Think Digital, Act Analog.

Frank E. Baxter, chairman and CEO of Jefferies & Co., has a stuffed green dinosaur on his L.A. office mantel with a sign around its neck that reads, "Adapt or die." Baxter, who thinks the biggest challenge facing his firm and industry is hubris, and thinking the old ways that have served the industry well will continue to do so, has a track record of adapting to adversity.

Founded in 1962 by Boyd Jefferies, Jefferies & Co. was an early trader in large blocks of stocks. In 1969 it was sold to Investors Diversified Services, now American Express, and forced to give up its seat on the New York Stock Exchange due to rules that prohibited institutions from owning brokers. "We had to develop a network before the word 'network' had much meaning unless you were ABC, CBS, or NBC," says Baxter, who joined Jefferies as a salesman in 1974, just after the firm bought itself back from IDS, and was made a director of the firm in 1975. After a tenure that included heading the firm's Manhattan office and opening and managing its London operation, he was called back to the states and named president and chief operating officer. When, just nine months later, Boyd Jefferies pled guilty to two felony securities violations--resulting in a five-year ban from the securities industry--Baxter took over as CEO.

His first tasks were to restore Jefferies' reputation and retain colleagues, who owned 50 percent of the firm's stock. "The market was roaring like it is today, so headhunters were all over the place," he says. "So I had to assure our people, and our clients, that we had a future."

At the time, Jefferies was a $147 million firm with 436 employees. Its shares were trading at 1 3/4. In March of 1998, before Baxter spun off Jefferies Information Technology Group, revenues were $724 million with 1,149 employees. Today, Jefferies has $400 million in capital and 900 employees in 18 offices worldwide. It posted record earnings in the second quarter of 1999, although both revenues and earnings skidded in the third quarter, reflecting the slump in high yield underwriting and small- and mid-cap equities trading markets in which Jefferies specializes. Still, earnings per share from continuing operations in 1999 were up 29 percent over 1998. Says Russell Keene, an equity analyst at Putnam, Lovell, de Guardiola & Thorton Inc., "[Jefferies'] stock has performed extremely well."

Baxter thinks it's easier to maintain an entrepreneurial and innovative culture in a small firm and he sees a niche to be filled in servicing small-cap firms, pointing out that 6,000 firms with less than $1 billion in market capitalization don't have an investment bank. "Having access to investors in small firms makes us desirable to investors who want to reach them," says Baxter.

However, Jefferies' relatively small size does present hurdles. "The challenge of any small, focused firm, is trying to maintain a balance because sectors come in and out of favor," says Keene.

Partnerships, counters Baxter, can augment Jefferies' offerings. "There are lots of things we can do outside our employee count. We can team up with others to complete any project."

In October 1999, Jefferies announced such an agreement with Credit Lyonnais Securities USA Inc. Credit Lyonnais will be Jefferies' preferred global bank, providing its clients with such banking products as senior credit and bridge financing. Jefferies, in turn, will be Credit Lyonnais' investment bank of choice, providing such services as merger and acquisition advisory activities and high yield and convertible debt offerings.

Building name recognition is next on the game plan. "The biggest advantage to size is branding," says Baxter, who is launching a branding campaign. "There is the IBM syndrome."

What will the Jefferies brand name stand for? Baxter, who meditates daily, doesn't hesitate: "We are innovative, opportunistic, frequently heretical; we are not staid."

His own innovation expresses itself in products--like the recently debuted @Harborside, which allows the firm's institutional clients to anonymously post desired trades, without anyone intervening until the match is made. @Harborside has had a slow start, but such electronic trading is clearly where the market is headed. "Mechanically it works," says Keene, "but the challenge is to get the big institutional traders to use the software."

Going forward, Baxter sees Jefferies' role changing to accommodate a market redefined by technology. "The world of financial services will be dramatically changed by the forces of the Internet and broadband," he says. "My vision is to be a continuation of the network, beyond the confines of the network. We relate to investors not only in the public markets but private markets. We are a clearinghouse for investors. We become an enlightened principal."

FRANK E. BAXTER Chairman and Chief Executive Jefferies & Co.

"THE BIGGEST ADVANTAGE TO SIZE IS BRANDING."

Age: 63

Born: November 20, 1936.

Family: Wife, Kathy, one son, two daughters, three grandkids.

Education: BA, economics, University of California Berkeley, 1961.

Downtime: Meditation. "[It helps] me distinguish between reality and illusion."

Outside Activities: Los Angeles Opera Board, Trustee of the I Have a Dream Foundation; Baxter Family Foundation.

Recent Reading: E-Business, Awakening the Buddah Within