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  • 1. Trusted Jefferies bankers provide growing and mid-sized companies with advisory and underwriting services through creative and idea-driven M&A, leveraged finance, equity and equity-linked financing and restructuring solutions. We serve a range of industries in the U.S., Europe and Asia. Business Overview 28. Driving Growth Through Investment Banking In 2005, our investment banking division worked with growing and mid-sized companies on more than 250 advisory and capital markets transactions, valued at more than $65 billion, in our focus industries across the U.S., in Europe and in Asia. Record revenues, totaling $495 million, were achieved in large part due to tremendous contributions from some of our recently-added partners, including Randall & Dewey (Energy) and Jefferies Broadview (Technology). Our product groups all performed exceptionally well during the year, and we made key additions to our equity and debt capital markets teams. On the advisory side, we advised on more than 135 M&A and restructuring transactions, valued at over $45.4 billion.We ranked as a Top 10 Middle Market M&A Advisor(8), and among the top 3 middle market investment banks in providing advisory services(9). On the capital markets side, we completed nearly 120 equity and equity-linked financings and leveraged finance transactions, valued at approximately $21.6 billion.We ranked among the top 3 firms on Wall Street in the performance of lead-managed equity underwritings(10) and have ranked as the top underwriter of U.S. Single B new issues under $150 million for the past four years(11). In addition, our financial sponsors group, a key element of our middle market strategy, completed nearly 75 transactions, valued at $5.5 billion. On the industry side, virtually every sector was strong. During the year, we hired experienced banking professionals to lead our dedicated media & communications and healthcare industry investment banking groups, and made key additions to our energy, technology, and aerospace & defense groups.We completed 70 energy transactions (including maritime & oil service) valued at $17.4 billion, and ranked as the #2 energy M&A advisor (12).We completed nearly 90 technology transactions, valued at $12.5 billion, and we ranked as the #1 technology M&A advisor (12).We completed over 30 aerospace & defense transactions, valued at $6.7 billion, and ranked as the #1 defense M&A advisor(12). In addition, we completed nearly 40 industrial transactions, valued at $7.9 billion; 30 healthcare transactions, valued at $4.2 billion; 30 retail and (8) Thomson Financial. Based on the number of U.S. transactions announced in 2005, under $500 million. Excludes: tender offers, exchange offers, self-tenders, repurchases, remaining interests, privatizations. Includes transactions where the value was undisclosed. (9) Bankruptcy Insider (The Deal). Based on bankruptcies with debtor pre-petition liabilities between $100 million and $1.0 billion. Rankings include only traditional investment banks as of 1/5/06. (10) Equidesk. January 1, 2005 - December 31, 2005, Lead-managed IPOs & FOs, U.S. issuer, excludes best efforts & closed end funds, for leads with 10 or more deals. (11) Thomson Financial. 2001-2005. Excludes split rated, mortgage and asset-backed securities. Full credit to lead manager, equal if joint. (12) Thomson Financial. Includes all industry related transactions as classified by Thomson Financial announced in 2005. Excludes tender offers, exchange offers, self-tenders, repurchases, remaining interests and privatizations. Includes transactions where the value was undisclosed. Defense transactions based in North America or Western Europe, all values. Technology transactions based in North America or Western Europe, $0-500 million OR based in the US, $0-1000 million. Energy transactions based in the U.S., all values.
  • 2. Investment Banking Revenues by Product 2000 2005 $91 million $495 million 11% 29. 21% 20% 69% 55% 24% M&A/Advisory/Restructuring Equity/Equity-Linked Leveraged Finance Investment Banking Revenues by Industry Investment Banking Transaction Value ($ in billions, approximations) $67.0* Energy 25% $56.7 Technology 15% Industrials 15% $28.1 $29.2 Other 6% Aerospace & Defense 8% $16.5 Financial/Business Services 6% Gaming/Leisure 4% Media/Communications 6% Healthcare 3% Consumer/Retail 12% 01 02 03 04 05 Investment Banking * includes pending transactions 2005 ANNUAL REPORT
  • 3. Jefferies’ industry specialists offer deep expertise in aerospace & defense, energy, financial & business services, gaming & leisure, healthcare, industrials, maritime & oil service, media & communications, retail & consumer, and technology. 30. consumer transactions, valued at $3 billion; 15 financial & business services transactions, valued at $2.8 billion; 16 media & communications transactions, valued at $1.9 billion; and eight gaming & leisure transactions, valued at $3 billion. Our international presence in investment banking is growing, with the additions of Helix Associates and a UK broking team, our Bank Leumi alliance and enhanced technology and energy teams.The completion of eight sole-managed Indian and European convertible offerings, and more than $10 billion in cross-border M&A transactions further established our reputation in the international markets.We now have 40 investment banking professionals in London, serving the UK and European Markets.We are committed to building upon our success in Europe and Asia, and are focused on bringing our full array of capabilities to these markets. Since year-end, we appointed an experienced industry veteran to oversee and lead our thriving Mergers & Acquisitions business and, in the UK, we were granted Nominated Adviser (NOMAD) status on the London Stock Exchange’s Alternative Investment Market (AIM). Adding Value In Sales & Trading Sales and trading performed very well in 2005, with strong contributions from equities, high yield, convertible and commodity-linked products, as well as correspondent clearing and securities lending. We maintained our position as a leading provider of liquidity for the securities of small-cap, mid-cap and growing companies—the core focus of our sales, trading and research efforts. Our equities division traded over 19 billion shares (excluding Bulletin Boards), despite decreased industry- wide block trading.We increased our market making capabilities 20 percent, now making markets in 5,000 securities.We ranked as the #3 trader of combined NASDAQ and Bulletin Board stocks(13) and #1 for best execution of all exchange-listed stock trades(14). We welcomed an industry veteran to head our Private Client Services group, focused on corporate clients and their senior executives, private equity firms, middle market institutions and high net worth individuals. We completed a number of significant distributions and block trades for our venture capital and private (13) AutEx ®, BLOCKDATA, 1/31/05-12/31/05. Ranking among investment banks, based on NASDAQ, NNM, SCM and advertised OTCBB combined share volume. (14) Pensions & Investments, “Tradewatch”, Plexus Universe, period ending 12/31/05.
  • 4. Jefferies’ knowledge-driven sales and trading force provides investors outstanding liquidity in the global markets, trading equity, convertible, high yield, investment grade fixed income and commodity-linked financial products. We also offer top-tier private client, correspondent clearing, prime brokerage, securities lending and NYSE floor brokerage services. equity clients during the year, as well as implementing directed share programs.We assisted many of the 31. Firm’s corporate clients in managing their assets and partnered with several leading firms for the distribution of structured products and alternative investments. On the execution side, Jefferies Execution Services accounted for nearly 9 percent of the average daily volume on the NYSE during the year, and is represented on virtually all of the committees involved in the building and implementation of the NYSE/Archipelago Hybrid Market we believe will create new opportunities in equities, as well as other asset classes. On the international front, our international equity commission business registered an increase of over 40 percent and we hired experienced UK equity sales and research sales teams. Our U.S. and international high yield trading desks traded a combined $24 billion in securities (face value), and provided tremendous support for our leveraged finance activities. Our international and domestic convertible desks traded nearly $17 billion in securities (face value), and were heavily involved in our equity-linked financings. We expanded our investment grade fixed income capabilities with the additions of mortgage-backed trading, U.S. government agency trading and emerging markets teams.This desk now trades 2,300 investment grade fixed income issues, including corporate, agency and U.S. treasury bonds. In June 2005, Jefferies Financial Products, in conjunction with Reuters America LLC, announced a major revision to the CRB index, now renamed the Reuters/Jefferies CRB Index. Since 1957, the CRB index has been the most widely followed global benchmark for commodities as an asset class.We had significant additional customer interest in our commodity index products and serve a growing roster of blue-chip institutional clients seeking exposure to commodities as an asset class.We welcomed a senior commodity derivatives professional to spearhead the growth of our commodity index derivatives business. Since year-end, we added experienced professionals to lead our established prime brokerage effort and a new quantitative strategies team, complementing our electronic and portfolio trading capabilities.We also appointed co-heads of equity products to help expand the Firm’s leading institutional trading platform. 2005 ANNUAL REPORT
  • 5. Sales & Trading Revenues by Product ( 15) 2000 2005 $485 million $617 million 32. Execution/Other 7% Execution/Other 2% Convertibles 6% Equities 81% Convertibles 11% High Yield 10% High Yield 6% Bonds Direct 5% Equities 64% Jefferies Financial Products 7% Other 1% Equities Fixed Income Equity Market Making Companies Under Research Coverage (no. of stocks, approximations) 5,000 1,112 959 4,000 873 826 731 3,000 2,000 1,500 01 02 03 04 05 01 02 03 04 05 Sales, Trading & Research (15) Includes commission and principal transaction revenues.
  • 6. Jefferies award-winning research team provides unique investment ideas in equity, high yield, convertible and investment grade fixed income securities around the globe—focusing on small-, mid-cap and growth companies. Forward Thinking In Research 33. In 2005, the scope and reputation of our research product continued to make great strides. Jefferies ranked as the #2 provider of equity research on Wall Street in WSJ’s “Best on the Street 2005 Analysts Survey” (May, 2005). Forbes and StarMine ranked Jefferies’ equity research effort among the Top 10 in their “North America’s Top Research Analysts Survey” (May, 2005). In addition, equity analysts were represented in Institutional Investor’s research survey, “Home Run Hitters” (April, 2005) and ranked #1 in Oil & Gas Drilling research in Bloomberg Markets’ survey, “Oil Prophets” (October, 2005). We enhanced energy, technology, gaming, life sciences, industrials, and telecom research coverage, incorporating semiconductor devices, medical devices and diagnostics, U.S. and UK oil and gas exploration and production, dry bulk shipping, emerging telecom, wireless and data services, specialty chemicals, alternative energy (clean technology), and UK hotel and gaming. Over 100 equity research professionals now cover more than 700 U.S. and European companies. Nearly 60 percent of companies under coverage have a market capitalization of less than $2 billion. Outside of Equities, we earned the #2 spot in Metals and Mining in Institutional Investor’s “2005 All-America Fixed Income Research Team” (September, 2005).We added high yield coverage of E&P, oil service, and refining, and maintained coverage of more than 300 companies. Coverage of the convertible universe increased to nearly 100 companies.We added high grade and corporate credit research to complement our investment grade fixed income trading capabilities, and enhanced our quantitative research for our portfolio trading offering. Jefferies hosted our 1st annual Internet, 2nd annual Shipping, and 3rd annual Communications & Media conferences. Other conference topics included Automotive, Offshore Technology, Specialty and Post-Acute Healthcare Services. In addition, we introduced a weekly conference call series covering timely topics. 2005 ANNUAL REPORT
  • 7. Strategic fund and portfolio managers seek to manage risk effectively and to consistently deliver favorable returns in all market conditions. Products managed by Jefferies include equities, fixed income securities, convertible securities and real assets. 34. Since year-end, we launched equity research coverage of the restaurant industry.We also hosted our 2nd annual Internet and 1st Wireless Broadband conferences, as well as a Q1 ‘06 High Yield Sector Outlook roadshow.We are looking forward to upcoming conferences focused on Gaming/Lodging/ Media/Entertainment, Industrials, Alternative Energy & Cleantech, and Life Sciences. Achieving Balance Through Asset Management Our growing asset management effort, still in its early years, has quickly established itself as a solid contributor.We are confident that it will present us with many rewarding opportunities as it evolves. Revenues from our asset management activities have increased nearly 70 percent in the past 5 years. In 2005, assets under our management increased 27 percent to $3.3 billion, comprised of fixed income securities, equities, convertible securities and real assets. Including third party managed funds, assets under management increased from $3.77 billion to $4.26 billion. Alignment of interests is important to us, and, across these asset classes, alongside our clients, we’ve had an average investment of $224 million during the year. During the year, we welcomed a Chief Investment Officer to drive the activities of Jefferies Asset Management, LLC.We manage two new CLOs, with over $600 million in assets, and made inroads toward the addition of new products and managers to the platform. We have a solid and scalable infrastructure for growing our asset management business. Our goal is to expand into new asset classes and strategies, recruit talented managers, and achieve consistent returns in all market conditions.We are seeking to grow our asset management business with a view to providing more balance to our overall Firm results, as well as to leverage our relationships and opportunities. Since year-end, Jefferies Asset Management, LLC became a registered adviser and we welcomed an additional portfolio management team. JEFFERIES GROUP, INC .
  • 8. Equity Research Companies Under Equity Research Companies Under Coverage by Market Cap Coverage by Industry Industrials 9% Services 11% 35. Over $5B 24.2% Aerospace/Defense 3% Gaming/Lodging 4% Healthcare 18% Media/Telecom 8% Technology 21% $ 2.0 – $ 5B 17.4% Consumer/Retail 4% Energy 22% $0 – $2B 58.4% Equity Research Assets Under Management (by predominant asset strategy) 2001 2005 $1,531 million (16) $4,260 million(16) Fixed Income 27% Equities/Fixed Private Equity(17) 15% Income(17) 7% Private Equity(17) 29% Real Assets 3% Fixed Income 24% Equities 12% Convertibles 44% Convertibles 39% Asset Management (16) Includes the Company’s managed or co-managed assets as well as third party managed funds. Jefferies’ managed and co-managed assets totaled $1,078 million in 2001 and $3,344 million in 2005. (17) Third party managed funds (funds in which the Company has an interest in the entities that manage these assets or otherwise receives a portion of the management or incentive fees).