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Jefferies Group, Inc.520 Madison Avenue New York, NY 10022

www.jefferies.com

DRIVEN EQUITY & EQUITY-LINKED FINANCING AEROSPACE & DEFENSE UNITED STATES RELATIONSHIPS LEVERAGED & STRUCTURED FINANCE ENERGY GREAT BRITAIN FOCUSED ON GROWTH FINANCIAL &

BUSINESS SERVICES FRANCE WASHINGTON DC INDUSTRIALS SWITZERLAND COMMODITY-LINKED GAMING JAPAN INVESTMENT BANK PRIVATE CLIENT SERVICES HEALTHCARE SECURITIES FIRM

RECAPITALIZATION & RESTRUCTURING CORRESPONDENT CLEARING MARITIME & OIL SERVICE MERGERS & ACQUISITIONS ADVISORY SECURITIES LENDING RETAIL & CONSUMER CANADA EQUITIES FINANCIAL

SPONSORS PRIME BROKERAGE MEDIA & COMMUNICATIONS ATLANTA PARIS INVESTMENT GRADE FIXED INCOME DENVER GLOBAL CREATIVE STRUCTURING FIXED INCOME ENTREPRENEURIAL SPIRIT

NYSE FLOOR BROKERAGE TECHNOLOGY BOSTON SERVING HIGH NET WORTH INDIVIDUALS SERVING GROWING & MID-SIZED COMPANIES CHICAGO COMMITMENT GLOBAL HIGH YIELD BONDS GLOBAL CON-

VERTIBLE BONDS DALLAS INTERNATIONAL CONVERTIBLE BONDS PROPRIETARY INDICES AWARD WINNING RESEARCH & ANALYSIS INVESTMENT BANKING & INSTITUTIONAL SECURITIES FIRM PRIVATE EQUITY

SILICON VALLEY LONDON SECURITIES ORIGINATION BLOCK TRADES LOS ANGELES ASSET-BASED BANK LOANS ZURICH BEST EXECUTION PRIVATE DEBT PLACEMENTS EXPERIENCED STRUCTURED

FINANCE MOTIVATED COLLATERALIZED BOND OBLIGATIONS BEST EXECUTION TENACIOUS SENIOR LOANS INDUSTRY EXPERTISE IPOs NEW YORK TRUSTED PARTNER BROAD PRODUCT CAPABILITIES

FOLLOW-ON OFFERINGS DIRECT PLACEMENTS SENIOR LEVEL ATTENTION CONSENT SOLICITATIONS GLOBAL NETWORK SERVING GROWING & MID-SIZED COMPANIES DRIVEN SERVING INSTITUTIONAL

INVESTORS BANK LOANS DIVERSIFIED JOINT VENTURES/STRATEGIC ALLIANCE NASDAQ MARKET MAKING LIQUIDITY PROVIDER One Firm FULL-SERVICE FOCUSED ON GROWTH

HANDS-ON MERGER ADVISORY SECTOR FOCUS TENDER OFFERS GROWTH-ORIENTED SINCE 1962 2,045 EMPLOYEE-PARTNERS Annual Report 2005 IDEA-DRIVEN SOLUTIONS EXCLUSIVE SALE &

DIVESTITURE TAKEOVER DEFENSE FIRST & SECOND LIEN FINANCING BRIDGE FINANCING SECURITIES RESEARCH SPECIAL SITUATIONS MIDDLE MARKET INVESTMENT BANK OF THE YEAR GROWING & MID-SIZED

COMPANIES DRIVEN AEROSPACE & DEFENSE UNITED STATES RELATIONSHIPS ENERGY GREAT BRITAIN ACQUISITIONS FINANCIAL & BUSINESS SERVICES RESPECTED UNDERWRITER CREATIVE FULL-

SERVICE INDUSTRIALS SWITZERLAND GLOBAL NETWORK GAMING RESTRUCTURING ADVICE FAIRNESS OPINIONS EXCHANGE OFFERS TRUSTED ADVISOR DEDICATED DISTRESSED CAPITAL RAISING

RECAPITALIZATION LOYAL CLIENT BASE DISTRESSED M&A RESEARCH SALES PORTFOLIO TRADING QUANTITATIVE EXECUTION STRATEGIES CAPITAL MARKETS ORIGINATION PRIVATE CLIENT SERVICES CORPO-

RATE SERVICES OPTIONS DERIVATIVES LISTED BLOCK TRADING INTERNATIONAL EQUITY SALES BULLETIN BOARD TRADING DIRECT MARKET ACCESS ELECTRONIC TRADING RISK ARBITRAGE TRADING

ETFs PROPRIETARY TRADING CLOSED-END FUNDS HIGH YIELD BONDS BANK DEBT TRADING CORPORATE BONDS GOVERNMENT AGENCY BONDS TREASURY NOTES AND BONDS MORTGAGE-BACKED SECURI-

TIES MUNICIPAL BONDS COMMODITIES INDICES COMMODITIES-LINKED FINANCIAL PRODUCTS LONG/SHORT EQUITY U.S. EQUITY SALES LONG/SHORT COMMODITIES COLLATERALIZED DEBT OBLIGATIONS

CONVERTIBLE SECURITIES DISTRESSED SECURITIES INVENTIVE REVOLVING CREDIT FACILITIES TERM LENDING NEW YORK CLIENT-FIRST CULTURE SAN FRANCISCO MEDIA & COMMUNICATIONS

RETAIL & CONSUMER SECURITIES FIRM TECHNOLOGY BOSTON SERVING HIGH NET WORTH INDIVIDUALS CHICAGO INVESTMENT BANK FINANCIAL SPONSORS MARITIME & OIL SERVICE ATLANTA SER

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1.

One FirmWe are one integrated firm. We are an investment banking and institutional

securities firm, serving growing and mid-sized companies and their investors.

We are focused on growth and providing world-class investment banking, sales and

trading, research and asset management services to our clients—while driving to

create lasting wealth for our shareholders and a rewarding professional environment

for our employee-partners. We are well over 2,000 strong, with record total revenues

of $1.5 billion in 2005 and an equity market capitalization of $3.1 billion*.

Our principal operating subsidiaries include Jefferies & Company, Inc., Jefferies Execution Services, Inc., Jefferies International Ltd., Jefferies Asset Management, LLC and Jefferies Financial Products, LLC.

* year-end, fully diluted

JEFFERIES GROUP, INC.

2.

Focused on GrowthGrowth is what drives us. Growing and mid-sized companies and their investors

comprise the most dynamic, thriving sector of the economy—and their businesses

and opportunities are as unique as their needs. We believe these companies are often

overlooked and underserved. Our mission is to meet their needs. From providing

capital and delivering unbiased advice, to matching buyers and sellers and selecting

research coverage, these companies and their investors inspire us. In 2005,

we were recognized as the “Middle Market Investment Bank of the Year” by

Investment Dealers’ Digest, while achieving our sixth consecutive year of

record results and creating significant returns for our shareholders.

01 02 03 04 05

Total Revenues($ in millions)

$785$755

$1,199

$1,498

01 02 03 04 05

Equity Market Capitalization(at year-end, fully diluted, $ in millions)

$1,153 $1,159

$2,016

$3,103

$927

$2,608

4.

2%

15%

50%

41%

3%

6%

2000$617 million

Net Revenues by Division

2005$1,205 million

At or for the year ended December 31,

(in millions, except per share amounts) 2005 2004 Change

Total Revenues $ 1,497.9 $ 1,198.6 + 25%

Net Revenues 1,204.7 1,058.2 + 14%

Operating Income 268.4 227.0 + 18%

Net Earnings 157.4 131.4 + 20%

Earnings Per Share (diluted) 2.32 2.06 + 13%

Dividends Paid Per Share .51 .36 + 42%

Book Value Per Share 22.14 18.14 + 22%

Stockholders’ Equity 1,286.9 1,039.1 + 24%

Closing Stock Price 44.98 40.28 + 12%

Equity Market Capitalization (fully diluted) 3,103 2,608 + 19%

FINANCIAL HIGHLIGHTS

Sales & Trading (1) Investment Banking Asset Management Other (2)

78%

(1) Includes commission and principal transaction revenues. (2) Includes net interest and other revenues.

5%

2005 ANNUAL REPORT

5.

Fellow Shareholders:

Six years ago, we analyzed our Firm, our competitors, our clients and our future, and recognized there was

a tremendous opportunity to fill a much-needed role serving growing and mid-sized companies and their

investors—a market segment in which we had naturally and increasingly specialized since our founding in

1962. Our goal was to understand their industries, and give these companies and their investors the tools

and support needed for all stages of growth, investment and transition. In true Jefferies fashion, we rolled

up our sleeves and went to work.

We began by investing in and leveraging our powerful equity, high yield and convertible trading platforms.

We revamped our research and research sales groups, with a focus on superior analysis, breadth and depth

of coverage and forward thinking ideas to create value for our buy-side clients.At the same time, we

sought to expand our investment banking platform in terms of breadth of industry coverage and full-service

product capabilities through a combination of key hires, acquisitions of outstanding specialty firms, and

joint ventures with world-class partners. Finally, we diversified and sought to balance our platform with

quality asset management teams and vehicles to leverage our relationships.

Meanwhile, the trend of consolidation and retrenchment in investment banking has worked in our favor.

Our primary competitors of the 1980s and 1990s are virtually all gone, swallowed up by huge banks.

These banks have in turn continued their own evolution, placing their priorities away from growth

companies and the middle market. Meantime, our focus has become only stronger, and our Firm even

more nimble and responsive.We believe we embody the now-rare Wall Street culture of a creative, hands-on,

client-focused and relationship-driven firm.

Six Years of Record Results

We are proud to have delivered our sixth consecutive year of record net revenues, earnings and earnings

per share.These results were achieved through both challenging and favorable environments, and are the

direct result of the dedication of our more than 2,000 employee-partners, and the loyalty of our broad and

unique client base.Total revenues in 2005 were up 25 percent over the prior year to a record $1.5 billion,

with net revenues up 14 percent to $1.2 billion. Net earnings were up 20 percent to a record $157.4 million

and earnings per share (diluted) were up 13 percent to a record $2.32. Investment banking revenues were up

40 percent to a record $495 million.Total stockholders’ equity was up 24 percent to $1.3 billion, or $22.14


6. per share, and we ended the year with an equity market capitalization of over $3.1 billion (fully diluted).

Across the board, our Firm delivered solid results and we believe we are executing well on our strategy to

become the leading Wall Street firm focused on growing and mid-sized companies and their investors.

Compensation and benefits as a percentage of net revenues were down slightly, while non-comp expenses,

excluding interest expense, were up modestly, as we invested in increased occupancy, technology and

business development costs associated with the integration of acquisitions and a 15 percent increase in

headcount. Our pre-tax operating margin was 22.3 percent for the year.

Growing & Diversifying Our Revenues

We have worked very hard to build on our capital markets expertise, and expand the breadth of our

capabilities and industry reach. Compared with six years ago, there is a healthy shift from a primarily

brokerage-driven revenue stream to a more balanced mix of sales and trading, investment banking and asset

management. Investment banking revenues totaled $495 million and accounted for more than 40 percent

of the Firm’s net revenues in 2005, up from 15 percent six years ago. Revenues from investment banking

are a combination of advisory services and capital markets products, with broad industry representation.

Our sales and trading platform, the backbone of our Firm, represented 50 percent of our net revenues,

totaling nearly $600 million from primarily equity-based products, with a healthy increase in fixed-income

revenues.The reputation of our research product continued to make great strides.We now cover over

1,100 companies, up nearly 15 percent over the prior year, primarily comprised of growth and mid-cap

companies in our focus industries. Our asset management activities, including asset management fees and

investment income from managed funds, now account for nearly 6 percent of revenues, representing the

foundation of a third leg to our platform.We are confident that this business is well-positioned to grow

significantly in the coming years.

We believe we can best serve growing and mid-sized companies and their investors by continuing to

enhance our core competencies, as we strive to build a great firm.The specific activities of our business

units are covered in more detail in our business review later in our Annual Report.

We are proud to have delivered our sixth consecutive year of record net revenues, earningsand earnings per share. Across the board, ourFirm delivered solid results and our financial position remains strong, with $2 billion in capital. Rich Handler

7.A Strong & Liquid Capital Position

Our balance sheet is solid, with $2 billion in capital, 83 percent of our book value tangible, and cash,

cash equivalents and short-term investments (including required deposits) exceeding $900 million as of

year-end. During the year, we repurchased nearly 2 million shares at an average price of $38.73 per share.

Employee ownership remains high, with the Jefferies family, which includes employees, board members and

retirees serving as consultants, owning approximately 50 percent of the fully diluted outstanding equity of

the firm. Our stock continues to outperform all relevant benchmarks, with a compounded annualized

return of nearly 22 percent since 1999.Within the past two years, quarterly dividends paid per share

increased nearly 90 percent, from 8 cents to 15 cents. The Wall Street Journal ranked ours the #1 stock in

Investment Services for 10-year stock performance for the past three years(3).

Moody’s Investment Services upgraded our long-term debt rating to BAA1 in January 2005.We have

been rated BBB by Standard & Poor’s since November 2003, and we were rated BBB+ by Fitch Ratings

in January 2006.We continue to maintain relatively low leverage and strong liquidity, with a pro forma

debt/equity ratio at year-end of approximately 109 percent.This compares to approximately 380 percent

for a cross-section of other full-service broker-dealers, reflecting the subsequent to year-end sale of

$500 million in aggregate principal amount of unsecured 6.25 percent 30-year senior debentures, and

MassMutual’s purchase of $125 million of our Series A convertible preferred stock, initially convertible

at $62 per share.

Gaining Recognition in Our Markets

More than ever before, our Firm is being recognized publicly for our leadership position. InvestmentDealers’ Digest named our Firm the “2005 Middle Market Investment Bank of the Year(4).” We maintained

leadership in the M&A and underwriting league tables, as well as equity trading rankings, and our equity

research effort ranked second in The Wall Street Journal’s 2005 “Best on the Street” analyst ranking (5). ForbesMagazine named our Firm as one of the 2005 “Platinum 400 – America’s Best Big Companies,” ranking

us as the third Best Managed Company in Diversified Financials (6).

We have a solid foundation for future growth andscalability, and have tremendous momentum goinginto 2006. We are gaining traction in our focus markets, as demonstrated by our recently beingnamed Middle Market Investment Bank of the Year by Investment Dealers’ Digest. Brian Friedman

(3) The Wall Street Journal, annual “Shareholder Scoreboard” survey, published March 3, 2003; March 8, 2004; February 28, 2005, respectively. Based on 10-yearannualized returns. (4) Investment Dealers’ Digest, published January 16, 2006. (5) The Wall Street Journal and Thomson Financial, published May 16, 2005. (6) Forbes Magazine, published January 9, 2005.


8. Acquisitions, Expansion and Strategic Partnerships

In February 2005, Jefferies acquired Randall & Dewey, a leading Oil & Gas industry M&A advisor, adding

meaningful depth to our strong presence in the energy sector and adding approximately 100 valuable new

partners to our platform. R&D’s deep industry knowledge, technical depth, strong commercial expertise

and long-term relationships with quality clients have quickly contributed to our Firm.This group closed

over 30 transactions in 2005, valued at more than $10 billion, and experienced a 50 percent increase in

dollar deal volume over their pre-acquisition performance in 2004.We are pleased with the integration of

this unit with our existing energy practice, and post-acquisition have made additions to our London- and

Calgary-based teams. Our integration of Randall & Dewey has followed a similar model to that of Jefferies

Quarterdeck, acquired in 2002, and Jefferies Broadview, acquired in 2003, both strong contributors to our

investment banking revenues in 2005. Our investment banking professionals now number nearly 400,

including technical specialists. During the year, we made key additions to our media & communications

and healthcare industry investment banking groups, among others, and have enhanced our M&A effort

since year-end.

On the trading side, we significantly enhanced our private client services, global commodity derivatives and

investment grade fixed income businesses. In research, we welcomed 10 analysts in the areas of energy,

technology, healthcare, industrials, telecommunications and investment grade fixed income, and hosted a

growing number of industry conferences for clients.We have more than 800 sales, trading and execution

professionals, and more than 120 research professionals worldwide. Since year-end, we made significant

additions in prime brokerage, electronic trading and equity products.

In May 2005, Jefferies acquired London-based Helix Associates, a leading private equity fund placement

firm. Helix was named “Boutique of the Year” at the 2005 European Private Equity Awards. Helix has

significantly expanded our offerings for the private equity, buyout and venture capital community.

Post-acquisition, we have taken steps to help drive the U.S. activities of this group. In April 2005, we

entered into a strategic alliance with Leumi & Company, the wholly owned Investment Banking unit of

Bank Leumi, Israel’s leading domestic markets securities underwriter, to enhance our Israeli technology

investment banking effort.

9.

Net Earnings($ in millions)

$157

$131

$84

$63$60

01 02 03 04 05

Highlights

EPS *

(fully diluted)

$2.32

$2.06

$1.42

$1.14$1.14

01 02 03 04 05

Book Value($ in millions)

$1,287

$1,039

$838

$629$566

01 02 03 04 05

JEF vs. Indices(annualized return, 4/99-12/05)

21.61%

11.72%

9.36%

6.51%

-.96%

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Rus

sell

2000

S

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Mid

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400

Am

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Bro

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* All per share information has been restated to retroactively reflect the effect of the two-for-one stock split declared by the Board of Directors on July 14, 2003 and effected as a stock dividend on August 15, 2003.


10. In January 2006, MassMutual, a AAA-rated world-class insurance company and investment manager, took

a strategic equity stake in Jefferies with the aforementioned purchase of a private placement of $125 million

of convertible preferred stock. Both Jefferies and MassMutual agreed to double our commitments to

Jefferies Babson Finance, our middle-market finance company joint venture formed in October 2004,

increasing the equity capital base to $500 million.With leverage, this will enable us to originate over

$10 billion of loans, and potentially offer multi-tranche, bridge, second lien, mezzanine and similar financings,

in addition to more traditional senior loans—adding a critical component to our leveraged finance capabilities.

We are confident this entity, now operating as Jefferies Finance, will provide cost-effective, long-term

capital to our corporate clients and support the continued growth of our investment bank.

In February 2006, Jefferies Asset Management, LLC became registered with the U.S. Securities and

Exchange Commission as an investment adviser.

A Global Opportunity

We have been operating outside the U.S. for over 20 years and today are delivering a full-service offering

to growing and mid-sized companies and their investors internationally. As in the U.S., we believe that our

focus and approach, coupled with our broad product offering and industry expertise, differentiates us in

the global markets, and the future holds significant growth potential.

With the addition of a UK corporate broking team, we have invested in our UK equities business to

support our ability to raise capital in the London capital markets.We also added a UK equity research sales

team and research analysts to enhance coverage of UK energy and gaming companies, augmenting existing

coverage of technology, healthcare and special situations.We made significant inroads in India and Asia as

a sole manager of capital raising transactions and maintained our strength in M&A, as well as technology,

media & communications, healthcare, aerospace & defense and energy. Randall & Dewey and Helix

have significantly enriched our industry and product expertise overseas.We currently have nearly 300

employee-partners in Europe and Asia.

Jefferies embodies the now-rare Wall Street culture of a creative, hands-on, client-focused,and relationship-driven firm. Brian Friedman

2005 ANNUAL REPORT

11.A Solid, Flexible and Integrated Platform

Our focus remains on driving growth, effectively managing our costs and maintaining strong operating

margins. Our legal, compliance, finance, accounting, clearing, support staff, marketing, operations, facilities

and technology backbone continues to develop, grow and improve to support the increased demands of

our overall business. Our investment in information technology has allowed the Firm to handle record

volumes, personnel additions and integration of new products, and we remain committed to further

innovation.We foster an environment that values a one-firm approach and client-first culture, and is

conducive to communication and appropriate information flow.We are deeply committed to maintaining

the highest of ethical standards and complying with our regulatory and legal obligations. In 2005, we

welcomed a Global Head of Compliance with more than 35 years of compliance experience.

A Social Responsibility

With an expanding global network of more than 25 offices in six countries spanning three continents,

contributing to society is important to us.Together with the help of clients and vendors, our Firm and its

employees contributed more than $5 million in donations toward the relief efforts in response to the

December 2004 Asian Tsunami and Hurricane Katrina, which struck very close to home in New Orleans

and the Mississippi Gulf Coast on August 29th, 2005.To date, our new partners at Randall & Dewey have

helped raise more than $2.6 million for cancer research. Our educational grant program, now in its 25th

year, supports the education of the children of Jefferies employees, and has granted nearly 650 scholarship

awards. In addition, the Firm continues its valuable employee contribution matching program.We hope

to continue making a difference where and when we can as our platform allows.

An Aligned and Motivated Management Team

Each day our business becomes more complex, challenging and competitive. Over the past few years,

together with our fellow Board and Executive Committee members, and the hard work of our employee-

shareholders, we have taken many steps to improve our ability to respond to our clients’ needs, and meet

the challenges of the marketplace and our industry.We remain focused on the execution of our strategy.

We will be true to our culture and continue to be heavily employee-owned, client-focused, highly ethical,

entrepreneurial, cost-conscious, non-bureaucratic and dedicated to serving growing and mid-sized

companies and their investors.

We believe we are executing successfully on our strategy to be the leading Wall Street firmfocused on growing and mid-sized companiesand their investors. Our opportunity in the marketplace is vast. Rich Handler

12.

Highlights

$1,205

$1,058

$830

$675$670

01 02 03 04 05

Investment in Human Capital(no. of employees)

Net Revenues($ in millions)

$495

$353

$230

$140$124

01 02 03 04 05

Investment Banking Revenues($ in millions)

(7) Includes asset management fees and investment income from managed funds.

2,045

1,7831,594

1,3571,201

01 02 03 04 05

Asset Management Revenues(7)

($ in millions)

$82$81

$33

$20$26

01 02 03 04 05

We have a solid foundation for future growth and scalability.We remain opportunistic, yet focused;

growth-oriented, yet prudent; and intensely committed to providing the best execution on all fronts.

Six years of growth and progress have only served to inspire us that much more is possible, and we believe

our opportunity in the global marketplace is unlimited.

We would like to acknowledge and thank John Shaw, former President, COO and Board member, without

whom we would not be the Firm we are today. John, who spent more than 20 years building this Firm,

retired in July.We are extremely grateful for his contribution and wish him well.

Since year-end, we appointed Bob Joyal to our Board of Directors. Bob was the President of MassMutual’s

Babson Capital Management LLC and brings with him a great deal of experience and wisdom.

Tremendous Momentum Going into 2006

This is the most exciting time in Jefferies’ 43-year history. Investment banking, sales and trading, research

and asset management remain the cornerstones of our Firm as we look to the future. Diversification

will continue to be a primary focus. Infrastructure and integration of new partners and products is always a

challenge, but we believe there are many opportunities still available.We’re still in the early innings as we

explore opportunities that can and will expand our horizons.We are very excited about what the future

holds, as we continue to build our special Firm.

As always, we are deeply appreciative of our loyal clients for trusting and relying on Jefferies to assist and

guide them in achieving their goals.We are grateful to our fellow shareholders for joining and supporting

us in our mission, and very thankful to our partners for their tireless hard work, dedication and faith in us

to guide our Firm forward. Our work is far from done.

Thank you all for your continued support.

RICHARD B. HANDLER BRIAN P. FRIEDMAN

Chairman of the Board and Chief Executive Officer Chairman of the Executive Committee

2005 ANNUAL REPORT

13.

14.

Built on RelationshipsWe value our relationships above all else. Whether it’s a trading client whom we help

on a daily basis, or an investment banking client whom we help periodically, our goal

is to partner with our clients as they develop and grow their businesses. For more

than 43 years, our Firm has fostered long-term, deep-seated relationships based on

trust, integrity and mutual respect. In 2005, we assisted more than 250 corporate

clients and 2,000 institutional investors in achieving their goals.

Client testimonials may not be representative of the experience of other clients or indicative of future performance or success.

“ When it comes to managing transactions for good middle market companies with business and financial complexity, Jefferies is one of thebest in the business.Whether it be in healthcare, industrial or energy, they have the multi-sector industry expertise and relationships toget the transaction done, and deliver on what they say with impeccable execution.We have come to rely on Jefferies over the years andenjoy working with them because of the quality and commitment of the people and high energy culture. It’s a great relationship.”

– JEAN-PIERRE L. CONTE, Chairman & Managing Director

Genstar Capital LLCJefferies served as joint book running agent for theSeptember 2005 $151 million senior subordinatednotes offering for Panolam Industries, a leadingmanufacturer of decorative laminates, and solemanager for the April 2005 $60 million seniorsecured notes offering for North American EnergyPartners, a leading provider of mining services, on behalf of Genstar Capital, a prominent privateequity investment firm.

LHC GroupJefferies served as lead managerand book runner on the June2005 $77 million initial publicoffering for LHC Group, aprovider of post-acute healthcare services.

“ You only get one chance when it comes to an IPO, and we’re glad we chose Jefferies as our partner.They helped us raise 20 percent more than we expected.We got the capital we needed to foster organic growth and to fund strategic acquisitions to expand our network and geographic reach.”

– JOHN INDEST, COO

“ Our initial public offering was a pivotal event in the history of our company, and we needed an underwriter we could trust.They spent morethan a year with us preparing and conducted a very comprehensive marketingprocess.The result was a strong demand among investors with our stockpricing at the top of the filing range during a difficult IPO market.”

– KEITH G. MYERS, Chairman & CEO

“ The unique insight of the Jefferies Quarterdeck team into the value drivers coupled with their in-depth knowledge of the potentialbuyer universe resulted in the highly successful divestiture of both our Aeronautics Services and Propulsion Systems business units.They conducted a competitive auction process in both cases, resulting in a strong valuation and advantageous transaction agreementterms.The senior level attention we received throughout the process proved invaluable.”

– MICHAEL J. MANCUSO, Senior Vice President & Chief Financial Officer

General Dynamics CorporationJefferies Quarterdeck advised General DynamicsCorporation, a leading supplier of sophisticateddefense systems, on the February 2005 divestmentof its Propulsion Systems unit to L-3 Communicationsand the January 2005 divestment of its AeronauticsServices unit to Wyle Laboratories, Inc.

PalmSource, Inc.Jefferies Broadview advised PalmSource, a leadingdeveloper of software for mobile devices and provider of Palm OS®, in its negotiations with Japanese softwarecompany ACCESS Co. Ltd., a global provider of mobilecontent delivery and Internet access software, completedNovember 2005.

“ Jefferies Broadview was able to effectivelycommunicate our unique value propositionand diverse capabilities to potential buyers with very different interests inan accelerated time frame.”

– MIKE KELLEY, Sr. VP, Engineering

“ They helped us evaluate and maximize acquisition proposals and come to a mutualagreement with ACCESS, a very innovativecompany with a broad set of device vendor andoperator relationships, at a very high premium—delivering great value to our shareholders.”

– JEANNE SEELEY, CFO

“ Jefferies Broadview provided guidance and support during a transitional time for our company.They brought in additional biddersand led a very dynamic and competitiveprocess.We could not have been happier with the outcome.”

– PATRICK MCVEIGH, Interim CEO

“ Randall & Dewey’s strong E&P industry expertise and execution capabilities, combined with an in-depth understanding of ourcompany’s opportunities, were key factors in completing this merger successfully.They made it possible for Spinnaker Explorationshareholders to realize substantial and immediate value at an attractive premium while giving Spinnaker employees the opportunity to join Hydro—a company offering complementary technical capabilities, a proven track record as a high-quality operator of assets, greater resources and a management eager to preserve Spinnaker’s entrepreneurial spirit.”

– ROBERT SNELL, CFO

Spinnaker ExplorationRandall & Dewey, a division ofJefferies, advised SpinnakerExploration, a leading independentHouston-based energy company, on its merger with Norsk Hydro,completed in December 2005.

Hornbeck Offshore Services, Inc.Jefferies served as joint book-running manager for the October 2005 $286 million follow-on public equity offering and $75 million tack-on senior notesoffering for Hornbeck Offshore Services, Inc., aleading provider of marine transportation services to the offshore oil and gas industry.

“ We chose Jefferies because of our access to their senior management,their creative approach to financing and their unique insight andunderstanding of the maritime oilfield service industry.They know our business in-depth, and we value them as a strategic financial partner in the on-going growth and success of our Company.”

– TODD M. HORNBECK, Chairman, President and CEO

“ Jefferies delivered flawless execution within a very tight time frameduring what was a fairly choppy market in the immediate aftermathof Hurricane Rita.They provided access to the capital we needed for the construction of new vessels that will significantly expand our fleet, and for the funding of future growth initiatives.”

– JAMES O. HARP, JR., Executive Vice President and CFO

“ We have had a long-standing relationship with Jefferies and are continually impressed by their client focus, superior execution anddetermination. In a very short time frame, Jefferies provided us a committed financing so that we could realize our long-term strategicgoal of acquiring Trump Indiana, our closest competitor. Jefferies put together an innovative deal structure which gave us absolute surety in execution and the best pricing possible. Jefferies was able to deliver what they promised and even exceeded our expectations.”

– DON H. BARDEN, Manager, Chairman, President and Chief Executive Officer

Majestic Star Casino, LLCJefferies served as sole manager on the December2005 three-tranche $303.5 million senior notes offeringfor Majestic Star Casino, LLC, a multi-jurisdictionalgaming company.

“ We use Jefferies as one of our primary brokers because of their ability to provide liquidity for small- and mid-cap stocks in virtually allmarket conditions with a focus on minimizing market impact.Their sales traders are extremely knowledgeable, experienced, responsive and accessible.They know us better than other brokers on The Street, how we like transactions done, and their execution is exceptional.When we need to get a trade executed, we use Jefferies.”

– CHERYL DEMAREE, Vice President of Trading

Sandler Capital ManagementFor more than 20 years, Jefferies has been servingSandler Capital Management, an investment manager ofhedge funds and private equity funds with a multi-sectorfocus and $1.3 billion in assets and commitments.

ICO Global CommunicationsJefferies served as lead manager of the August 2005$650 million convertible notes offering for ICO NorthAmerica, the wholly-owned subsidiary of ICO GlobalCommunications (Holdings), a leading satellite communications company.

“ We went in to the transaction hoping to raise 400 million dollars and, at the end of the day, we raised 650 milliondollars—fully funding our plan.Jefferies far exceeded our expectations.”

– CRAIG JORGENS, President

“ We were extremely impressed by Jefferies’industry expertise, targeted approach, and commitment.We received senior level attentionthroughout the transaction and they did whatthey said they would, every step of the way.”

– DONNA P. ALDERMAN, Vice Chairman

“ Jefferies helped raise the capital needed to develop ICO’s advanced hybrid satellite terrestrial MSS/ATC system and lay the foundation for next generation wireless communications.”

– J. TIMOTHY BRYAN, CEO

“ As a mid-sized hedge fund, we are always impressed by the level of attention and service we receive from Jefferies.They are amongthe best brokerage firms on the Street, providing outstanding execution and liquidity, particularly with illiquid or difficult to movestocks, and they have only improved over the years.Their research has also become a very valuable tool, giving us great analyticalcoverage of the small and mid-cap universe that is hard to find at other firms.”

– NED SADAKA, President

Para Advisors LLCJefferies has been assisting Para Advisors LLC, a hedge fund with more than $1 billion under management, achieve its trading objectives for fifteen years.


26.

Full-ServiceOur mission is to serve. Growing and mid-sized companies and their investors need

a full-service firm that they can rely on to deliver tailored, customized solutions

and assist them in achieving their objectives. We are that firm. We provide a full array

of investment banking, sales and trading, research and asset management services.

We have solid expertise in aerospace & defense, energy, financial & business services,

gaming & leisure, healthcare, industrials, maritime & oil service, media & communications,

retail & consumer, and technology. In 2005, we made significant personnel

additions across all our product and industry groups.

27.

GROWTH COMPANIES& INVESTORS

ENERGYTECHNOLOGY

INDUSTRIALS

MARITIME & OIL SERVICE

RETAIL & CONSUMER FINANCIAL &BUSINESS SERVICES

FINANCIALSPONSORS

GAMING &LEISURE

HEALTHCARE

MEDIA & COMMUNICATIONS

AEROSPACE & DEFENSE

INVESTMENT BANKING SALES & TRADING

ASSET MANAGEMENT RESEARCH

28.

Business Overview

Driving Growth Through Investment Banking

In 2005, our investment banking division worked with growing and mid-sized companies on more than

250 advisory and capital markets transactions, valued at more than $65 billion, in our focus industries across

the U.S., in Europe and in Asia. Record revenues, totaling $495 million, were achieved in large part due to

tremendous contributions from some of our recently-added partners, including Randall & Dewey (Energy)

and Jefferies Broadview (Technology).

Our product groups all performed exceptionally well during the year, and we made key additions to our

equity and debt capital markets teams. On the advisory side, we advised on more than 135 M&A and

restructuring transactions, valued at over $45.4 billion.We ranked as a Top 10 Middle Market M&A

Advisor(8), and among the top 3 middle market investment banks in providing advisory services(9). On the

capital markets side, we completed nearly 120 equity and equity-linked financings and leveraged finance

transactions, valued at approximately $21.6 billion.We ranked among the top 3 firms on Wall Street in the

performance of lead-managed equity underwritings(10) and have ranked as the top underwriter of U.S.

Single B new issues under $150 million for the past four years(11). In addition, our financial sponsors group, a

key element of our middle market strategy, completed nearly 75 transactions, valued at $5.5 billion.

On the industry side, virtually every sector was strong. During the year, we hired experienced banking

professionals to lead our dedicated media & communications and healthcare industry investment banking

groups, and made key additions to our energy, technology, and aerospace & defense groups.We completed

70 energy transactions (including maritime & oil service) valued at $17.4 billion, and ranked as the #2

energy M&A advisor (12).We completed nearly 90 technology transactions, valued at $12.5 billion, and we

ranked as the #1 technology M&A advisor (12).We completed over 30 aerospace & defense transactions,

valued at $6.7 billion, and ranked as the #1 defense M&A advisor(12). In addition, we completed nearly 40

industrial transactions, valued at $7.9 billion; 30 healthcare transactions, valued at $4.2 billion; 30 retail and

Trusted Jefferies bankers provide growing and mid-sized companies with advisory andunderwriting services through creative andidea-driven M&A, leveraged finance, equity and equity-linked financing and restructuringsolutions. We serve a range of industries in the U.S., Europe and Asia.

(8) Thomson Financial. Based on the number of U.S. transactions announced in 2005, under $500 million. Excludes: tender offers, exchange offers, self-tenders, repurchases, remaining interests, privatizations. Includes transactions where the value was undisclosed. (9) Bankruptcy Insider (The Deal). Based on bankruptcies withdebtor pre-petition liabilities between $100 million and $1.0 billion. Rankings include only traditional investment banks as of 1/5/06. (10) Equidesk. January 1, 2005 -December 31, 2005, Lead-managed IPOs & FOs, U.S. issuer, excludes best efforts & closed end funds, for leads with 10 or more deals. (11) Thomson Financial. 2001-2005.Excludes split rated, mortgage and asset-backed securities. Full credit to lead manager, equal if joint. (12) Thomson Financial. Includes all industry related transactionsas classified by Thomson Financial announced in 2005. Excludes tender offers, exchange offers, self-tenders, repurchases, remaining interests and privatizations.Includes transactions where the value was undisclosed. Defense transactions based in North America or Western Europe, all values. Technology transactions based in North America or Western Europe, $0-500 million OR based in the US, $0-1000 million. Energy transactions based in the U.S., all values.

2005 ANNUAL REPORT

29.

Investment Banking Revenues by Industry Investment Banking Transaction Value($ in billions, approximations)

$67.0*

$56.7

$29.2$28.1

$16.5

20%

11%

24%

55%

21%

2000$91 million

Investment Banking

2005$495 million

M&A/Advisory/Restructuring Equity/Equity-Linked Leveraged Finance

69%

Investment Banking Revenues by Product

Technology 15%

Other 6%

Financial/Business Services 6%

Gaming/Leisure 4%Healthcare 3%

Energy 25%

Industrials 15%

Aerospace & Defense 8%

Media/Communications 6%Consumer/Retail 12%

01 02 03 04 05

* includes pending transactions

30. consumer transactions, valued at $3 billion; 15 financial & business services transactions, valued at $2.8 billion;

16 media & communications transactions, valued at $1.9 billion; and eight gaming & leisure transactions,

valued at $3 billion.

Our international presence in investment banking is growing, with the additions of Helix Associates and a

UK broking team, our Bank Leumi alliance and enhanced technology and energy teams.The completion

of eight sole-managed Indian and European convertible offerings, and more than $10 billion in cross-border

M&A transactions further established our reputation in the international markets.We now have 40 investment

banking professionals in London, serving the UK and European Markets.We are committed to building upon

our success in Europe and Asia, and are focused on bringing our full array of capabilities to these markets.

Since year-end, we appointed an experienced industry veteran to oversee and lead our thriving Mergers &

Acquisitions business and, in the UK, we were granted Nominated Adviser (NOMAD) status on the

London Stock Exchange’s Alternative Investment Market (AIM).

Adding Value In Sales & Trading

Sales and trading performed very well in 2005, with strong contributions from equities, high yield,

convertible and commodity-linked products, as well as correspondent clearing and securities lending.

We maintained our position as a leading provider of liquidity for the securities of small-cap, mid-cap and

growing companies—the core focus of our sales, trading and research efforts.

Our equities division traded over 19 billion shares (excluding Bulletin Boards), despite decreased industry-

wide block trading.We increased our market making capabilities 20 percent, now making markets in 5,000

securities.We ranked as the #3 trader of combined NASDAQ and Bulletin Board stocks(13) and #1 for best

execution of all exchange-listed stock trades(14).

We welcomed an industry veteran to head our Private Client Services group, focused on corporate clients

and their senior executives, private equity firms, middle market institutions and high net worth individuals.

We completed a number of significant distributions and block trades for our venture capital and private

Jefferies’ industry specialists offer deep expertisein aerospace & defense, energy, financial & businessservices, gaming & leisure, healthcare, industrials,maritime & oil service, media & communications,retail & consumer, and technology.

(13) AutEx®, BLOCKDATA, 1/31/05-12/31/05. Ranking among investment banks, based on NASDAQ, NNM, SCM and advertised OTCBB combined share volume.(14) Pensions & Investments, “Tradewatch”, Plexus Universe, period ending 12/31/05.

2005 ANNUAL REPORT

31.equity clients during the year, as well as implementing directed share programs.We assisted many of the

Firm’s corporate clients in managing their assets and partnered with several leading firms for the distribution

of structured products and alternative investments.

On the execution side, Jefferies Execution Services accounted for nearly 9 percent of the average daily

volume on the NYSE during the year, and is represented on virtually all of the committees involved in

the building and implementation of the NYSE/Archipelago Hybrid Market we believe will create new

opportunities in equities, as well as other asset classes. On the international front, our international equity

commission business registered an increase of over 40 percent and we hired experienced UK equity sales and

research sales teams.

Our U.S. and international high yield trading desks traded a combined $24 billion in securities (face value),

and provided tremendous support for our leveraged finance activities. Our international and domestic

convertible desks traded nearly $17 billion in securities (face value), and were heavily involved in our

equity-linked financings.We expanded our investment grade fixed income capabilities with the additions

of mortgage-backed trading, U.S. government agency trading and emerging markets teams.This desk now

trades 2,300 investment grade fixed income issues, including corporate, agency and U.S. treasury bonds.

In June 2005, Jefferies Financial Products, in conjunction with Reuters America LLC, announced a major

revision to the CRB index, now renamed the Reuters/Jefferies CRB Index. Since 1957, the CRB index

has been the most widely followed global benchmark for commodities as an asset class.We had significant

additional customer interest in our commodity index products and serve a growing roster of blue-chip

institutional clients seeking exposure to commodities as an asset class.We welcomed a senior commodity

derivatives professional to spearhead the growth of our commodity index derivatives business.

Since year-end, we added experienced professionals to lead our established prime brokerage effort and a

new quantitative strategies team, complementing our electronic and portfolio trading capabilities.We also

appointed co-heads of equity products to help expand the Firm’s leading institutional trading platform.

Jefferies’ knowledge-driven sales and tradingforce provides investors outstanding liquidity inthe global markets, trading equity, convertible,high yield, investment grade fixed income andcommodity-linked financial products. We alsooffer top-tier private client, correspondentclearing, prime brokerage, securities lendingand NYSE floor brokerage services.

32.

Equity Market Making(no. of stocks, approximations)

5,000

4,000

3,000

2,0001,500

01 02 03 04 05 01 02 03 04 05

Companies Under Research Coverage

1,112

959873826

731

Sales, Trading & Research

Equities Fixed Income

Sales & Trading Revenues by Product (15)

(15) Includes commission and principal transaction revenues.

Equities 64%

High Yield 10%

Bonds Direct 5%

Jefferies Financial Products 7%

Other 1%

Equities 81%

Execution/Other 7%

Convertibles 6%Execution/Other 2%

Convertibles 11%

High Yield 6%

2005$617 million

2000$485 million

2005 ANNUAL REPORT

33.Forward Thinking In Research

In 2005, the scope and reputation of our research product continued to make great strides. Jefferies ranked

as the #2 provider of equity research on Wall Street in WSJ’s “Best on the Street 2005 Analysts Survey”

(May, 2005). Forbes and StarMine ranked Jefferies’ equity research effort among the Top 10 in their “North

America’s Top Research Analysts Survey” (May, 2005). In addition, equity analysts were represented in

Institutional Investor’s research survey,“Home Run Hitters” (April, 2005) and ranked #1 in Oil & Gas

Drilling research in Bloomberg Markets’ survey,“Oil Prophets” (October, 2005).

We enhanced energy, technology, gaming, life sciences, industrials, and telecom research coverage,

incorporating semiconductor devices, medical devices and diagnostics, U.S. and UK oil and gas exploration

and production, dry bulk shipping, emerging telecom, wireless and data services, specialty chemicals,

alternative energy (clean technology), and UK hotel and gaming. Over 100 equity research professionals

now cover more than 700 U.S. and European companies. Nearly 60 percent of companies under coverage

have a market capitalization of less than $2 billion.

Outside of Equities, we earned the #2 spot in Metals and Mining in Institutional Investor’s “2005

All-America Fixed Income Research Team” (September, 2005).We added high yield coverage of E&P, oil

service, and refining, and maintained coverage of more than 300 companies. Coverage of the convertible

universe increased to nearly 100 companies.We added high grade and corporate credit research to

complement our investment grade fixed income trading capabilities, and enhanced our quantitative

research for our portfolio trading offering.

Jefferies hosted our 1st annual Internet, 2nd annual Shipping, and 3rd annual Communications & Media

conferences. Other conference topics included Automotive, Offshore Technology, Specialty and Post-Acute

Healthcare Services. In addition, we introduced a weekly conference call series covering timely topics.

Jefferies award-winning research team providesunique investment ideas in equity, high yield,convertible and investment grade fixed incomesecurities around the globe—focusing on small-,mid-cap and growth companies.


34. Since year-end, we launched equity research coverage of the restaurant industry.We also hosted our

2nd annual Internet and 1st Wireless Broadband conferences, as well as a Q1 ‘06 High Yield Sector

Outlook roadshow.We are looking forward to upcoming conferences focused on Gaming/Lodging/

Media/Entertainment, Industrials,Alternative Energy & Cleantech, and Life Sciences.

Achieving Balance Through Asset Management

Our growing asset management effort, still in its early years, has quickly established itself as a solid

contributor.We are confident that it will present us with many rewarding opportunities as it evolves.

Revenues from our asset management activities have increased nearly 70 percent in the past 5 years. In 2005,

assets under our management increased 27 percent to $3.3 billion, comprised of fixed income securities,

equities, convertible securities and real assets. Including third party managed funds, assets under management

increased from $3.77 billion to $4.26 billion.Alignment of interests is important to us, and, across these

asset classes, alongside our clients, we’ve had an average investment of $224 million during the year.

During the year, we welcomed a Chief Investment Officer to drive the activities of Jefferies Asset

Management, LLC.We manage two new CLOs, with over $600 million in assets, and made inroads toward

the addition of new products and managers to the platform.

We have a solid and scalable infrastructure for growing our asset management business. Our goal is to

expand into new asset classes and strategies, recruit talented managers, and achieve consistent returns in all

market conditions.We are seeking to grow our asset management business with a view to providing more

balance to our overall Firm results, as well as to leverage our relationships and opportunities.

Since year-end, Jefferies Asset Management, LLC became a registered adviser and we welcomed an

additional portfolio management team.

Strategic fund and portfolio managers seek to manage risk effectively and to consistentlydeliver favorable returns in all market conditions.Products managed by Jefferies include equities,fixed income securities, convertible securities and real assets.

35.

Equity Research Companies UnderCoverage by Industry

Equity Research Companies UnderCoverage by Market Cap

Asset Management

Industrials 9%Aerospace/Defense 3%

Healthcare 18%

Consumer/Retail 4%

Energy 22%

Services 11%

Gaming/Lodging 4%

Media/Telecom 8%

Technology 21%

$2.0 – $5B 17.4%

$0 – $2B 58.4%

Over $5B 24.2%

Equity Research

2001$1,531 million(16)

2005$4,260 million(16)

Assets Under Management(by predominant asset strategy)

Equities/FixedIncome(17) 7%

Real Assets 3%

Equities 12%

Private Equity(17) 29%

Private Equity(17) 15%

Fixed Income 24%

Convertibles 44%

Fixed Income 27%

Convertibles 39%

(16) Includes the Company’s managed or co-managed assets as well as third party managed funds. Jefferies’ managed and co-managed assets totaled $1,078 million in 2001 and$3,344 million in 2005. (17) Third party managed funds (funds in which the Company has an interest in the entities that manage these assets or otherwise receives a portion of themanagement or incentive fees).


36.

2,045 Employee-PartnersOur people are our most important asset. Intellectual capital is vital. We attract and retain

some of the brightest minds on Wall Street and foster a one-firm, creative-thinking approach.

Our absolute goal is to provide our clients with the best advice, the best ideas and the best

opportunities, across all our products and services. We seek to advise them, to identify and

overcome any obstacles, and help them reach their objectives effectively. We are a firm of

shareholders, vested deeply in the success of our Firm and the success of our clients.

This alignment makes us highly effective and unique.


38.

Global OpportunityThe markets and our clients know no geographic boundaries. Jefferies serves

thousands of institutions and hundreds of growing and mid-sized companies around

the world. We pair a client-first approach with a regionally-focused sensibility, and have

offices across the U.S., in Canada, the UK, Switzerland, France and Japan. 2005

marked twenty years of Jefferies’ presence outside of the U.S., and we made

significant inroads to serving companies based in Israel, India and China and their

global-minded investors. We are committed to serving the needs of a

growing client base wherever they do business.

2005 ANNUAL REPORT

39.

United States

New YorkSan FranciscoSilicon Valley Los AngelesDenverStamfordAtlantaChicagoBoston

Jersey CityChapel HillNashvilleDallasAustinHoustonRichmondWashington DC

International

LondonCalgaryParisTokyoZurich

Six Years of Record Results

The financial information presented in this Annual Report should be read in conjunction with our complete Consolidated Financial Statements (including the notes) contained in our Form 10-K for the year ended December 31, 2005. Our Form 10-K for the year ended December 31, 2005 was filed with the SEC on March 1, 2006and is also available on our website at www.jefferies.com.

2005 ANNUAL REPORT

41.

Year ended December 31,

(in thousands, except per share amounts) 2005 2004 2003

REVENUES:Commissions $ 246,943 $ 258,838 $ 250,191

Principal transactions 349,489 358,213 301,299

Investment banking 495,014 352,804 229,608

Asset management fees and investment income from managed funds 82,052 81,184 32,769

Interest 304,053 134,450 102,403

Other 20,322 13,150 10,446

Total revenues 1,497,873 1,198,639 926,716

Interest expense 293,173 140,394 97,102

Revenues, net of interest expense 1,204,700 1,058,245 829,614

NON-INTEREST EXPENSES:Compensation and benefits 669,957 595,887 474,709

Floor brokerage and clearing fees 46,644 52,922 48,217

Technology and communications 67,666 64,555 58,581

Occupancy and equipment rental 47,040 39,553 32,534

Business development 42,512 35,006 26,481

Other 62,474 43,333 44,559

Total non-interest expenses 936,293 831,256 685,081

Earnings before income taxes and minority interest 268,407 226,989 144,533

Income taxes 104,089 83,955 52,851

Earnings before minority interest 164,318 143,034 91,682

Minority interest 6,875 11,668 7,631

Net earnings $ 157,443 $ 131,366 $ 84,051

EARNINGS PER SHARE OF COMMON STOCK:Basic $ 2.55 $ 2.29 $ 1.58

Diluted $ 2.32 $ 2.06 $ 1.42

WEIGHTED AVERAGE SHARES OF COMMON STOCK:Basic 61,823 57,453 53,090

Diluted 67,784 63,908 59,266

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS


42.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31,

(in thousands) 2005 2004

ASSETS

Cash and cash equivalents $ 255,933 $ 284,111

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations 629,360 553,720

Short term bond funds 7,037 6,861

Investments 107,684 97,586

Investments in managed funds 278,116 195,982

Securities borrowed 8,143,478 10,232,950

Receivable from brokers, dealers and clearing organizations 389,994 312,973

Receivable from customers 457,839 371,842

Securities owned 1,612,782 649,299

Securities pledged to creditors 178,686 597,434

Premises and equipment 69,821 57,749

Goodwill 220,607 134,936

Other assets 429,594 329,185

$ 12,780,931 $ 13,824,628

LIABILITIES AND STOCKHOLDERS’ EQUITY

Bank loans $ – $ 70,000

Securities loaned 7,729,544 9,330,980

Payable to brokers, dealers and clearing organizations 303,480 376,735

Payable to customers 813,896 702,200

Securities sold, not yet purchased 1,260,565 1,120,173

Accrued expenses and other liabilities 570,229 361,254

10,677,714 11,961,342

Long-term debt 779,873 789,067

Minority interest 36,494 35,086

11,494,081 12,785,495

STOCKHOLDERS’ EQUITY:Preferred stock – –

Common stock 7 7

Additional paid-in capital 709,447 508,221

Retained earnings 803,262 677,464

Less:Treasury stock (220,703) (149,039)

Currency translation adjustments 962 9,348

Additional minimum pension liability (6,125) (6,868)

Net stockholders’ equity 1,286,850 1,039,133

$ 12,780,931 $ 13,824,628

42.

2005 ANNUAL REPORT

43.


(in thousands) 2005 2004 2003

Cash flows from operating activities:Net earnings $ 157,443 $ 131,366 $ 84,051

Adjustments to reconcile net earnings to net cash provided by (used in)operating activities:Depreciation and amortization 15,556 14,544 15,519

Accruals related to various benefit plans, stock issuances,net of forfeitures 118,276 117,720 73,989

Deferred income taxes (23,475) (31,532) (17,570)

(Increase) decrease in cash and securities segregated (75,640) (371,079) 106,395

(Increase) decrease in receivables:Securities borrowed 2,089,418 (1,864,593) (3,249,005)

Brokers, dealers and clearing organizations (92,263) (20,370) (187,936)

Customers (105,113) (88,251) (73,803)

(Increase) decrease in securities owned (964,112) (298,150) 101,226

Decrease (increase) in securities pledged to creditors 418,748 (39,707) (501,379)

Increase in other assets (71,318) (68,114) (68,173)

Increase (decrease) in payables:Securities loaned (1,601,436) 1,244,397 3,381,255

Brokers, dealers and clearing organizations (58,856) 263,386 (89)

Customers 127,959 211,503 9,351

Increase in securities sold, not yet purchased 140,392 446,951 433,345

Increase in accrued expenses and other liabilities 213,102 89,710 90,964

Increase (decrease) in minority interest 1,408 (14,834) 23,538

Net cash used in (provided by) operating activities 290,089 (277,053) 221,678

Cash flows from investing activities:(Increase) decrease in short term bond funds (176) 208,929 (23,130)

(Increase) decrease in investments (9,277) (11,623) 3,835

Increase in investments in managed funds (82,134) (68,796) (75,003)

Purchase of premises and equipment (27,186) (17,012) (15,850)

Acquisitions (53,030) (8,894) (26,879)

Net cash flows (used in) provided by investing activities (171,803) 102,604 (137,027)

Cash flows from financing activities:Net proceeds from (payments on) bank loans (70,000) 70,000 (12,000)

Issuance of long term debt – 347,809 –

Retirement of long term debt – (300) (1,000)

Payments on:Repurchase of treasury stock (76,291) (59,492) (6,563)

Dividends paid (31,645) (21,534) (11,807)

Proceeds from exercise of stock options 33,661 10,184 5,913

Common shares – – 5,027

Net cash (used in) provided by financing activities (144,275) 346,667 (20,430)

Effect of currency translation on cash (2,189) 4,017 3,707

Net (decrease) increase in cash and cash equivalents (28,178) 176,235 67,928

Cash and cash equivalents at beginning of year 284,111 107,876 39,948

Cash and cash equivalents at end of year $ 255,933 $ 284,111 $ 107,876

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


44.


(in thousands, except share data) 2005 2004 2003

Supplemental disclosures of cash flow information:Cash paid during the year for:

Interest $ 283,318 $ 121,444 $ 93,592

Income taxes 87,013 91,954 55,436

Randall & Dewey acquisition:Fair value of assets acquired, including goodwill $ 53,503

Liabilities assumed (8,769)

Stock issued (456,442 shares) (17,500)

Cash paid for acquisition 27,234

Cash acquired in acquisition 1,435

Net cash paid for acquisition $ 25,799

Helix acquisition:Fair value of assets acquired, including goodwill $ 41,615




Cash acquired in acquisition –


Bonds Direct acquisition:Fair value of assets acquired, including goodwill $ 20,643

Liabilities assumed (863)



Cash acquired in acquisition 11


Broadview acquisition:Fair value of assets acquired, including goodwill $ 58,904




Cash acquired in acquisition 7,090


Supplemental disclosure of non-cash financing activities:

In 2003, the additional minimum pension liability included in stockholders’ equity of $7,464 resulted from an increase of $1,695 to accrued expenses and other liabilities and an offsetting decrease in stockholders’ equity. In 2004, the additional minimum pension liability included in stockholders’ equity of $6,868 resulted from a decrease of $596 to accrued expenses and other liabilities and an offsetting increase in stockholders’ equity. In 2005, the additional minimum pension liability included in stockholders’ equity of $6,125resulted from a decrease of $743 to accrued expenses and other liabilities and an offsetting increase in stockholders’ equity.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS continued

2005 ANNUAL REPORT

45.

SELECTED QUARTERLY DATA (UNAUDITED)

(in thousands, except per share and percentage data) March June September December Year

2005EARNINGS STATEMENT DATA

Revenues $ 343,893 $ 344,163 $ 378,084 $ 431,733 $ 1,497,873

Interest expense 57,883 67,605 78,804 88,881 293,173

Revenues, net of interest expense 286,010 276,558 299,280 342,852 1,204,700

Non-interest expenses 223,837 216,248 231,743 264,465 936,293

Earnings before income taxes and minority interest 62,173 60,310 67,537 78,387 268,407

Income taxes 23,445 23,621 26,143 30,880 104,089

Minority interest 2,056 1,252 2,799 768 6,875

Net earnings $ 36,672 $ 35,437 $ 38,595 $ 46,739 $ 157,443

Earnings per share of Common Stock:Basic $ 0.61 $ 0.58 $ 0.62 $ 0.74 $ 2.55

Diluted $ 0.56 $ 0.53 $ 0.57 $ 0.68 $ 2.32

Weighted average shares of Common Stock:Basic 60,570 61,468 62,224 62,985 61,823

Diluted 65,997 67,422 68,112 68,979 67,784

OTHER SELECTED DATA

Total assets $ 13,570,684 $ 12,729,233 $ 13,601,570 $ 12,780,931 $ 12,780,931

Long term debt $ 780,988 $ 788,765 $ 781,443 $ 779,873 $ 779,873

Total stockholders’ equity $ 1,121,386 $ 1,170,872 $ 1,201,860 $ 1,286,850 $ 1,286,850

Book value per share of Common Stock $ 19.30 $ 20.27 $ 20.69 $ 22.14 $ 22.14

Common stock shares outstanding 58,090 57,759 58,083 58,110 58,110

Annualized return on equity 13.7% 13.1% 13.1% 15.3% 13.7%

2004EARNINGS STATEMENT DATA

Revenues $ 303,094 $ 277,170 $ 293,102 $ 325,273 $ 1,198,639

Interest expense 24,587 29,303 39,316 47,188 140,394

Revenues, net of interest expense 278,507 247,867 253,786 278,085 1,058,245

Non-interest expenses 217,288 193,191 198,836 221,941 831,256

Earnings before income taxes and minority interest 61,219 54,676 54,950 56,144 226,989

Income taxes 21,257 21,207 21,516 19,975 83,955

Minority interest 8,053 1,683 1,159 773 11,668

Net earnings $ 31,909 $ 31,786 $ 32,275 $ 35,396 $ 131,366

Earnings per share of Common Stock:Basic $ 0.57 $ 0.55 $ 0.56 $ 0.61 $ 2.29

Diluted $ 0.51 $ 0.50 $ 0.51 $ 0.55 $ 2.06

Weighted average shares of Common Stock:Basic 56,298 57,559 57,833 58,112 57,453

Diluted 63,078 63,927 63,867 64,744 63,908

OTHER SELECTED DATA

Total assets $ 11,045,626 $ 13,058,203 $ 14,084,052 $ 13,824,628 $ 13,824,628

Long term debt $ 795,399 $ 783,421 $ 788,905 $ 789,067 $ 789,067

Total stockholders’ equity $ 903,149 $ 949,649 $ 968,150 $ 1,039,133 $ 1,039,133

Book value per share of Common Stock $ 15.90 $ 16.60 $ 17.02 $ 18.14 $ 18.14

Common stock shares outstanding 56,808 57,202 56,872 57,289 57,289

Annualized return on equity 14.6% 13.7% 13.6% 14.1% 14.0%

2005 ANNUAL REPORT


46.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Jefferies Group, Inc.:

We have audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the consolidated statements of financial condition of Jefferies Group, Inc. and subsidiaries

as of December 31, 2005 and 2004, and the related consolidated statements of earnings, changes in

stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year

period ended December 31, 2005 (not presented herein); and in our report dated February 28, 2006, we

expressed an unqualified opinion on those consolidated financial statements.

In our opinion, the information set forth in the accompanying condensed consolidated financial statements

on pages 41-44 is fairly stated, in all material respects, in relation to the consolidated financial statements

from which it has been derived.

New York, New York

February 28, 2006

2005 ANNUAL REPORT

47.

(1) Member of Audit Committee(2) Member of Compensation Committee(3) Member of Corporate Governance and Nominating Committee

JEFFERIES GROUP, INC. BOARD OF DIRECTORS &

JEFFERIES & COMPANY, INC. EXECUTIVE COMMITTEE

Richard B. Handler (44) (BOD)(EC)15 years with Jefferies Chairman of the Board,Chief Executive Officer (JG)(JC)

Brian P. Friedman (50) (BOD)(EC)Board member since July 2005 5 years with JefferiesChairman of the Executive Committee (JC)

W. Patrick Campbell (60)(BOD) (1) (2) (3)

6 years on BoardIndependent Consultant

Richard G. Dooley (76) (BOD) (1) (2) (3)

12 years on BoardRetired Chief Investment Officer,Massachusetts Mutual LifeInsurance Company

Frank J. Macchiarola (64) (BOD) (1) (2) (3)

14 years on BoardPresident, St. Francis College

Jonathan R. Cunningham (43)(EC)19 years with JefferiesExecutive Vice PresidentHead of Convertible Securities (JC)

Lloyd H. Feller (63) (EC)3 years with JefferiesGeneral Counsel, SecretaryExecutive Vice President (JG)(JC)

Scott W. Jones (49) (EC)24 years with JefferiesExecutive Vice PresidentHead of Equities (JC)

Chris M. Kanoff (49)(EC)14 years with JefferiesExecutive Vice PresidentCo-Head Investment Banking (JC)

Joseph A. Schenk (47) (EC)12 years with JefferiesChief Financial Officer (JG)Executive Vice President (JC)

Clifford A. Siegel (48) (EC)15 years with JefferiesChief Executive Officer (JIL)Executive Vice President (JC)

Andrew R. Whittaker (44) (EC)15 years with JefferiesVice ChairmanCo-Head Investment Banking (JC)

(BOD)– Board of Directors(EC) – Executive Committee(JG) – Jefferies Group, Inc.(JC) – Jefferies & Company, Inc. (JIL) – Jefferies International Limited

Not Pictured:Robert E. Joyal (BOD)Board member since January 2006Retired President of Babson Capital Management LLC


48.

CORPORATE DIRECTORY

Primary offices of Jefferies Group, Inc. and Subsidiaries:

UNITED STATES

New York Area

520 Madison Avenue(Corporate Headquarters)New York, NY 10022(212) 284 2300

30 Broad StreetNew York, NY 10004(212) 425 7460

One Station PlaceStamford, CT 06902(203) 708 5800

51 JFK Parkway Short Hills, NJ 07078 (973) 912 2900

Harborside Financial Center34 Exchange Place(Operations Office)Jersey City, NJ 07311(201) 200 1222

Atlanta

3414 Peachtree Road, NEAtlanta, GA 30326(404) 264 5000

Boston

One Post Office SquareBoston, MA 02109(617) 342 7800

1050 Winter Street Waltham, MA 02451(781) 522 8400

Chicago

55 West Monroe StreetChicago, IL 60603(312) 750 4700

Dallas

13355 Noel RoadDallas,TX 75240(972) 701 3000

Houston

909 Fannin StreetHouston,TX 77010(713) 658 1100

333 Clay StreetHouston,TX 77002(281) 774 2000

Los Angeles

11100 Santa Monica BoulevardLos Angeles, CA 90025(310) 445 1199

Nashville

2525 West End AvenueNashville,TN 37203(615) 963 8300

San Francisco

650 California StreetSan Francisco, CA 94108(415) 229 1400

Silicon Valley

950 Tower LaneFoster City, CA 94404(650) 573 4800

Washington, DC

1399 New York Avenue, NWWashington, DC 20005(202) 639 3980

2005 ANNUAL REPORT

49.

INTERNATIONAL

United Kingdom

Bracken HouseOne Friday StreetLondon EC4M 9JAUnited Kingdom+44 20 7618 3500

St. James’s House23 King StreetLondon SW1Y 6QYUnited Kingdom+44 20 7968 8000

Japan

Hibiya Marine Building1-5-1,Yuraku-choChiyoda-ku,Tokyo 100-0006Japan+81 3 5251 6100

Switzerland

Uraniastrasse 128023 ZurichSwitzerland+411 227 1600

France

8 rue Halevy75009 ParisFrance+331 5343 6700

Canada

Stock Exchange Tower300 5th Avenue SWCalgary,Alberta T2P 3C4(403) 444 0973

Corporate Counsel

Morgan, Lewis & Bockius LLP

Transfer Agent, Registrar

American Stock Transfer & Trust Company

Independent Registered Public Accounting Firm

KPMG LLP

Form 10-K

Additional supporting detail to thefinancial statements is provided annually to the Securities andExchange Commission on Form 10-K.Copies may be obtained withoutcharge, upon request.

Common Stock

Jefferies Group, Inc.’s Common Stockis listed on the New York StockExchange under the symbol JEF.

Shareholder Inquiries

(203) 708 5975

Internet Address

http://www.jefferies.com

Member SIPC

Forward-Looking StatementsThis annual report contains statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.These forward-looking statementsmay contain expectations regarding revenues, earnings, operations and other financial projections, and may include statements of future performance,positioning, plans and objectives. These forward-looking statements usually include the words “become,” “continue,” “intend,” “may,” “plan,” “will”and other similar expressions.These forward-looking statements represent only our belief regarding future events, many of which, by their nature, areinherently uncertain and outside of our control. Actual results could differ materially from those projected in these forward-looking statements.Please refer to our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission and other filings we make with the Securities and Exchange Commission for a discussion of important factors that could cause actual results to differ materially from those projected in these forward-looking statements.We do not assume any obligation to update any forward-looking statement we make.

50.

PRODUCTS AND SERVICES

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INVESTMENT BANKING

Equity & Equity-Linked IPOsFollow-on OfferingsDirect PlacementsPIPEsPrivate EquityConvertible Securities

Leveraged Finance High Yield Capital MarketsLeveraged Bank Loan Arrangement Asset-Based Bank Loan ArrangementPrivate Debt Placements Structured FinanceCollateralized Bond Obligations Senior LoansRevolving Credit Facilities*Term Lending*

First & Second Lien Financing*

Bridge Financing*

Mergers & Acquisitions Exclusive Sale & Divestiture Acquisitions Merger Advisory Tender OffersJoint Ventures/Strategic Alliance Takeover DefenseFairness Opinion

Restructuring & Recapitalization Exchange Offers Consent SolicitationsDistressed Capital Raising RecapitalizationRestructuring AdviceDistressed M&A

SALES & TRADING

EquityU.S. SalesInternational SalesResearch SalesPortfolio Trading/QESCapital Markets/OriginationListed Block TradingNASDAQ Market MakingBulletin Board TradingDirect Market AccessElectronic TradingRisk Arbitrage Trading NYSE Floor Brokerage

Equity ProductsPrime BrokerageSecurities LendingCorrespondent ClearingOptionsDerivativesETFs

ConvertiblesTraditional and Mandatory Convertible StructuresCapital Markets/Origination U.S./International Proprietary TradingClosed-end funds

High YieldSales/Trading of High Yield BondsDistressed and Special SituationsBank Debt Trading

Bonds Direct Corporate Bonds Government Agency BondsTreasury Notes and BondsMortgage-backed SecuritiesMunicipal BondsStructured Products

Jefferies Financial ProductsCommodities Indices Commodities-Linked Financial Products

Private Client ServicesWealth Management Restricted Stock Sales Corporate Services Venture ServicesMiddle Market Equity SalesCorporate Cash Management

RESEARCH

U.S. & International Equity Distressed SecuritiesSpecial Situations Post-reorganization Equity U.S. & International High YieldU.S. & International ConvertibleIndustry ConferencesCompany Management MeetingsSite ToursProprietary Channel Checks

ASSET MANAGEMENT

High YieldDistressedSpecial SituationsLong/Short EquityLong/Short Commodities Collateralized Debt Obligations Long/Short Convertible Bonds Convertible Securities Arbitrage Long-Only Strategies

INDUSTRIES/AREAS OF FOCUS

Aerospace & DefenseEnergyFinancial & Business ServicesGamingHealthcareIndustrialMaritime & Oil ServiceMedia & CommunicationsRetail & ConsumerTechnologyFinancial Sponsors

*Services offered as of February 2006

Jefferies Group, Inc.520 Madison Avenue New York, NY 10022

www.jefferies.com

DRIVEN EQUITY & EQUITY-LINKED FINANCING AEROSPACE & DEFENSE UNITED STATES RELATIONSHIPS LEVERAGED & STRUCTURED FINANCE ENERGY GREAT BRITAIN FOCUSED ON GROWTH FINANCIAL &

BUSINESS SERVICES FRANCE WASHINGTON DC INDUSTRIALS SWITZERLAND COMMODITY-LINKED GAMING JAPAN INVESTMENT BANK PRIVATE CLIENT SERVICES HEALTHCARE SECURITIES FIRM

RECAPITALIZATION & RESTRUCTURING CORRESPONDENT CLEARING MARITIME & OIL SERVICE MERGERS & ACQUISITIONS ADVISORY SECURITIES LENDING RETAIL & CONSUMER CANADA EQUITIES FINANCIAL

SPONSORS PRIME BROKERAGE MEDIA & COMMUNICATIONS ATLANTA PARIS INVESTMENT GRADE FIXED INCOME DENVER GLOBAL CREATIVE STRUCTURING FIXED INCOME ENTREPRENEURIAL SPIRIT

NYSE FLOOR BROKERAGE TECHNOLOGY BOSTON SERVING HIGH NET WORTH INDIVIDUALS SERVING GROWING & MID-SIZED COMPANIES CHICAGO COMMITMENT GLOBAL HIGH YIELD BONDS GLOBAL CON-

VERTIBLE BONDS DALLAS INTERNATIONAL CONVERTIBLE BONDS PROPRIETARY INDICES AWARD WINNING RESEARCH & ANALYSIS INVESTMENT BANKING & INSTITUTIONAL SECURITIES FIRM PRIVATE EQUITY

SILICON VALLEY LONDON SECURITIES ORIGINATION BLOCK TRADES LOS ANGELES ASSET-BASED BANK LOANS ZURICH BEST EXECUTION PRIVATE DEBT PLACEMENTS EXPERIENCED STRUCTURED

FINANCE MOTIVATED COLLATERALIZED BOND OBLIGATIONS BEST EXECUTION TENACIOUS SENIOR LOANS INDUSTRY EXPERTISE IPOs NEW YORK TRUSTED PARTNER BROAD PRODUCT CAPABILITIES

FOLLOW-ON OFFERINGS DIRECT PLACEMENTS SENIOR LEVEL ATTENTION CONSENT SOLICITATIONS GLOBAL NETWORK SERVING GROWING & MID-SIZED COMPANIES DRIVEN SERVING INSTITUTIONAL

INVESTORS BANK LOANS DIVERSIFIED JOINT VENTURES/STRATEGIC ALLIANCE NASDAQ MARKET MAKING LIQUIDITY PROVIDER One Firm FULL-SERVICE FOCUSED ON GROWTH

HANDS-ON MERGER ADVISORY SECTOR FOCUS TENDER OFFERS GROWTH-ORIENTED SINCE 1962 2,045 EMPLOYEE-PARTNERS Annual Report 2005 IDEA-DRIVEN SOLUTIONS EXCLUSIVE SALE &

DIVESTITURE TAKEOVER DEFENSE FIRST & SECOND LIEN FINANCING BRIDGE FINANCING SECURITIES RESEARCH SPECIAL SITUATIONS MIDDLE MARKET INVESTMENT BANK OF THE YEAR GROWING & MID-SIZED

COMPANIES DRIVEN AEROSPACE & DEFENSE UNITED STATES RELATIONSHIPS ENERGY GREAT BRITAIN ACQUISITIONS FINANCIAL & BUSINESS SERVICES RESPECTED UNDERWRITER CREATIVE FULL-

SERVICE INDUSTRIALS SWITZERLAND GLOBAL NETWORK GAMING RESTRUCTURING ADVICE FAIRNESS OPINIONS EXCHANGE OFFERS TRUSTED ADVISOR DEDICATED DISTRESSED CAPITAL RAISING

RECAPITALIZATION LOYAL CLIENT BASE DISTRESSED M&A RESEARCH SALES PORTFOLIO TRADING QUANTITATIVE EXECUTION STRATEGIES CAPITAL MARKETS ORIGINATION PRIVATE CLIENT SERVICES CORPO-

RATE SERVICES OPTIONS DERIVATIVES LISTED BLOCK TRADING INTERNATIONAL EQUITY SALES BULLETIN BOARD TRADING DIRECT MARKET ACCESS ELECTRONIC TRADING RISK ARBITRAGE TRADING

ETFs PROPRIETARY TRADING CLOSED-END FUNDS HIGH YIELD BONDS BANK DEBT TRADING CORPORATE BONDS GOVERNMENT AGENCY BONDS TREASURY NOTES AND BONDS MORTGAGE-BACKED SECURI-

TIES MUNICIPAL BONDS COMMODITIES INDICES COMMODITIES-LINKED FINANCIAL PRODUCTS LONG/SHORT EQUITY U.S. EQUITY SALES LONG/SHORT COMMODITIES COLLATERALIZED DEBT OBLIGATIONS

CONVERTIBLE SECURITIES DISTRESSED SECURITIES INVENTIVE REVOLVING CREDIT FACILITIES TERM LENDING NEW YORK CLIENT-FIRST CULTURE SAN FRANCISCO MEDIA & COMMUNICATIONS

RETAIL & CONSUMER SECURITIES FIRM TECHNOLOGY BOSTON SERVING HIGH NET WORTH INDIVIDUALS CHICAGO INVESTMENT BANK FINANCIAL SPONSORS MARITIME & OIL SERVICE ATLANTA SER

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