		Assets				Liabilities				Investments
Balance, December 31, 2006		$	205,278			$	¾			$	97,289
Total gains/ (losses) (realized and unrealized) (1)			5,575				45				21,515
Purchases, sales, settlements, and Issuances			220,292				515				(13,254	)
Net transfers in and/or out of Level 3			(16,774	)			21,517				¾
Balance, September 30, 2007		$	414,371			$	22,077			$	105,550
Change in unrealized gains/ (losses) relating to instruments still held at September 30, 2007 (1)		$	(11,292	)		$	(5	)		$	21,515

(1)

Realized and unrealized gains/ losses are reported in principal transactions in the Consolidated Statements of Earnings.

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

Note 5. Short-Term Borrowings

Bank loans represent short-term borrowings that are payable on demand and generally bear interest at a spread over the Fed Funds rate. We had no outstanding secured bank loans as of September 30, 2007 and December 31, 2006. Unsecured bank loans are typically overnight loans used to finance securities owned or clearing related balances. We had $399.8 million and $0 of outstanding unsecured bank loans as of September 30, 2007 and December 31, 2006, respectively. Average daily bank loans for the nine month period ended September 30, 2007 and year ended December 31, 2006 were $237.3 million and $12.4 million, respectively.

Note 6. Long-Term Debt

The following summarizes long-term debt outstanding at September 30, 2007 and December 31, 2006 (in thousands of dollars):

		September 30, 2007				December 31, 2006
7.75% Senior Notes, due 2012, net of unamortized discount of $4,127 (2007)			329,237				328,003
5.875% Senior Notes, due 2014, net of unamortized discount of $1,653 (2007)			248,347				¾
5.5% Senior Notes, due 2016, net of unamortized discount of $1,544 (2007)			348,456				348,320
6.45% Senior Debentures, due 2027, net of unamortized discount of $3,790 (2007)			346,210				¾
6.25% Senior Debentures, due 2036, net of unamortized discount of $7,690 (2007)			492,310				492,239
		$	1,764,560			$	1,168,562

We previously entered into a fair value hedge with no ineffectiveness using interest rate swaps in order to convert $200 million aggregate principal amount of unsecured 7³/4% senior notes due March 15, 2012 into floating rates based upon LIBOR. During the third quarter of 2007 we terminated these interest rate swaps and received cash consideration less accrued interest of $8.5 million. The $8.5 million basis difference related to the fair value of the interest rate swaps at the time of the termination is being amortized as a reduction in interest expense of $1.9 million per year over the remaining life of the notes through March 2012.

In January 2006, we sold in a registered public offering $500 million aggregate principal amount of our unsecured 6.25% 30-year senior debentures due January 15, 2036.

In June 2007, we sold in a registered public offering $600 million aggregate principal amount of our senior debt, consisting of $250 million of 5.875% senior notes due June 8, 2014 and $350 million of 6.45% senior debentures due June 8, 2027.

Note 7. Mandatorily Redeemable Convertible Preferred Stock

In February 2006, Massachusetts Mutual Life Insurance Company (“MassMutual”) purchased in a private placement $125 million of our Series A convertible preferred stock. Our Series A convertible preferred stock has a 3.25% annual, cumulative cash dividend and is currently convertible into 4,074,300 shares of our common stock at an effective conversion price of approximately $30.68 per share. The preferred stock is callable beginning in 2016 and will mature in 2036. As of September 30, 2007, 10,000,000 shares of preferred stock were authorized and 125,000 shares of preferred stock were issued and outstanding. The dividend is recorded as a component of interest expense as the Series A convertible preferred stock is treated as debt for accounting purposes. The dividend is not deductible for tax purposes because the Series A convertible preferred stock is considered “equity” for tax purposes.

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

Note 8. Income Taxes

We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of January 1, 2007. As a result of adoption, we recognized a $0.4 million increase to reserves for uncertain tax positions. This increase was accounted for as an adjustment to the beginning balance of retained earnings on the Consolidated Statement of Financial Condition. As of September 30, 2007 and January 1, 2007, we had approximately $4.2 million and $3.3 million, respectively, of total gross unrecognized tax benefits. These totals also represent the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.

We are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. We have concluded all U.S federal income tax matters for the years through 2000. Substantially all material state and local, and foreign income tax matters have been concluded for the years through 1998. New York State and New York City income tax returns for the years 2001 through 2004 and 2000 through 2003, respectively, are currently under examination. The final outcome of these examinations is not yet determinable. However, management anticipates that adjustments to the unrecognized tax benefits, if any, will not result in a material change to the results of operations or financial condition.

We recognize interest accrued related to unrecognized tax benefits in interest expense. Penalties, if any, are recognized in other expenses. As of September 30, 2007 and January 1, 2007, we had accrued interest and penalties related to unrecognized tax benefits of approximately $1.1 million and $1.0 million, respectively.

Note 9. Benefit Plans

The following summarizes the net periodic pension cost for the three-month and nine-month periods ended September 30, 2007 and 2006 (in thousands of dollars):

		Three Months Ended								Nine Months Ended
		Sept. 30,				Sept. 30,				Sept. 30,				Sept. 30,
		2007				2006				2007				2006
Net pension cost included the following components:
Service cost (1)		$	69			$	137			$	207			$	137
Interest cost on projected benefit obligation			599				543				1,779				1,818
Expected return on plan assets			(833	)			(697	)			(2,089	)			(1,816	)
Amortization of prior service cost			¾				¾				¾				¾
Amortization of net loss			(141	)			26				141				536
Net periodic pension cost		$	(306	)		$	9			$	38			$	675

(1)

Service costs relates to administrative expenses incurred during the three and nine month periods.

We contributed $2.0 million to our pension plan during the quarter ended September 30, 2007 and do not anticipate contributing more during the remainder of 2007. Effective December 31, 2005, benefits under the pension plan have been frozen. There are no incremental benefit accruals for service after December 31, 2005.

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

Note 10. Minority Interest

Under FASB No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“FASB 150”), certain minority interests in consolidated entities may meet the standard’s definition of a mandatorily redeemable financial instrument and thus require reclassification as liabilities and remeasurement at the estimated amount of cash that would be due and payable to settle such minority interests under the applicable entity’s organization agreement, assuming an orderly liquidation of the entity, net of estimated liquidation costs.  Our consolidated financial statements include certain minority interests that meet the standard’s definition of mandatorily redeemable financial instruments.  These mandatorily redeemable minority interests represent interests held by third parties in Jefferies High Yield Holdings, LLC (“JHYH”).  The mandatorily redeemable minority interests are entitled to a pro rata share of the profits of JHYH, as set forth in JHYH’s organization agreements, and are scheduled to terminate in 2013, with an option to extend up to three additional one-year periods. The carrying amount of these mandatorily redeemable minority interests are approximately $609.1 million at September 30, 2007, which represents the initial capital and the pro rata share of the profits of JHYH assigned to the holder of the mandatorily redeemable minority interests. A certain portion of these mandatorily redeemable minority interests represent investments from Jefferies Special Opportunities Partners (“JSOP”) and Jefferies Employees Special Opportunities Partners (“JESOP”), and are eliminated in consolidation. The carrying amount of these mandatorily redeemable minority interests eliminated in consolidation is approximately $252.7 million at September 30, 2007, resulting in minority interest related to JHYH on a consolidated basis of approximately $356.4 million at September 30, 2007.

Minority interest also includes the minority equity holders’ proportionate share of the equity of JSOP and JESOP. At September 30, 2007, minority interest related to JSOP and JESOP was approximately $211.6 million and $27.3 million, respectively.

At September 30, 2007, we had other minority interests of approximately $9.9 million primarily related to our start-up asset management funds.

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

Note 11. Earnings Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three-month and nine-month periods ended September 30, 2007 and 2006 (in thousands, except per share amounts):

		Three Months Ended								Nine Months Ended
		Sept. 30,				Sept. 30,				Sept. 30,				Sept. 30,
		2007				2006				2007				2006
Earnings before cumulative effect of change in accounting principle, net		$	38,773			$	45,940			$	168,867			$	148,361
Cumulative effect of change in accounting principle, net			¾				¾				¾				1,606
Net earnings		$	38,773			$	45,940			$	168,867			$	149,967
Add: Convertible preferred stock dividends			1,016				1,016				3,048				2,528
Net earnings for diluted earnings per share		$	39,789			$	46,956			$	171,915			$	152,495
Shares:
Average shares used in basic computation			142,822				135,140				141,905				133,048
Unvested restricted stock / restricted stock units			8,351				8,542				7,462				8,771
Stock options			236				1,184				480				1,341
Convertible preferred stock			4,071				4,042				4,064				3,342
Average shares used in diluted computation			155,480				148,908				153,911				146,502
Earnings per share:
Basic-
Earnings before cumulative effect of change in accounting principle, net		$	0.27			$	0.34			$	1.19			$	1.12
Cumulative effect of change in accounting principle, net			¾				¾				¾				0.01
Net earnings		$	0.27			$	0.34			$	1.19			$	1.13
Diluted-
Earnings before cumulative effect of change in accounting principle, net		$	0.26			$	0.32			$	1.12			$	1.03
Cumulative effect of change in accounting principle, net			¾				¾				¾				0.01
Net earnings		$	0.26			$	0.32			$	1.12			$	1.04