<PAGE>   1
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                  FORM 10-K/A
 
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934.
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                                       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: 1-11665
 
                             JEFFERIES GROUP, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                            <C>
                   DELAWARE                                      95-2848406
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
   11100 SANTA MONICA BOULEVARD, 11TH FLOOR                        90025
           LOS ANGELES, CALIFORNIA                               (ZIP CODE)
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
 
              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 (310) 445-1199
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                 COMMON STOCK, $.01 PAR VALUE (TITLE OF CLASS)
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]     No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K.  [ ]
 
     State the aggregate market value of the common stock held by nonaffiliates
of the registrant. $865,304,648 as of March 16, 1998.
 
     Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practical date. 20,775,495 shares as of the close
of business March 16, 1998.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
                          See list on following page.
 
                           LOCATION OF EXHIBIT INDEX
        The index of exhibits is contained in Part IV herein on page 40.
================================================================================
<PAGE>   2


        Jefferies Group, Inc. hereby amends Item 8 of its annual report on
Form 10-K for 1997 as set forth in the pages attached hereto.
<PAGE>   3
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Consolidated Financial Statements of Jefferies Group, Inc.
  and Subsidiaries Independent Auditors' Report.............   15
Consolidated Statements of Financial Condition as of
  December 31, 1997 and 1996................................   16
Consolidated Statements of Earnings for the Three Years
  Ended December 31, 1997...................................   17
Consolidated Statements of Changes in Stockholders' Equity
  for the Three Years Ended December 31, 1997...............   18
Consolidated Statements of Cash Flows for the Three Years
  Ended December 31, 1997...................................   19
Notes to Consolidated Financial Statements..................   20
</TABLE>
 
                                       14
<PAGE>   4
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Stockholders
  JEFFERIES GROUP, INC.:
 
     We have audited the accompanying consolidated statements of financial
condition of Jefferies Group, Inc. and subsidiaries as of December 31, 1997 and
1996 and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Jefferies
Group, Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
 
                                          KPMG Peat Marwick LLP
 
Los Angeles, California
January 20, 1998, except as to
  note 19 to the consolidated
  financial statements, which
  is as of March 17, 1998
 
                                       15
<PAGE>   5
 
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           DECEMBER 31, 1997 AND 1996
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                 1997          1996
                                                              ----------    ----------
<S>                                                           <C>           <C>
                                        ASSETS
 
Cash and cash equivalents...................................  $  109,488    $  114,142
Cash and securities segregated and on deposit for regulatory
  purposes or deposited with clearing and depository
  organizations.............................................      30,977        29,107
Receivable from brokers and dealers.........................   1,269,664       965,625
Receivable from customers, officers and directors...........     166,284       113,872
Securities owned............................................     245,413       197,770
Investments.................................................     154,584        50,609
Premises and equipment......................................      42,828        30,871
Other assets................................................      80,304        66,091
                                                              ----------    ----------
                                                              $2,099,542    $1,568,087
                                                              ==========    ==========
 
                         LIABILITIES AND STOCKHOLDERS' EQUITY
 
Payable to brokers and dealers..............................  $  981,705    $  805,713
Payable to customers........................................     202,255       170,384
Securities sold, not yet purchased..........................     188,703       124,315
Accrued expenses and other liabilities......................     318,258       207,281
                                                              ----------    ----------
                                                               1,690,921     1,307,693
Long-term debt..............................................     149,290        52,987
Minority interest...........................................      16,575        11,962
                                                              ----------    ----------
                                                               1,856,786     1,372,642
                                                              ----------    ----------
Stockholders' equity:
  Preferred stock, $.01 par value. Authorized 1,000,000
     shares; none issued....................................          --            --
  Common stock, $.01 par value. Authorized 25,000,000
     shares; issued 22,393,910 shares in 1997 and 37,514,124
     shares in 1996.........................................         224           188
  Additional paid-in capital................................          39        62,569
  Retained earnings.........................................     271,589       232,741
  Less:
     Treasury stock, at cost; 2,107,842 shares in 1997 and
      16,788,226 shares in 1996.............................     (26,954)      (99,404)
     Accumulated other comprehensive income (loss):
       Currency translation adjustments.....................        (622)          (96)
       Additional minimum pension liability adjustment......      (1,520)         (553)
                                                              ----------    ----------
     Total accumulated other comprehensive income (loss)....      (2,142)         (649)
                                                              ----------    ----------
       Net stockholders' equity.............................     242,756       195,445
                                                              ----------    ----------
                                                              $2,099,542    $1,568,087
                                                              ==========    ==========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       16
<PAGE>   6
 
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENTS OF EARNINGS
                      THREE YEARS ENDED DECEMBER 31, 1997
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                               1997        1996        1995
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
REVENUES:
  Commissions..............................................  $282,317    $222,048    $165,610
  Principal transactions...................................   177,214     143,912      97,954
  Corporate finance........................................   228,640      97,870      72,003
  Interest.................................................    70,740      47,803      65,792
  Other....................................................     5,593       4,993       4,228
                                                             --------    --------    --------
     Total revenues........................................   764,504     516,626     405,587
  Interest expense.........................................    61,466      37,852      54,365
                                                             --------    --------    --------
     Revenues, net of interest expense.....................   703,038     478,774     351,222
                                                             --------    --------    --------
NON-INTEREST EXPENSES:
  Compensation and benefits................................   409,979     264,041     195,278
  Floor brokerage and clearing fees........................    35,066      27,323      20,273
  Telecommunications and data processing services..........    47,192      35,177      24,960
  Occupancy and equipment rental...........................    21,297      17,207      15,993
  Travel and promotional...................................    19,207      13,541      10,296
  Software royalties.......................................     9,853       8,805       5,987
  Other....................................................    44,494      29,493      25,197
                                                             --------    --------    --------
     Total non-interest expenses...........................   587,088     395,587     297,984
                                                             --------    --------    --------
Earnings before income taxes and minority interest.........   115,950      83,187      53,238
Income taxes...............................................    47,677      35,438      21,911
                                                             --------    --------    --------
     Earnings before minority interest.....................    68,273      47,749      31,327
Minority interest in earnings of consolidated subsidiaries,
  net......................................................     4,706       4,189       2,798
                                                             --------    --------    --------
     Net earnings..........................................  $ 63,567    $ 43,560    $ 28,529
                                                             ========    ========    ========
EARNINGS PER SHARE:
  Basic....................................................  $   2.95    $   1.90    $   1.23
                                                             ========    ========    ========
  Diluted..................................................  $   2.80    $   1.84    $   1.19
                                                             ========    ========    ========
WEIGHTED AVERAGE SHARES OF COMMON STOCK:
  Basic....................................................    21,552      22,980      23,270
  Diluted..................................................    22,349      23,410      23,922
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       17
<PAGE>   7
 
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                      THREE YEARS ENDED DECEMBER 31, 1997
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                                     ACCUMULATED
                                                                 ADDITIONAL                             OTHER            NET
                                                        COMMON    PAID-IN     RETAINED   TREASURY   COMPREHENSIVE   STOCKHOLDERS'
                                                        STOCK     CAPITAL     EARNINGS    STOCK     INCOME (LOSS)      EQUITY
                                                        ------   ----------   --------   --------   -------------   -------------
<S>                                                     <C>      <C>          <C>        <C>        <C>             <C>
Balance, December 31, 1994............................   $ 90     $ 51,120    $165,597   $(52,958)     $  (614)       $ 163,235
Exercise of stock options (970,572 shares)............      2        5,613          --         --           --            5,615
Purchase of 1,455,476 shares of treasury stock........     --           --          --    (12,768)          --          (12,768)
Issuance of common stock (319,328 shares).............      1        1,205          --      1,237           --            2,443
Issuance of restricted stock (165,212 shares).........     --          179          --        626           --              805
Capital Accumulation Plan distribution (94,564
  shares).............................................     --           --          --        788           --              788
Increase in proportionate share of subsidiary's equity
  related to subsidiary's purchase of treasury
  stock...............................................     --           --        (766)        --           --             (766)
Comprehensive income:
  Net earnings........................................     --           --      28,529         --           --           28,529
  Other comprehensive income (loss), net of tax:
  Currency translation adjustment.....................     --           --          --         --          (57)             (57)
  Additional minimum pension liability adjustment.....     --           --          --         --         (437)            (437)
                                                                                                       -------        ---------
  Other comprehensive income (loss)...................                                                    (494)            (494)
                                                                                                                      ---------
Comprehensive income..................................     --           --          --         --           --           28,035
Dividends paid ($.05 per share).......................     --           --      (1,126)        --           --           (1,126)
                                                         ----     --------    --------   --------      -------        ---------
Balance, December 31, 1995............................     93       58,117     192,234    (63,075)      (1,108)         186,261
Exercise of stock options (352,460 shares)............      1        2,555          --         97           --            2,653
Purchase of 2,320,352 shares of treasury stock........     --           --          --    (36,766)          --          (36,766)
Issuance of common stock (71,388 shares)..............     --          770          --         --           --              770
Issuance of restricted stock (68,864 shares)..........     --          695          --         --           --              695
Capital Accumulation Plan distribution (39,186
  shares).............................................     --          138          --        340           --              478
Increase in proportionate share of subsidiary's equity
  related to subsidiary's purchase of treasury
  stock...............................................     --           --      (1,115)        --           --           (1,115)
Additional vesting of restricted stock shares.........     --          388          --         --           --              388
Comprehensive income:
  Net earnings........................................     --           --      43,560         --           --           43,560
  Other comprehensive income (loss), net of tax:
  Currency translation adjustment.....................     --           --          --         --          426              426
  Additional minimum pension liability adjustment.....     --           --          --         --           33               33
                                                                                                       -------        ---------
  Other comprehensive income (loss)...................                                                     459              459
                                                                                                                      ---------
Comprehensive income..................................     --           --          --         --           --           44,019
Dividends paid ($.0875 per share).....................     --           --      (1,883)        --           --           (1,883)
Redemption of rights ($.0025 per right)...............     --           --         (55)        --           --              (55)
Two-for-one stock split...............................     94          (94)         --         --                            --
                                                         ----     --------    --------   --------      -------        ---------
Balance, December 31, 1996............................    188       62,569     232,741    (99,404)        (649)         195,445
Exercise of stock options (240,028 shares)............      2        3,431          --         --           --            3,433
Purchase of 1,063,026 shares of treasury stock........     --           --          --    (23,584)          --          (23,584)
Issuance of common stock (41,052 shares)..............     --          879          --          3           --              882
Issuance of restricted stock (198,888 shares).........     --        3,282          --         --           --            3,282
Capital Accumulation Plan distribution (143,228
  shares).............................................     --          508          --      1,289           --            1,797
Retirement of treasury shares (15,600,000 shares).....    (78)     (70,902)    (23,762)    94,742           --               --
Increase in proportionate share of subsidiary's equity
  related to subsidiary's purchase of treasury
  stock...............................................     --           --         (45)        --           --              (45)
Decrease in proportionate share of subsidiary's equity
  related to stock issuances at the subsidiary........     --           --       1,603         --           --            1,603
Additional vesting and tax benefits on restricted
  stock shares........................................     --          384          --         --           --              384
Comprehensive income:
  Net earnings........................................     --           --      63,567         --           --           63,567
  Other comprehensive income (loss), net of tax:
  Currency translation adjustment.....................     --           --          --         --         (526)            (526)
  Additional minimum pension liability adjustment.....     --           --          --         --         (967)            (967)
                                                                                                       -------        ---------
  Other comprehensive income (loss)...................                                                  (1,493)          (1,493)
                                                                                                                      ---------
Comprehensive income..................................                                                                   62,074
Dividends paid ($.125 per share)......................     --           --      (2,515)        --           --           (2,515)
Two-for-one stock split...............................    112         (112)         --         --           --               --
                                                         ----     --------    --------   --------      -------        ---------
Balance, December 31, 1997............................   $224     $     39    $271,589   $(26,954)     $(2,142)       $(242,756)
                                                         ====     ========    ========   ========      =======        =========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       18
<PAGE>   8
 
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                      THREE YEARS ENDED DECEMBER 31, 1997
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                1997         1996        1995
                                                              ---------    --------    ---------
<S>                                                           <C>          <C>         <C>
Cash flows from operating activities:
  Net earnings..............................................  $  63,567    $ 43,560    $  28,529
                                                              ---------    --------    ---------
  Adjustments to reconcile net earnings to net cash provided
    by operating activities:
    Depreciation and amortization...........................     16,504      13,644        9,720
    Deferred income taxes...................................     (8,813)    (10,462)      (4,110)
    Additional vesting of restricted stock..................        384         388           --
    (Increase) decrease in cash and securities segregated...     (1,870)    (23,849)       8,000
    (Increase) decrease in receivables:
      Brokers and dealers...................................   (304,039)    152,529       31,516
      Customers, officers and directors.....................    (52,412)     (6,714)      (1,278)
    Increase in securities owned............................    (47,643)    (30,560)     (22,270)
    Increase in investments.................................   (103,975)    (25,452)      (4,066)
    (Increase) decrease in other assets.....................    (16,316)    (38,044)      17,090
    Increase (decrease) in payables:
      Brokers and dealers...................................    175,992     (58,743)      23,623
      Customers.............................................     31,871     (44,171)    (110,841)
    Increase in securities sold, not yet purchased..........     64,388      41,383       22,345
    Increase in accrued expenses and other liabilities......    118,822      83,252       45,708
                                                              ---------    --------    ---------
      Net cash provided by (used in) operating activities...    (63,540)     96,761       43,966
                                                              ---------    --------    ---------
Cash flows from financing activities:
  Net payments on bank loans................................         --          --         (866)
  Issuance of term debt.....................................     99,722          --           --
  Net payments on:
    Repurchase of treasury stock............................    (23,584)    (36,766)     (12,768)
    Redemption of 8 7/8% Subordinated Notes, due 1997.......     (3,576)     (3,576)      (3,576)
    Dividends paid..........................................     (2,515)     (1,883)      (1,126)
    Redemption of rights....................................         --         (55)          --
  Proceeds from exercise of stock options...................      3,433       2,653        5,615
  Increase in minority interest.............................      4,613       3,581        2,245
  Net decrease (increase) in proportionate share of
    subsidiary's equity.....................................      1,558      (1,115)        (766)
  Distribution of Capital Accumulation Plan shares..........      1,797         478          788
  Payments -- repurchase agreements.........................         --          --      (18,696)
  Issuance of restricted shares.............................      3,282         695          805
  Issuance of common shares.................................        882         770        2,443
                                                              ---------    --------    ---------
      Net cash provided by (used in) financing activities        85,612     (35,218)     (25,902)
                                                              ---------    --------    ---------
Cash flows from investing activities -- purchase of premises
  and equipment.............................................    (26,200)    (16,145)     (13,070)
                                                              ---------    --------    ---------
Effect of currency translation on cash......................       (526)        426          (57)
                                                              ---------    --------    ---------
      Net (decrease) increase in cash and cash
       equivalents..........................................     (4,654)     45,824        4,937
Cash and cash equivalents at beginning of year..............    114,142      68,318       63,381
                                                              ---------    --------    ---------
Cash and cash equivalents at end of year....................  $ 109,488    $114,142    $  68,318
                                                              =========    ========    =========
Supplemental disclosures of cash flow information:
  Cash paid during the year for:
    Interest................................................  $  58,038    $ 38,522    $  54,934
    Income taxes............................................     52,030      42,724       15,168
</TABLE>
 
Supplemental disclosure of non-cash financing activities:
 
  In 1995, the additional minimum pension liability included in stockholders'
    equity of $586 resulted from an increase of $437 to accrued expenses and
    other liabilities and an offsetting decrease in stockholders' equity. In
    1996, the additional minimum pension liability included in stockholders'
    equity of $553 resulted from a decrease of $33 to accrued expenses and other
    liabilities and an offsetting increase in stockholders' equity. In 1997, the
    additional minimum pension liability included in stockholders' equity of
    $1,520 resulted from an increase of $967 to accrued expenses and other
    liabilities and an offsetting decrease in stockholders' equity.
          See accompanying notes to consolidated financial statements.
                                       19
<PAGE>   9
 
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF CONSOLIDATION
 
     The accompanying consolidated financial statements include the accounts of
Jefferies Group, Inc. (Company) and all subsidiaries, including Jefferies &
Company, Inc. (Jefferies) and Investment Technology Group, Inc. (ITGI) and its
wholly owned subsidiary, ITG Inc. (ITG). The accounts of W & D Securities, Inc.
(W & D) are also consolidated because of the nature and extent of the Company's
ownership interest in W & D. The Company and its subsidiaries are primarily
engaged in a single line of business as a securities broker-dealer, which
includes several types of services, such as principal and agency transactions in
equity, convertible debt and taxable fixed income securities, as well as
corporate finance activities. Operations of the Company include agency and
principal transactions and other securities-related financial services.
 
     All significant intercompany accounts and transactions are eliminated in
consolidation.
 
SECURITIES TRANSACTIONS
 
     All transactions in securities, commission revenues and related expenses
are recorded on a trade-date basis.
 
     Securities owned and securities sold, not yet purchased, are valued at
market, and unrealized gains or losses are reflected in revenues from principal
transactions.
 
INVESTMENTS
 
     Partnership interests are recorded at their initial cost. The carrying
values of these investments are adjusted when the adjustment can be supported by
quoted market prices, adjusted for liquidity and other relevant factors. In
addition, the carrying values are reduced when the Company determines that the
estimated realizable value is less than the carrying value based on relevant
financial and market information.
 
     Debt and equity investments consist primarily of mutual funds which are
valued at market, based on available quoted prices.
 
     Equity and debt interests in affiliates are recorded under either the
equity or cost method depending on the Company's level of ownership and control.
 
RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS
 
     Receivable from, and payable to, customers includes amounts receivable and
payable on cash and margin transactions. Securities owned by customers and held
as collateral for these receivables are not reflected in the accompanying
consolidated financial statements. Receivable from officers and directors
represents balances arising from their individual security transactions. Such
transactions are subject to the same regulations as customer transactions.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     Substantially all of the Company's financial instruments are carried at
fair value or amounts approximating fair value. Assets, including cash and cash
equivalents, securities borrowed or purchased under agreements to sell, and
certain receivables, are carried at fair value or contracted amounts, which
approximate fair value due to the short period to maturity. Similarly,
liabilities, including bank loans, securities loaned or sold under agreements to
repurchase, long-term debt and certain payables, are carried at amounts
approximating fair value. Securities owned and securities sold, not yet
purchased, are valued at quoted market prices, if available.
 
                                       20
<PAGE>   10
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
For securities without quoted prices, the reported fair value is estimated using
various sources of information, including quoted prices for comparable
securities.
 
     The Company has derivative financial instrument positions in option
contracts, foreign exchange forward contracts and index futures contracts which
are measured at fair value with gains and losses recognized in earnings. The
gross contracted or notional amount of these contracts is not reflected in the
consolidated statements of financial condition (see note 14 of the notes to
consolidated financial statements.)
 
PREMISES AND EQUIPMENT
 
     Premises and equipment are depreciated using the straight-line method over
the estimated useful lives of the related assets (generally three to ten years).
Leasehold improvements are amortized using the straight-line method over the
term of related leases or the estimated useful lives of the assets, whichever is
shorter.
 
GOODWILL
 
     Goodwill, which represents the excess of cost over net assets acquired, is
amortized on a straight-line basis over ten to fifteen years. The Company
assesses the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through future operating cash flows of the acquired business.
 
CAPITALIZED SOFTWARE
 
     The Company capitalizes software development costs where technological
feasibility of the product has been established. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs requires considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenues, estimated
economic life and changes in software and hardware technologies. The Company is
amortizing capitalized software costs using the straight-line method over one to
two years, with an average remaining life of under two years. Amortization
begins when the product is available for release to the customers. As of
December 31, 1997 and 1996, respectively, the Company had $6.0 million and $3.0
million of capitalized software costs, net of accumulated amortization included
in other assets. In 1997, 1996 and 1995, the Company amortized software costs of
$1.5 million, $1.4 million, and $894,000, respectively.
 
     Research and development expenses related to software were $7.1 million,
$6.0 million and $4.9 million in 1997, 1996 and 1995, respectively. In 1997,
1996 and 1995, $4.4 million, $1.6 million and $2.1 million, respectively, were
capitalized.
 
INCOME TAXES
 
     The Company files a consolidated U.S. Federal income tax return which
includes all qualifying subsidiaries. Amounts provided for income taxes are
based on income reported for financial statement purposes and do not necessarily
represent amounts currently payable. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Deferred
income taxes are provided for temporary differences in reporting certain items,
principally state income taxes, depreciation,
 
                                       21
<PAGE>   11
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
deferred compensation and unrealized gains and losses on securities owned. Tax
credits are recorded as a reduction of income taxes when realized.
 
CASH EQUIVALENTS
 
     The Company generally invests its excess cash in money market funds and
other short-term investments. At December 31, 1997 and 1996, such cash
equivalents amounted to $90,064,000 and $95,650,000, respectively. Cash
equivalents are part of the cash management activities of the Company and
generally mature within 90 days.
 
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
 
     Repurchase agreements consist of sales of U.S. Treasury notes under
agreements to repurchase. They are treated as collateralized financing
transactions and are recorded at their contracted repurchase amount.
 
     Reverse repurchase agreements consist of purchases of U.S. Treasury notes
under agreements to re-sell. They are treated as collateralized financing
transactions and are recorded at their contracted re-sale amount.
 
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, but not yet issued. Diluted earnings per share of common stock are
computed by dividing net earnings by the average number of shares outstanding of
common stock and all dilutive common stock equivalents outstanding during the
period. All shares used in the earnings per share calculations were restated to
retroactively reflect the two-for-one stock splits approved by the Board of
Directors on November 19, 1997 and March 2, 1996.
 
     In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS 128 established new standards for computing and presenting earnings
per share. SFAS No. 128 replaced the presentation of primary earnings per share
with a presentation of basic earnings per share. SFAS No. 128 also requires dual
presentation of basic and diluted earnings per share on the face of the
statement of earnings for entities with complex capital structures and requires
a reconciliation of the numerator and denominator of the basic earnings per
share computation to the numerator and denominator of the diluted earnings per
share computation. SFAS 128 did not have a material impact on the Company.
Earnings per share information has been restated to retroactively reflect the
adoption of Statement of Financial Accounting Standards No. 128.
 
COMMON STOCK
 
     On November 19, 1997, the Company's Board of Directors approved a
two-for-one split of all of the outstanding shares of the Company's common
stock, payable December 15, 1997 to stockholders of record at the close of
business on November 28, 1997. The stated par value of each share was not
changed from $0.01.
 
     In addition, the Board of Directors, approved the quarterly cash dividend
at $0.05 per share on the approximately 20,000,000 common shares outstanding
after the split (effectively doubling the dividend rate).
 
     On March 2, 1996, the Company's Board of Directors approved a two-for-one
split of all of the outstanding shares of the Company's common stock, payable
March 29, 1996 to stockholders of record at the close of business on March 15,
1996. The stated par value of each share was not changed from $0.01.
 
                                       22
<PAGE>   12
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
     In addition, the Board of Directors, approved the quarterly cash dividend
at $0.05 per share (pre November 1997 stock split) on the approximately
12,000,000 common shares (pre November 1997 stock split) to be outstanding after
the March 2, 1996 split (effectively doubling the dividend rate), as well as
repurchase of up to 1 million of the new common shares (pre November 1997 stock
split), on the open market or otherwise, from time to time.
 
     All share, share price and per share information included in the
consolidated financial statements has been restated to retroactively reflect the
effect of the November 19, 1997 and the March 2, 1996 two-for-one stock splits.
 
     The amount of common stock shares issued as of December 31, 1996 has been
restated to reflect the November 19, 1997 two-for-one stock split. Prior to
restatement, the actual amount of common stock shares issued as of December 31,
1996 was 18,757,062 with 25,000,000 common stock shares authorized.
 
TRANSFERS OF FINANCIAL ASSETS
 
     In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125
establishes, among other things, new criteria for determining whether a transfer
of financial assets should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. SFAS No. 125 also establishes new accounting
requirements for pledged collateral. As issued, SFAS No. 125 was to be effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and was to be applied
prospectively. Earlier or retroactive application of SFAS No. 125 is not
permitted. In November 1996, the FASB deferred for one year the effective date
of significant provisions of SFAS No. 125. SFAS No. 125 did not have a material
impact on the Company.
 
COMPREHENSIVE INCOME
 
     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. All items that are
required to be recognized under accounting standards as components of
comprehensive income are required to be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS No.
130 does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income for
the period in that financial statement.
 
     SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
 
     The Company implemented SFAS No. 130 in 1997. The adoption of SFAS No. 130
did not have a material impact on the Company's consolidated financial position,
results of operations, or liquidity.
 
SEGMENT REPORTING
 
     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also
 
                                       23
<PAGE>   13
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
establishes standards for related disclosures about products and services,
geographic areas, and major customers.
 
     SFAS No. 131 requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
 
     SFAS No. 131 also requires that a public business enterprise report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
 
     SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997. SFAS No. 131 is not expected to have a material impact
on the Company.
 
FOREIGN CURRENCY TRANSLATION
 
     The Company's foreign revenues and expenses are translated at average
current rates during each reporting period. Foreign currency transaction gains
and losses are included in the consolidated statement of earnings. Gains and
losses resulting from translation of financial statements are excluded from the
consolidated statement of earnings and are recorded directly to a separate
component of stockholders' equity.
 
RECLASSIFICATIONS
 
     Certain reclassifications have been made to the prior years' amounts to
conform to the current year's presentation.
 
USE OF ESTIMATES
 
     Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
 
(2) GOODWILL
 
     At December 31, 1997 and 1996, excess of purchase price over net assets
acquired remaining was $3,556,000 and $2,471,000, net of accumulated
amortization of $3,436,000 and $2,811,000, respectively, and is included in
other assets.
 
                                       24
<PAGE>   14
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
(3) RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS
 
     The following is a summary of the major categories of receivable from, and
payable to, brokers and dealers as of December 31, 1997 and 1996 (in thousands
of dollars):
 
<TABLE>
<CAPTION>
                                                                 1997          1996
                                                              ----------    ----------
<S>                                                           <C>           <C>
Receivable from brokers and dealers:
  Securities borrowed.......................................  $1,197,227    $  919,616
  Other.....................................................      72,437        46,009
                                                              ----------    ----------
                                                              $1,269,664    $  965,625
                                                              ==========    ==========
Payable to brokers and dealers:
  Securities loaned.........................................  $  966,132    $  787,322
  Other.....................................................      15,573        18,391
                                                              ----------    ----------
                                                              $  981,705    $  805,713
                                                              ==========    ==========
</TABLE>
 
     The Company has a securities borrowed versus securities loaned business
with other brokers. The Company also borrows securities to cover short sales and
to complete transactions in which customers have failed to deliver securities by
the required settlement date, and lends securities to other brokers and dealers
for similar purposes. From these activities, the Company derives interest
revenue and interest expense.
 
(4) RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS
 
     The following is a summary of the major categories of receivables from
customers, officers and directors as of December 31, 1997 and 1996 (in thousands
of dollars):
 
<TABLE>
<CAPTION>
                                                                1997       1996
                                                              --------   --------
<S>                                                           <C>        <C>
Customers (net of allowance for uncollectible accounts of
  $2,453 in 1997 and $3,051 in 1996)........................  $164,099   $109,924
Officers and directors......................................     2,185      3,948
                                                              --------   --------
                                                              $166,284   $113,872
                                                              ========   ========
</TABLE>
 
     Interest is paid on free credit balances in accounts of customers who have
indicated that the funds will be used for investment at a future date. The rate
of interest paid on such free credit balances varies between the thirteen-week
treasury bill rate and 1% below that rate, depending upon the size of the
customers' free credit balances.
 
     Uncollectible accounts expense amounted to $1,273,000, $18,000 and $81,000
for the years ended December 31, 1997, 1996 and 1995, respectively, and is
included in other expense.
 
                                       25
<PAGE>   15
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
(5) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
 
     The following is a summary of the market value of major categories of
securities owned and securities sold, not yet purchased, as of December 31, 1997
and 1996 (in thousands of dollars):
 
<TABLE>
<CAPTION>
                                                            1997                        1996
                                                  ------------------------    ------------------------
                                                                SECURITIES                  SECURITIES
                                                                  SOLD,                       SOLD,
                                                  SECURITIES     NOT YET      SECURITIES     NOT YET
                                                    OWNED       PURCHASED       OWNED       PURCHASED
                                                  ----------    ----------    ----------    ----------
<S>                                               <C>           <C>           <C>           <C>
Corporate equity securities.....................   $120,316      $134,163      $122,608      $110,104
High-yield securities...........................     59,270        52,332         8,961        12,348
Corporate debt securities.......................     37,382         1,571        29,949           340
U.S. Government and agency obligations..........     25,370            --        31,435            --
Other...........................................      3,075           637         4,817         1,523
                                                   --------      --------      --------      --------
                                                   $245,413      $188,703      $197,770      $124,315
                                                   ========      ========      ========      ========
</TABLE>
 
(6) INVESTMENTS
 
     The following is a summary of the major categories of investments, as of
December 31, 1997 and 1996 (in thousands of dollars):
 
<TABLE>
<CAPTION>
                                                                1997       1996
                                                              --------    -------
<S>                                                           <C>         <C>
Partnership interests.......................................  $ 75,814    $24,975
Debt and equity investments.................................    64,397     16,655
Equity and debt interests in affiliates.....................    14,373      8,979
                                                              --------    -------
                                                              $154,584    $50,609
                                                              ========    =======
</TABLE>
 
(7) PREMISES AND EQUIPMENT
 
     The following is a summary of premises and equipment as of December 31,
1997 and 1996 (in thousands of dollars):
 
<TABLE>
<CAPTION>
                                                                1997       1996
                                                              --------    -------
<S>                                                           <C>         <C>
Furniture, fixtures and equipment...........................  $ 88,683    $60,166
Leasehold improvements......................................    12,352     14,669
                                                              --------    -------
          Total.............................................   101,035     74,835
Less accumulated depreciation and amortization..............    58,207     43,964
                                                              --------    -------
                                                              $ 42,828    $30,871
                                                              ========    =======
</TABLE>
 
     Depreciation and amortization expense amounted to $14,243,000, $11,480,000
and $7,934,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
 
(8) BANK LOANS
 
     Bank loans represent short-term borrowings that are payable on demand and
generally bear interest at the brokers' call loan rate. At December 31, 1997 and
1996, there were no bank loans.
 
                                       26
<PAGE>   16
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
(9) LONG TERM DEBT
 
     The following summarizes long term debt outstanding at December 31, 1997
and 1996 (in thousands of dollars):
 
<TABLE>
<CAPTION>
                                                                1997       1996
                                                              --------    -------
<S>                                                           <C>         <C>
8 7/8% Subordinated Notes, due 1997, less unamortized
  discount of $79 in 1996, effective rate of 12%............  $     --    $ 3,499
8 7/8% Series B Senior Notes, due 2004, less unamortized
  discount of $442 and $512 in 1997 and 1996, respectively,
  effective rate of 9%......................................    49,558     49,488
7 1/2% Senior Notes, due 2007, less unamortized discount of
  $268 in 1997, effective rate of 8%........................    99,732         --
                                                              --------    -------
                                                              $149,290    $52,987
                                                              ========    =======
</TABLE>
 
     During 1997, the remainder of the Subordinated Notes were redeemed. Also,
during 1997, Jefferies obtained a NASDR approved $200,000,000 revolving credit
facility to be used in connection with underwriting activities. The revolving
credit facility terminates on October 30, 1999. Loans under this facility bear
interest at 2.5% over either the Federal funds rate or the London Interbank
Offered Rate. During 1997, there were no borrowings against the revolving credit
facility.
 
(10) INCOME TAXES
 
     Total income taxes for the years ended December 31, 1997, 1996 and 1995
were allocated as follows (in thousands of dollars):
 
<TABLE>
<CAPTION>
                                                               1997       1996       1995
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Income from operations......................................  $47,677    $35,438    $21,911
Stockholders' equity, for compensation expense for tax
  purposes in excess of amounts recognized for financial
  reporting purposes........................................   (1,704)    (1,568)    (2,451)
Goodwill, for initial recognition of acquired tax
  benefits..................................................       --         --       (122)
                                                              -------    -------    -------
                                                              $45,973    $33,870    $19,338
                                                              =======    =======    =======
</TABLE>
 
     Income taxes (benefits) for the years ended December 31, 1997, 1996 and
1995 consists of the following (in thousands of dollars):
 
<TABLE>
<CAPTION>
                                                               1997       1996       1995
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
CURRENT:
  Federal...................................................  $42,895    $35,059    $17,361
  State and city............................................   13,595     10,841      8,660
                                                              -------    -------    -------
                                                               56,490     45,900     26,021
                                                              -------    -------    -------
DEFERRED:
  Federal...................................................   (6,450)    (8,756)    (1,692)
  State and city............................................   (2,363)    (1,706)    (2,418)
                                                              -------    -------    -------
                                                               (8,813)   (10,462)    (4,110)
                                                              -------    -------    -------
                                                              $47,677    $35,438    $21,911
                                                              =======    =======    =======
</TABLE>
 
                                       27
<PAGE>   17
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
     Income taxes differed from the amounts computed by applying the Federal
income tax rate of 35% for 1997, 1996 and 1995 as a result of the following (in
thousands of dollars):
 
<TABLE>
<CAPTION>
                                                     1997              1996              1995
                                                --------------    --------------    --------------
                                                AMOUNT     %      AMOUNT     %      AMOUNT     %
                                                -------   ----    -------   ----    -------   ----
<S>                                             <C>       <C>     <C>       <C>     <C>       <C>
Computed expected income taxes................  $40,583   35.0%   $29,115   35.0%   $18,633   35.0%
Increase (decrease) in income taxes resulting
  from:
  State and city income taxes, net of Federal
     income tax benefit.......................    7,301    6.3      5,938    7.1      4,057    7.6
  Limited deductibility of meals and
     entertainment............................    1,263    1.1        867    1.1        663    1.3
  Non-taxable interest income.................     (481)  (0.4)      (473)  (0.6)      (308)  (.06)
  Research and development tax credits........     (584)  (0.5)      (291)  (0.3)    (1,114)  (2.1)
  Other, net..................................     (405)  (0.4)       282    0.3        (20)    --
                                                -------   ----    -------   ----    -------   ----
          Total income taxes..................  $47,677   41.1%   $35,438   42.6%   $21,911   41.2%
                                                =======   ====    =======   ====    =======   ====
</TABLE>
 
     The cumulative tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at December 31,
1997 and 1996 are presented below (in thousands of dollars):
 
<TABLE>
<CAPTION>
                                                               1997       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Deferred tax assets:
  Long-term compensation....................................  $25,018    $16,916
  Lease allowances..........................................      929        499
  Accounts receivable.......................................    2,888      4,159
  State income taxes........................................    2,516      2,069
  Securities inventories....................................       --        417
  Premises and equipment....................................    1,328        952
  Other.....................................................      581        272
                                                              -------    -------
          Total gross deferred tax assets...................   33,260     25,284
  Valuation allowance.......................................       --         --
                                                              -------    -------
          Net deferred tax assets...........................   33,260     25,284
                                                              -------    -------
Deferred tax liabilities:
  Investment in subsidiaries................................  (13,765)   (14,342)
  Notes payable.............................................       --        (30)
  Other.....................................................       --       (230)
                                                              -------    -------
          Total gross deferred tax liabilities..............  (13,765)   (14,602)
                                                              -------    -------
          Net deferred tax asset, included in other
           assets...........................................  $19,495    $10,682
                                                              =======    =======
</TABLE>
 
     There was no valuation allowance for deferred tax assets as of December 31,
1997, 1996 and 1995.
 
     Management believes it is more likely than not that the Company will
generate sufficient taxable income in the future to realize the deferred tax
asset.
 
                                       28
<PAGE>   18
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
(11) BENEFIT PLANS
 
PENSION PLAN
 
     The Company has a defined benefit pension plan which covers certain
employees of the Company and its subsidiaries. The plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974. Benefits are
based on years of service and the employee's career average pay. The Company's
funding policy is to contribute to the plan at least the minimum amount that can
be deducted for Federal income tax purposes.
 
     The following tables set forth the plan's funded status and amounts
recognized in the Company's accompanying consolidated statements of financial
condition and consolidated statements of earnings (in thousands of dollars):
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31
                                                              ------------------
                                                               1997       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Actuarial present value of benefit obligations --
  accumulated benefit obligation, including vested benefits
  of $18,449 and $13,647 as of December 31, 1997 and 1996,
  respectively..............................................  $19,777    $14,607
                                                              =======    =======
Projected benefit obligation for service rendered to date...  $22,603    $16,279
Plan assets, at fair market value...........................   16,479     13,102
                                                              -------    -------
  Excess of the projected benefit obligation over plan
     assets.................................................    6,124      3,177
Unrecognized prior service cost.............................      624        689
Unrecognized net transition obligation being recognized over
  15 years..................................................     (172)      (215)
Unrecognized net loss.......................................   (5,876)    (3,099)
Adjustment to recognize minimum liability...................    2,598        953
                                                              -------    -------
  Pension liability included in other liabilities...........  $ 3,298    $ 1,505
                                                              =======    =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31
                                                              -----------------------------
                                                               1997       1996       1995
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Net pension cost included the following components:
  Service cost -- benefits earned during the period.........  $ 1,288    $ 1,125    $   595
  Interest cost on projected benefit obligation.............    1,222      1,064        851
  Actual loss (return) on plan assets.......................   (2,403)    (1,691)    (2,195)
  Net amortization..........................................    1,516      1,000      1,442
                                                              -------    -------    -------
     Net periodic pension cost..............................  $ 1,623    $ 1,498    $   693
                                                              =======    =======    =======
</TABLE>
 
     The plan assets consist of approximately 60% equities and 40% fixed income
securities.
 
     The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.00% and 5.00%, respectively, in 1997 and
7.50% and 5.00%, respectively, in both 1996 and 1995. The expected long-term
rate of return on assets was 8.40% in 1997, 1996 and 1995.
 
STOCK COMPENSATION PLANS
 
     In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 defines a fair value based method of accounting for an
employee stock option or similar instrument and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
 
                                       29
<PAGE>   19
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
However, it allows an entity to continue to measure compensation cost for these
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities electing to remain with the accounting in APB Opinion
No. 25 must make pro forma disclosures of net earnings and earnings per share,
as if the fair value based method of accounting defined in SFAS 123 had been
applied. The Company implemented the statement during the year ended December
31, 1996.
 
     At December 31, 1997, the Company had six stock-based compensation plans
and ITGI had two stock-based compensation plans, which are described below. The
Company and ITGI applied APB Opinion No. 25 in accounting for their plans.
Accordingly, no compensation cost has been recognized for fixed stock option
plans. Had compensation cost for the Company's and ITGI's stock-based
compensation plans been determined consistent with SFAS 123, the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands of dollars, except per share amounts):
 
<TABLE>
<CAPTION>
                                                               1997       1996       1995
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Net earnings:
     As reported............................................  $63,567    $43,560    $28,529
     Pro forma..............................................  $58,927    $40,102    $25,474
 
Basic earnings per share:
     As reported............................................  $  2.95    $  1.90    $  1.23
     Pro forma..............................................  $  2.73    $  1.75    $  1.09
 
Diluted earnings per share:
     As reported............................................  $  2.80    $  1.84    $  1.19
     Pro forma..............................................  $  2.60    $  1.69    $  1.06
</TABLE>
 
1993 PLAN
 
     The Company has a Stock Ownership and Long-Term Incentive Plan (1993 Plan)
which allows awards in the form of incentive stock options (within the meaning
of Section 422 of the Internal Revenue code), nonqualified stock options, stock
appreciation rights, restricted stock, unrestricted stock, performance awards,
dividend equivalents or other stock based awards. The maximum number of shares
of common stock of the Company with respect to which any awards may be made in
any calendar year during the term of the 1993 Plan may not exceed 20% of the
number of shares of common stock issued and outstanding as of the first day of
the calendar year in which awards are made, less the number of shares of common
stock reserved for issuance with respect to, or underlying, any award, made
pursuant to the 1993 Plan or any predecessor plan, as of such date. The 1993
Plan provides flexibility as to exercise price and term of each option.
 
DIRECTOR PLAN
 
     The Company, also, has a Non-Employee Directors' Stock Option Plan
(Director Plan) which provides for an annual grant to each non-employee director
of an option to purchase 2,000 shares of the Company's common stock. Such grants
will be made automatically on the date directors are elected or reelected at the
Company's annual meeting. In addition, the Director Plan provides for the
automatic grant to a non-employee director, at the time he or she is first
elected or appointed, of an option to purchase 5,000 shares of the Company's
common stock. A total of 300,000 shares of the Company's common stock are
reserved under the Director Plan. Under the Director Plan, the exercise price of
each option equals the market price of the Company's stock on the date of grant
and the option's maximum term is five years.
 
                                       30
<PAGE>   20
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
1996 PLAN
 
     Additionally, in 1996, the Company established a Non-Employee Directors'
Deferred Compensation Plan (1996 Plan). The 1996 Plan permits each non-employee
director to elect to be paid annual retainer fees and annual fees for service as
chairman or a member of a Board committee in the form of stock options and to
defer receipt of any director fees in an interest-bearing cash account or as
deferred shares in a deferred share account. A total of 200,000 shares of the
Company's common stock are reserved under the 1996 Plan. Under the 1996 Plan,
the exercise price of each option equals the market price of the Company's stock
on the date of grant and the options expire ten years after the date of grant.
 
UNITED KINGDOM CAPITAL ACCUMULATION PLAN
 
     The Company has a United Kingdom Capital Accumulation Plan (UK CAP) for
certain officers and key employees of the Company who work in the United
Kingdom. Participation in the plan is optional, with those who elect to
participate agreeing to defer graduated percentages of their compensation. The
UK CAP allows selected employees to acquire the Company's common stock (through
the granting of stock options) at a 15% discount with 40% of the amount
deferred. The remaining 60% of the amount deferred is placed in a Profit-Based
Deferred Compensation Account that earns interest at a rate based on the
performance of the Company.
 
OPTIONS ISSUED UNDER ALL PLANS
 
     The fair value of all option grants for all the Company's plans are
estimated on the date of grant using the Black-Scholes option-pricing model with
the weighted-average assumptions used for all fixed option grants in 1997, 1996
and 1995, respectively: dividend yield of 0.4%, 0.6%, and 0.7%; expected
volatility of 33.4%, 33.3%, and 32.8%; risk-free interest rates of 6.4%, 5.4%,
and 7.0%; and expected lives of 5.5 years, 3.3 years, and 4.0 years.
 
     A summary of the status of Company stock options in all its stock-based
plans as of December 31, 1997, 1996 and 1995 and changes during the year then
ended is presented below:
 
<TABLE>
<CAPTION>
                                           1997                     1996                     1995
                                   ---------------------    ---------------------    ---------------------
                                               WEIGHTED-                WEIGHTED-                WEIGHTED-
                                                AVERAGE                  AVERAGE                  AVERAGE
                                               EXERCISE                 EXERCISE                 EXERCISE
                                    SHARES       PRICE       SHARES       PRICE       SHARES       PRICE
                                   ---------   ---------    ---------   ---------    ---------   ---------
<S>                                <C>         <C>          <C>         <C>          <C>         <C>
Outstanding at beginning of
  year...........................  1,702,000    $ 9.37      1,467,832    $ 6.07      1,964,132    $ 4.44
Granted..........................    367,061     22.91        594,628     13.28        483,372      7.61
Exercised........................   (240,028)     9.48       (352,460)     3.47       (970,572)     3.14
Forfeited........................         --        --         (8,000)     8.13         (9,100)     5.26
                                   ---------                ---------                ---------
Outstanding at end of year.......  1,829,033     12.05      1,702,000      9.37      1,467,832      6.07
                                   =========                =========                =========
Options exercisable at
  year-end.......................  1,349,124                  858,996                1,056,460
Weighted-average fair value of
  options granted during the
  year...........................               $10.05                   $ 4.19                   $ 2.99
</TABLE>
 
                                       31
<PAGE>   21
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
     The following table summarizes information about stock options outstanding
at December 31, 1997:
 
<TABLE>
<CAPTION>
                                               OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
                                     ----------------------------------------    -----------------------
                                        NUMBER         WEIGHTED                     NUMBER
                                     OUTSTANDING       AVERAGE       WEIGHTED    EXERCISABLE    WEIGHTED
                                          AT          REMAINING      AVERAGE          AT        AVERAGE
                                     DECEMBER 31,    CONTRACTUAL     EXERCISE    DECEMBER 31,   EXERCISE
     RANGE OF EXERCISE PRICES            1997        LIFE (YEARS)     PRICE          1997        PRICE
     ------------------------        ------------    ------------    --------    ------------   --------
<S>                                  <C>             <C>             <C>         <C>            <C>
$1 to 6............................     275,901          0.2          $ 4.05        240,000      $ 4.25
$7 to 12...........................     822,600          1.4            8.57        686,600        8.72
$13 to 21..........................     473,000          2.8           15.92        274,992       15.31
$22 to 32..........................     257,532          5.3           24.64        147,532       22.95
                                      ---------                                   ---------
$1 to 32...........................   1,829,033          2.1           12.05      1,349,124       10.82
                                      =========                                   =========
</TABLE>
 
INVESTMENT TECHNOLOGY GROUP, INC.'S PLANS
 
     In 1994 ITGI, established the 1994 Employee Stock Option and Long-Term
Incentive Plan (ITGI Plan) which allows for the granting of options to purchase
a total of 3,650,000 shares of ITGI common stock. In 1995, the ITGI Board of
Directors adopted, and the ITGI stockholders approved, the Non-Employee
Directors' Plan (ITGI Director Plan). The ITGI Director Plan generally provides
for an annual grant to each non-employee director an option to purchase 2,500
shares of ITGI common stock. In addition, the ITGI Director Plan provides for
the automatic grant to a non-employee director, at the time he or she is
initially elected, a stock option to purchase 10,000 shares of ITGI common
stock. Stock options granted under the ITGI Director Plan are non-qualified
stock options having an exercise price equal to 100% of the fair market value of
ITGI common stock at the date of grant. A total of 125,000 shares of ITGI common
stock are reserved for issuance under the ITGI Director Plan. There were a total
of 2,311,059 fixed stock options outstanding and 18,254,800 ITGI common stock
shares outstanding as of December 31, 1996. There were a total of 3,458,216
fixed stock options outstanding and 18,220,968 ITGI common stock shares
outstanding as of December 31, 1997.
 
     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the weighted-average assumptions
used for all fixed option grants in 1997, 1996 and 1995, respectively: dividend
yield of 0.0%, 0.0% and 0.0%; expected volatility of 54%, 49% and 51%; risk-free
interest rates of 6.6%, 6.1% and 6.3%; and expected lives of 5 years, 4 years
and 4 years.
 
     The following table summarizes information about stock options outstanding
at December 31, 1997:
 
<TABLE>
<CAPTION>
                                                  OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                                         --------------------------------------    -----------------------
                                            NUMBER        WEIGHTED                    NUMBER
                                         OUTSTANDING      AVERAGE      WEIGHTED    EXERCISABLE    WEIGHTED
                                              AT         REMAINING     AVERAGE          AT        AVERAGE
                                         DECEMBER 31,   CONTRACTUAL    EXERCISE    DECEMBER 31,   EXERCISE
       RANGE OF EXERCISE PRICES              1997       LIFE (YEARS)    PRICE          1997        PRICE
       ------------------------          ------------   ------------   --------    ------------   --------
<S>                                      <C>            <C>            <C>         <C>            <C>
$ 7.33 - 10.00.........................     455,603         2.9         $ 9.07          9,934      $ 7.90
$11.00 - 15.00.........................   1,728,332         1.7         $12.52      1,296,008      $13.01
$16.00 - 20.00.........................     167,177         4.4         $19.23         12,377      $18.43
$21.00 - 25.00.........................   1,019,604         4.1         $22.21        419,604      $22.25
$26.00 - 27.80.........................      87,500         9.8         $27.60             --          --
                                          ---------                                 ---------
$ 7.33 - 27.80.........................   3,458,216         2.9         $15.63      1,737,923      $15.25
                                          =========                                 =========
</TABLE>
 
                                       32
<PAGE>   22
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
PERFORMANCE-BASED STOCK OPTIONS
 
     While the 1993 Plan allows for the granting of performance-based stock
options, no such options were granted during 1997, 1996 and 1995, and no such
options were outstanding at December 31, 1997, 1996 and 1995.
 
RESTRICTED STOCK
 
     The 1993 Plan allows for grants of restricted stock awards, whereby certain
key employees are granted restricted shares of common stock subject to
forfeiture until the restrictions lapse or terminate. With certain exceptions,
the employee must remain with the Company for a period of years after the date
of grant to receive the full number of shares granted. During 1997, 1996 and
1995, there were restricted stock awards of 198,888 shares, 49,264 shares and
256,092 shares, respectively, with a corresponding market value of $4,189,000,
$624,000 and $2,187,000, respectively. Certain grants are expensed over the
vesting periods of one to three years, while others have been granted in
settlement of previously accrued compensation liabilities. The compensation
cost, excluding the cost associated with the settlement of previously accrued
compensation liabilities, charged against earnings was $1,142,000, $394,000 and
$1,788,000 in 1997, 1996 and 1995, respectively. As of December 31, 1997, 1996
and 1995, restricted stock shares outstanding were 203,468 shares, 95,160 shares
and 234,676 shares, respectively.
 
EMPLOYEE STOCK PURCHASE PLAN
 
     The Company has an Employee Stock Purchase Plan (ESPP). All regular
full-time employees are eligible for the ESPP. Employee contributions are
voluntary and are made via payroll deduction. The employee contributions are
used to purchase the Company's common stock which is then held in an outside
trust account. The Company matches employee contributions at a rate of 15%
(more, if profits exceed targets set by the Company's Board of Directors). The
Company's match vests after two years. The Company recognizes compensation cost
related to its ESPP matching. The compensation cost charged against earnings was
$228,000, $250,000 and $161,000 in 1997, 1996 and 1995, respectively.
 
CAPITAL ACCUMULATION PLAN
 
     The Company has a Capital Accumulation Plan (CAP) for certain officers and
key employees of the Company. Participation in the plan is optional, with those
who elect to participate agreeing to defer graduated percentages of their
compensation. The plan allows selected employees to acquire the Company's common
stock at a 15% discount with 50% of the amount deferred. The remaining 50% of
the amount deferred is placed in a Profit-Based Deferred Compensation Account
that earns interest at a rate based on the performance of the Company.
 
     The Company will from time to time repurchase shares of its common stock in
the open market for use in both the CAP and UK CAP plans. The Company has
acquired 2,304,616 shares since the inception of the plans (CAP in 1993 and UK
CAP in 1995) and has made distributions of 347,702 shares. The Company
recognizes compensation cost related to the 15% discount and interest on
Profit-Based Deferred Compensation Accounts. The compensation cost charged
against earnings was $4,834,000, $2,742,000 and $2,200,000 in 1997, 1996 and
1995, respectively.
 
                                       33
<PAGE>   23
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
PROFIT SHARING PLAN
 
     The Company has a profit sharing plan, covering substantially all
employees, which includes a salary reduction feature designed to qualify under
Section 401-K of the Internal Revenue Code. Expenses related to this plan
amounted to $7,923,000, $5,713,000 and $3,565,000 in 1997, 1996 and 1995,
respectively.
 
(12) EARNINGS PER SHARE
 
     The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years 1997, 1996 and
1995 (in thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               1997       1996       1995
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Net earnings for basic earnings per share...................  $63,567    $43,560    $28,529
  Earnings adjustment -- stock options on subsidiary........     (890)      (501)        --
                                                              -------    -------    -------
  Adjusted earnings for diluted earnings per share..........  $62,677    $43,059    $28,529
                                                              =======    =======    =======
Shares of common stock and common stock equivalents:
  Average number of common shares...........................   20,148     21,644     22,198
  Capital Accumulation Plan unissued shares.................    1,404      1,336      1,072
                                                              -------    -------    -------
  Average shares used in basic computation..................   21,552     22,980     23,270
  Stock options.............................................      651        398        482
  Other unissued common shares..............................      146         32        170
                                                              -------    -------    -------
  Average shares used in diluted computation................   22,349     23,410     23,922
                                                              =======    =======    =======
Earnings per share:
  Basic.....................................................  $  2.95    $  1.90    $  1.23
                                                              =======    =======    =======
  Diluted...................................................  $  2.80    $  1.84    $  1.19
                                                              =======    =======    =======
</TABLE>
 
     The Company had no anti-dilutive securities during 1997, 1996 and 1995.
 
(13) LEASES
 
     As lessee, the Company leases certain premises and equipment under
noncancelable agreements expiring at various dates through 2012. Future minimum
lease payments for all noncancelable operating leases at December 31, 1997 are
as follows (in thousands of dollars):
 
<TABLE>
<S>                                                           <C>
1998........................................................  $10,714
1999........................................................    9,198
2000........................................................    7,544
2001........................................................    6,114
2002........................................................    4,078
Thereafter..................................................   23,892
</TABLE>
 
     Rental expense for the Company was $8,342,000 in 1997, $6,759,000 in 1996
and $5,996,000 in 1995.
 
                                       34
<PAGE>   24
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
(14) FINANCIAL INSTRUMENTS
 
OFF-BALANCE SHEET RISK
 
     The Company has contractual commitments arising in the ordinary course of
business for securities loaned or purchased under agreements to sell, securities
sold but not yet purchased, repurchase agreements, future purchases and sales of
foreign currencies, securities transactions on a when-issued basis, options
contracts, futures index contracts, and underwriting. Each of these financial
instruments and activities contains varying degrees of off-balance sheet risk
whereby the market values of the securities underlying the financial instruments
may be in excess of, or less than, the contract amount. The settlement of these
transactions is not expected to have a material effect upon the Company's
consolidated financial statements.
 
     In the normal course of business, the Company had letters of credit
outstanding aggregating $20,915,000 at December 31, 1997 to satisfy various
collateral requirements in lieu of depositing cash or securities.
 
     The Company has derivative financial instrument positions in foreign
exchange forward contracts, option contracts, and index futures contracts, all
of which are measured at fair value with realized and unrealized gains and
losses recognized in earnings. The foreign exchange forward contract positions
are generally taken to lock in the dollar cost or proceeds of foreign currency
commitments associated with unsettled foreign denominated securities purchases
or sales. The average maturity of the forward contracts is generally less than
two weeks. The option positions taken are generally part of a strategy in which
offsetting equity positions are taken. Currently, the index futures positions
are taken as a hedge against other securities positions.
 
     The gross contracted or notional amount of index futures contracts,
commodities futures contracts, options contracts, and foreign exchange forward
contracts, which are not reflected in the consolidated statement of financial
condition, is set forth in the table below and provide only a measure of the
Company's involvement in these contracts at December 31, 1997 and 1996. They do
not represent amounts subject to market risk and, in many cases, serve to reduce
the Company's overall exposure to market and other risks (in thousands of
dollars):
 
<TABLE>
<CAPTION>
                                                             NOTIONAL OR CONTRACTED AMOUNT
                                                       -----------------------------------------
                                                              1997                  1996
                                                       ------------------    -------------------
                                                       PURCHASE     SALE     PURCHASE     SALE
                                                       --------    ------    --------    -------
<S>                                                    <C>         <C>       <C>         <C>
Index futures contracts..............................   $   --     $8,173    $    --     $13,327
Commodities futures contracts........................       --         --     11,833          --
Option contracts.....................................    6,277      4,803         60       4,681
Foreign exchange forward contracts...................      430      4,461      2,978       4,135
</TABLE>
 
                                       35
<PAGE>   25
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
 
     The following is an aggregate summary of the average 1997 and 1996 and
December 31, 1997 and 1996 fair values of derivative financial instruments (in
thousands of dollars):
 
<TABLE>
<CAPTION>
                                                            1997                        1996
                                                  ------------------------    ------------------------
                                                  AVERAGE    END OF PERIOD    AVERAGE    END OF PERIOD
                                                  -------    -------------    -------    -------------
<S>                                               <C>        <C>              <C>        <C>
Index futures contracts:
  In a favorable position.......................  $   55        $   --        $  104        $   78
  In an unfavorable position....................     204           149           298            57
Option contracts:
  Purchases.....................................     682           799           208             9
  Sales.........................................     372           637           706         1,523
Foreign exchange forward contracts:
  Purchases.....................................   3,406           430         4,031         2,978
  Sales.........................................   3,291         4,461         5,177         4,135
</TABLE>
 
CREDIT RISK
 
     In the normal course of business, the Company is involved in the execution,
settlement and financing of various customer and principal securities
transactions. Customer activities are transacted on a cash, margin or
delivery-versus-payment basis. Securities transactions are subject to the risk
of counterparty or customer nonperformance. However, transactions are
collateralized by the underlying security, thereby reducing the associated risk
to changes in the market value of the security through settlement date or to the
extent of margin balances.
 
     The Company seeks to control the risk associated with these transactions by
establishing and monitoring credit limits and by monitoring collateral and
transaction levels daily. The Company may require counterparties to deposit
additional collateral or return collateral pledged. In the case of aged
securities failed to receive, the Company may, under industry regulations,
purchase the underlying securities in the market and seek reimbursement for any
losses from the counterparty.
 
CONCENTRATION OF CREDIT RISK
 
     As a major securities firm, the Company's activities are executed primarily
with and on behalf of other financial institutions, including brokers and
dealers, banks and other institutional customers. Concentrations of credit risk
can be affected by changes in economic, industry or geographical factors. The
Company seeks to control its credit risk and the potential risk concentration
through a variety of reporting and control procedures, including those described
in the preceding discussion of credit risk.
 
                                       36
<PAGE>   26
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
(15) OTHER COMPREHENSIVE INCOME
 
     The following summarizes other comprehensive income and accumulated other
comprehensive income at December 31, 1997 and for the year then ended (in
thousands of dollars):
 
<TABLE>
<CAPTION>
                                                                TAX
                                                             BEFORE-TAX    (EXPENSE)     NET-OF-TAX
                                                               AMOUNT      OR BENEFIT      AMOUNT
                                                             ----------    ----------    ----------
<S>                                                          <C>           <C>           <C>
Currency translation adjustments...........................   $  (526)        $ --        $  (526)
Minimum pension liability adjustment.......................    (1,645)         678           (967)
                                                              -------         ----        -------
Other comprehensive income (loss)..........................   $(2,171)        $678        $(1,493)
                                                              =======         ====        =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                                         MINIMUM       ACCUMULATED
                                                         CURRENCY        PENSION          OTHER
                                                        TRANSLATION     LIABILITY     COMPREHENSIVE
                                                        ADJUSTMENTS    ADJUSTMENT     INCOME (LOSS)
                                                        -----------    -----------    -------------
<S>                                                     <C>            <C>            <C>
Beginning balance.....................................     $ (96)        $  (553)        $  (649)
Change in 1997........................................      (526)           (967)         (1,493)
                                                           -----         -------         -------
Ending balance........................................     $(622)        $(1,520)        $(2,142)
                                                           =====         =======         =======
</TABLE>
 
(16) NET CAPITAL REQUIREMENTS
 
     As registered broker-dealers, Jefferies, ITG and W & D are subject to the
Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1), which
requires the maintenance of minimum net capital. Jefferies, ITG and W & D have
elected to use the alternative method permitted by the Rule, which requires that
they each maintain minimum net capital, as defined, equal to the greater of
$250,000 or 2% of the aggregate debit balances arising from customer
transactions, as defined.
 
     At December 31, 1997, Jefferies', ITG Inc.'s and W & D's net capital was
$96.8 million, $35.0 million and $1.3 million, respectively, which exceeded
minimum net capital requirements by $91.4 million, $34.8 million and $1.0
million, respectively.
 
(17) CONTINGENCIES
 
     In re Nasdaq Market-Makers Antitrust Litigation. Beginning in July 1994,
antitrust class actions were commenced against Jefferies and 33 other defendants
in various federal courts (the "Lawsuits"). Following the filing of the
Lawsuits, the Antitrust Division of the United States Department of Justice
("DOJ") and the Commission commenced investigations into certain issues related
to the allegations of the Lawsuits. In August 1996, the DOJ entered into a
antitrust consent decree with 24 defendants who are market makers in Nasdaq
stocks. Jefferies was neither asked nor required to settle with the DOJ. Shortly
after the DOJ settlement, the Commission filed a Section 21(a) report against
the National Association of Securities Dealers, Inc. ("NASD"), criticizing
various practices by market makers, and the NASD for failing to adequately
police or discipline the market makers for those practices. However, the
Commission did not take any action at that time against the market maker firms.
 
     In October 1994, the Lawsuits were consolidated for discovery purposes in
the United States District Court for the Southern District of New York (the
"Court"). The consolidated complaint alleges that the defendants violated the
antitrust laws by conspiring to fix the spread paid by plaintiffs and class
members to trade in certain Nasdaq securities, by refusing to quote bids and
asks in so-called odd-eighths. The cases purport to be brought on behalf of all
persons who purchased or sold certain securities on the Nasdaq National
 
                                       37
<PAGE>   27
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
Market System during the period May 1, 1989 to May 27, 1994. The plaintiffs seek
damages in an unspecified amount.
 
     In order to avoid the uncertainties of litigation, Jefferies has entered
into a settlement agreement which received the preliminary approval of the Court
on October 15, 1997, but which is still subject to final approval of the Court.
The amount of the settlement has been previously provided for and will not have
a material adverse effect on Jefferies.
 
     Other. Many aspects of the Company's business involve substantial risks of
liability. In the normal course of business, the Company and its subsidiaries
have been named as defendants or co-defendants in lawsuits involving primarily
claims for damages. The Company's management believes that pending litigation
will not have a material adverse effect on the Company.
 
(18) SEGMENT REPORTING
 
     The Company's operations have been classified into two business segments:
Financial services and ITGI. The Financial services segment includes the
traditional securities brokerage and investment banking activities of Jefferies
Group, Inc. and its subsidiaries, except ITGI and its subsidiaries. The ITGI
segment includes the automated equity trading and transaction research
activities of ITGI and its subsidiaries. Financial information by segment for
the three years in the period ended December 31, 1997 are summarized as follows
(in thousands of dollars):
 
<TABLE>
<CAPTION>
                                           FINANCIAL                   ELIMINATIONS/
                                            SERVICES       ITGI      RECLASSIFICATIONS    CONSOLIDATED
                                           ----------    --------    -----------------    ------------
<S>                                        <C>           <C>         <C>                  <C>
1997
Total revenues...........................  $  630,842    $137,042        $ (3,380)         $  764,504
Operating income.........................      68,690      47,260              --             115,950
Identifiable assets......................   1,994,684     113,641          (8,783)          2,099,542
Capital expenditures.....................      10,521      15,679              --              26,200
Depreciation and amortization............       9,862       6,642              --              16,504
 
1996
Total revenues...........................  $  407,023    $111,556        $ (1,953)         $  516,626
Operating income.........................      42,186      41,001              --              83,187
Identifiable assets......................   1,493,117      82,798          (7,828)          1,568,087
Capital expenditures.....................      10,521       5,624              --              16,145
Depreciation and amortization............       9,687       3,957              --              13,644
 
1995
Total revenues...........................  $  334,282    $ 72,381        $ (1,076)         $  405,587
Operating income.........................      28,350      24,888              --              53,238
Identifiable assets......................   1,497,351      55,318         (15,700)          1,536,969
Capital expenditures.....................       8,067       5,003              --              13,070
Depreciation and amortization............       7,472       2,248              --               9,720
</TABLE>
 
     Financial services provided trade execution, clearance and administrative
services to ITGI for $21.6 million, $14.7 million and $11.4 million in 1997,
1996 and 1995, respectively. ITGI provided automated trade execution services to
Financial services for $3.1 million, $1.7 million and $1.1 million in 1997, 1996
and 1995, respectively.
 
                                       38
<PAGE>   28
                             JEFFERIES GROUP, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
(19) JEFFERIES GROUP, INC. AND INVESTMENT TECHNOLOGY GROUP, INC. ANNOUNCE
     INTENTION TO CONSIDER SEPARATING INTO TWO INDEPENDENT COMPANIES
 
     On March 17, 1998, Jefferies Group, Inc. and Investment Technology Group,
Inc. jointly announced that they are considering the separation, through a
spin-off and a restructuring, of Jefferies & Company, Inc. and other Jefferies
Group, Inc. subsidiaries ("JEFCO") and Investment Technology Group, Inc.
("ITGI").
 
     If the separation is completed, Jefferies Group, Inc. shareholders will own
100% of JEFCO and approximately 82.3% of ITGI. The public ITGI shareholders will
continue to own 17.7% of ITGI. (The ITGI percentage ownership interests could
change slightly as a result of ITGI stock repurchases or issuances before the
transaction closing date.) The spin-off will be accomplished by a tax-free
distribution of 100% of the shares of a new company, JEFCO, to Jefferies Group,
Inc. shareholders. Jefferies Group, Inc.'s 15 million shares of ITGI would then
be its only asset. The spin-off would be followed immediately by a tax-free
merger of Jefferies Group, Inc. and ITGI, with ITGI's public shareholders
receiving shares of Jefferies Group, Inc. Jefferies Group, Inc. would then be
renamed Investment Technology Group, Inc.
 
     The spin-off and restructuring transactions are contingent on a number of
factors, including receipt of all required Board of Directors and shareholder
approvals of Jefferies Group, Inc. and ITGI, receipt of a favorable tax ruling
from the Internal Revenue Service and other required regulatory and contractual
approvals.
 
(20) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 
     The following is a summary of unaudited quarterly statements of earnings
for the years ended December 31, 1997 and 1996 (in thousands of dollars, except
per share amounts):
 
<TABLE>
<CAPTION>
                                               MARCH       JUNE     SEPTEMBER   DECEMBER     YEAR
                                              --------   --------   ---------   --------   --------
<S>                                           <C>        <C>        <C>         <C>        <C>
1997
Revenues....................................  $147,178   $201,485   $184,823    $231,018   $764,504
Earnings before income taxes and minority
  interest..................................    21,567     35,327     26,405      32,651    115,950
Net earnings................................    11,397     19,748     14,420      18,002     63,567
Basic earnings per share....................      0.53       0.92       0.67        0.83       2.95
Diluted earnings per share..................      0.50       0.87       0.63        0.79       2.80
 
1996
Revenues....................................  $121,854   $120,645   $127,353    $146,774   $516,626
Earnings before income taxes and minority
  interest..................................    20,252     17,883     21,535      23,517     83,187
Net earnings................................    10,632      9,140     11,455      12,333     43,560
Basic earnings per share....................      0.45       0.40       0.50        0.55       1.90
Diluted earnings per share..................      0.44       0.39       0.49        0.54       1.84
</TABLE>
 
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<PAGE>   29
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, the 
Registrant has duly caused this report to be signed on its behalf by the 
undersigned, thereunto duly authorized.
 
                                          JEFFERIES GROUP, INC.
 
                                          By        /s/ JERRY M. GLUCK   
                                            ------------------------------------
                                                      Jerry M. Gluck
                                                      Secretary
Dated: March 20, 1998
 
 
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