10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File No. 001-31720

PIPER JAFFRAY COMPANIES

(Exact Name of Registrant as specified in its Charter)

DELAWARE	30-0168701
(State or Other Jurisdiction of	(IRS Employer Identification No.)
Incorporation or Organization)
800 Nicollet Mall, Suite 800
Minneapolis, Minnesota	55402
(Address of Principal Executive Offices)	(Zip Code)

(612) 303-6000
(Registrant’s Telephone Number, Including Area Code)

     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 þ No o

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

YES þ       NO o

     As of April 22, 2005, the Registrant had 20,538,425 shares of Common Stock outstanding.

Piper Jaffray Companies
Index to Quarterly Report on Form 10-Q

 Rule 13a-14(a)/15d-14(a) Certification of CEO

 Rule 13a-14(a)/15d-14(a) Certification of CFO

 Certifications Pursuant to Section 906

 Risk Factors

1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Piper Jaffray Companies

Consolidated Statements of Financial Condition

	March 31,			December 31,
	2005			2004
(Amounts in thousands, except share data)	(Unaudited)
Assets
Cash and cash equivalents	$	36,544		$	67,387
Receivables:
Customers (net of allowance of $1,793)		437,522			433,173
Brokers, dealers and clearing organizations		382,194			536,705
Deposits with clearing organizations		65,138			70,886
Securities purchased under agreements to resell		250,507			251,923
Trading securities owned		453,228			694,222
Trading securities owned and pledged as collateral		299,115			290,499
Total trading securities owned		752,343			984,721
Fixed assets (net of accumulated depreciation and amortization of $113,900 and $110,928, respectively)		52,644			53,968
Goodwill and intangible assets (net of accumulated amortization of $53,064 and $52,664, respectively)		321,434			321,834
Other receivables		31,587			31,832
Other assets		76,337			75,828
Total assets	$	2,406,250		$	2,828,257
Liabilities and Shareholders’ Equity
Short-term bank financing	$	145,000		$	—
Payables:
Customers		220,698			189,153
Checks and drafts		51,688			63,270
Brokers, dealers and clearing organizations		237,057			287,217
Securities sold under agreements to repurchase		170,319			312,273
Trading securities sold, but not yet purchased		442,222			746,604
Accrued compensation		78,281			184,608
Other liabilities and accrued expenses		144,367			139,704
Total liabilities		1,489,632			1,922,829
Subordinated debt		180,000			180,000
Shareholders’ equity:
Common stock, $0.01 par value;
Shares authorized: 100,000,000 at March 31, 2005 and December 31, 2004; Shares issued: 19,487,319 at March 31, 2005 and 19,333,261 at December 31, 2004; Shares outstanding: 19,339,695 at March 31, 2005 and 19,333,261 at December 31, 2004		195			193
Additional paid-in capital		688,447			678,755
Other comprehensive loss		(3,868	)		(3,868	)
Retained earnings		57,683			50,348
Less common stock held in treasury, at cost: 147,624 shares at March 31, 2005		(5,839	)		—
Total shareholders’ equity		736,618			725,428
Total liabilities and shareholders’ equity	$	2,406,250		$	2,828,257

See Notes to Consolidated Financial Statements

2

Piper Jaffray Companies

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended
	March 31,
(Amounts in thousands, except per share data)	2005		2004
Revenues:
Commissions and fees	$	70,160	$	69,512
Principal transactions		34,871		52,076
Investment banking		56,315		64,862
Interest income		15,602		13,327
Other income		10,727		14,400
Total revenues		187,675		214,177
Interest expense		8,607		4,777
Net revenues		179,068		209,400
Non-interest expenses:
Compensation and benefits		109,402		129,707
Occupancy and equipment		14,027		13,732
Communications		10,405		10,458
Floor brokerage and clearance		4,203		4,800
Marketing and business development		10,650		10,662
Outside services		10,639		9,158
Cash award program		1,136		1,071
Other operating expenses		7,127		7,640
Total non-interest expenses		167,589		187,228
Income before income tax expense		11,479		22,172
Income tax expense		4,144		8,382
Net income	$	7,335	$	13,790
Earnings per common share
Basic	$	0.38	$	0.71
Diluted	$	0.38	$	0.71
Weighted average number of common shares outstanding
Basic		19,378		19,333
Diluted		19,523		19,366

See Notes to Consolidated Financial Statements

3

Piper Jaffray Companies

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended
	March 31,
(Dollars in thousands)	2005			2004
Operating Activities:
Net income	$	7,335		$	13,790
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		4,421			5,303
Deferred income taxes		982			—
Stock-based compensation		3,697			1,372
Amortization of intangible assets		400			—
Decrease (increase) in operating assets:
Cash and cash equivalents segregated for regulatory purposes		—			66,000
Receivables:
Customers		(4,349	)		7,605
Brokers, dealers and clearing organizations		154,511			90,835
Deposits with clearing organizations		5,748			(5,243	)
Securities purchased under agreements to resell		1,416			75,425
Net trading securities owned		(72,004	)		(254,462	)
Other receivables		245			287
Other assets		(1,491	)		(2,941	)
Increase (decrease) in operating liabilities:
Payables:
Customers		31,545			(23,601	)
Checks and drafts		(11,582	)		(10,806	)
Brokers, dealers and clearing organizations		(37,264	)		21,695
Securities sold under agreements to repurchase		(6,189	)		(251	)
Accrued compensation		(93,140	)		(93,684	)
Other liabilities and accrued expenses		4,663			40,844
Net cash used in operating activities		(11,056	)		(67,832	)
Investing Activities:
Purchases of fixed assets, net		(3,097	)		(2,805	)
Net cash used in investing activities		(3,097	)		(2,805	)
Financing Activities:
Increase (decrease) in securities loaned		(12,896	)		18,798
Increase (decrease) in securities sold under agreements to repurchase		(135,765	)		102,378
Increase (decrease) in short-term bank financing, net		145,000			(53,000	)
Repurchase of common stock		(13,029	)		—
Net cash provided by (used in) financing activities		(16,690	)		68,176
Net decrease in cash and cash equivalents		(30,843	)		(2,461	)
Cash and cash equivalents at beginning of period		67,387			84,436
Cash and cash equivalents at end of period	$	36,544		$	81,975
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest	$	7,915		$	3,485
Income taxes	$	1,338		$	94
Noncash financing activities -
Issuance of 331,434 shares of common stock for retirement plan obligations	$	13,187		$	—

See Notes to Consolidated Financial Statements

4

Piper Jaffray Companies

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 Background and Basis of Presentation

Background

     Piper Jaffray Companies is the parent company of Piper Jaffray & Co. (“Piper Jaffray”), a securities broker dealer and investment banking firm; Piper Jaffray Ltd., a firm providing securities brokerage and investment banking services in Europe through an office located in London, England; and Piper Jaffray Financial Products Inc. and Piper Jaffray Financial Products II Inc., two entities that facilitate Piper Jaffray Companies customer derivative transactions. The Company, through its subsidiaries, operates in three business segments: Capital Markets, Private Client Services, and Corporate Support and Other. Capital Markets includes institutional sales and trading services and investment banking services. Private Client Services provides financial advice and investment products and services to individual investors. Corporate Support and Other includes the Company’s results from its private equity business and certain public company and financing costs. The Company’s business segments are described more fully in Note 13.

     On April 28, 2003, Piper Jaffray Companies was incorporated in Delaware as a subsidiary of U.S. Bancorp (“USB”) to effect the spin-off of USB’s capital markets business to its shareholders. On December 31, 2003, after receiving regulatory approval, USB distributed to its shareholders all of its interest in Piper Jaffray Companies and its subsidiaries (collectively, the “Company”). On that date, 19,334,261 shares of Piper Jaffray Companies common stock were issued to USB shareholders (the “Distribution”).

Basis of Presentation

     The consolidated financial statements include the accounts of Piper Jaffray Companies, its wholly owned subsidiaries and other entities in which the Company has a controlling financial interest. All material intercompany balances have been eliminated. Where appropriate, prior periods’ financial information has been reclassified to conform to the current period presentation.

     The consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) with respect to Form 10-Q and reflect all adjustments, which in the opinion of management are normal and recurring and that are necessary for a fair statement of the results for the interim periods presented. In accordance with these rules and regulations, certain disclosures that are normally included in annual financial statements have been omitted. The consolidated financial statements included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

     The consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles. These principles require management to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The nature of the Company’s business is such that the results of any interim period may not be indicative of the results to be expected for a full year.

Note 2 Summary of Significant Accounting Policies

     There have been no changes in the significant accounting policies from those included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Note 3 Recent Accounting Pronouncements

     On March 29, 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) Share-Based Payment, which expresses views of the staff regarding the interaction between SFAS No. 123(R) (“SFAS 123R”) Share-Based Payment and certain SEC rules and regulations. SAB 107 also provides the Staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company will evaluate the requirements of SAB 107 in connection with the Company’s future adoption of SFAS 123(R). On April 14, 2005, the SEC approved a new rule that delays the effective date of SFAS 123(R) for public companies. Under the SEC’s rule, SFAS 123(R) is now effective for public companies for annual, rather than interim, periods that begin after June 15, 2005.

5

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

Note 4 Derivatives

     Derivative contracts are financial instruments such as forwards, futures, swaps or option contracts that derive their value from underlying assets, reference rates, indices or a combination of these factors. A derivative contract generally represents future commitments to purchase or sell financial instruments at specified terms on a specified date or to exchange currency or interest payment streams based on the contract or notional amount. Derivative contracts exclude certain cash instruments, such as mortgage-backed securities, interest-only and principal-only obligations and indexed debt instruments that derive their values or contractually required cash flows from the price of some other security or index.

     In the normal course of business, the Company enters into derivative contracts to facilitate customer transactions and as a means to manage risk in net trading securities. The Company also enters into interest rate swap agreements to manage interest rate exposure associated with holding residual interest securities from its tender option bond program. As of March 31, 2005, and December 31, 2004, the Company was counterparty to notional/contract amounts of $2.7 billion and $2.5 billion, respectively, of derivative instruments.

     The market or fair values related to derivative contract transactions are reported in trading securities owned and trading securities sold, but not yet purchased on the Consolidated Statements of Financial Condition and any unrealized gain or loss resulting from changes in fair values of derivatives is recognized in principal transactions on the Consolidated Statements of Operations. Derivatives are reported on a net-by-counterparty basis when a legal right of offset exists under an enforceable netting agreement.

     Fair values for derivative contracts represent amounts estimated to be received from or paid to a counterparty in settlement of these instruments. These derivatives are valued using quoted market prices when available or pricing models based on the net present value of estimated future cash flows. The valuation models used require inputs including contractual terms, market prices, yield curves, credit curves and measures of volatility. The net fair value of derivative contracts was an asset of approximately $6.5 million and $1.7 million as of March 31, 2005, and December 31, 2004, respectively.

Note 5 Trading Securities Owned and Trading Securities Sold, But Not Yet Purchased

     Trading securities owned and trading securities sold, but not yet purchased were as follows:

	March 31,		December 31,
(Dollars in thousands)	2005		2004
Owned:
Corporate securities:
Equity securities	$	19,181	$	9,490
Convertible securities		47,314		93,480
Fixed income securities		143,356		208,494
Mortgage-backed securities		255,540		459,322
U.S. government securities		33,376		37,244
Municipal securities		242,139		165,435
Other		11,437		11,256
	$	752,343	$	984,721
Sold, but not yet purchased:
Corporate securities:
Equity securities	$	33,052	$	59,106
Convertible securities		7,778		12,600
Fixed income securities		128,652		155,534
Mortgage-backed securities		122,418		406,621
U.S. government securities		145,399		103,148
Municipal securities		6		—
Other		4,917		9,595
	$	442,222	$	746,604

6

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

     At March 31, 2005, and December 31, 2004, trading securities owned in the amount of $299.1 million and $290.5 million, respectively, have been pledged as collateral for the Company’s secured borrowings, repurchase agreements and securities loaned activities.

     Trading securities sold, but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price, thereby creating a liability to purchase the security in the market at prevailing prices. The Company is obligated to acquire the securities sold short at prevailing market prices, which may exceed the amount reflected on the Consolidated Statements of Financial Condition. The Company hedges changes in market value of its trading securities owned utilizing trading securities sold, but not yet purchased, interest rate swaps, futures and exchange-traded options. It is the Company’s practice to hedge a significant portion of its trading securities owned.

Note 6 Goodwill and Intangible Assets

     The following table presents the changes in the carrying value of goodwill and intangible assets by reportable segment for the three months ended March 31, 2005:

				Private		Corporate
	Capital			Client		Support and		Consolidated
	Markets			Services		Other		Company
(Dollars in thousands)
Goodwill
Balance at December 31, 2004	$	231,567		$	85,600	$	—	$	317,167
Goodwill acquired		—			—		—		—
Impairment losses		—			—		—		—
Balance at March 31, 2005	$	231,567		$	85,600	$	—	$	317,167
Intangible assets
Balance at December 31, 2004	$	4,667		$	—	$	—	$	4,667
Intangible assets acquired		—			—		—		—
Amortization of intangible assets		(400	)		—		—		(400	)
Impairment losses		—			—		—		—
Balance at March 31, 2005	$	4,267		$	—	$	—	$	4,267
Total goodwill and intangible assets	$	235,834		$	85,600	$	—	$	321,434

The intangible assets are amortized on a straight-line basis over three years.

Note 7 Short-Term Financing

     The Company has uncommitted credit agreements with banks totaling $650 million at March 31, 2005, composed of $530 million in discretionary secured lines of which $145 million was outstanding at March 31, 2005, and $120 million in discretionary unsecured lines. In addition, the Company has established arrangements to obtain financing using as collateral the Company’s securities held by its clearing bank and by another broker dealer at the end of each business day. Repurchase agreements and securities loaned to other broker dealers are also used as sources of funding.

     Piper Jaffray has executed a $180 million subordinated debt agreement with an affiliate of USB, which satisfies provisions of Appendix D of SEC Rule 15c3-1 and has been approved by the New York Stock Exchange, Inc. (“NYSE”) and is therefore allowable in Piper Jaffray’s net capital computation. The entire amount of the subordinated debt will mature in 2008.

     During 2004, Piper Jaffray entered into an agreement whereby an affiliate of USB has agreed to provide up to $40 million in temporary subordinated debt, which will be used as necessary to facilitate underwriting transactions. The temporary subordinated debt satisfies provisions of Appendix D of SEC Rule 15c3-1, and in form has been approved by the NYSE and would therefore be allowed in Piper Jaffray’s net capital computation. No advances were made under this agreement for the three months ended March 31, 2005. The term of the agreement expires in December 2005.

7

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

     The Company’s subordinated debt and short-term financing bear interest at rates based on the London Interbank Offered Rate or federal funds rate. At March 31, 2005 and December 31, 2004, the weighted average interest rate on borrowings was 3.72 percent and 3.51 percent, respectively. At March 31, 2005 and December 31, 2004, no formal compensating balance agreements existed, and the Company was in compliance with all debt covenants related to these facilities.

Note 8 Legal Contingencies

     The Company has been the subject of customer complaints and also has been named as a defendant in various legal proceedings arising primarily from securities brokerage and investment banking activities, including certain class actions that primarily allege violations of securities laws and seek unspecified damages, which could be substantial. Also, the Company is involved from time to time in investigations and proceedings by governmental agencies and self-regulatory organizations.

     The Company has established reserves for potential losses that are probable and reasonably estimable that may result from pending and potential complaints, legal actions, investigations and proceedings. In addition to the Company’s established reserves, USB has agreed to indemnify the Company in an amount up to $17.5 million for certain legal and regulatory matters. Approximately $13.5 million of this amount remained available as of March 31, 2005.

     Given uncertainties regarding the timing, scope, volume and outcome of pending and potential litigation, arbitration and regulatory proceedings and other factors, the reserve is difficult to determine and of necessity subject to future revision. Subject to the foregoing, management of the Company believes, based on its current knowledge, after consultation with counsel and after taking into account its established reserves and the USB indemnity agreement entered into in connection with the spin-off, that pending legal actions, investigations and proceedings will be resolved with no material adverse effect on the financial condition of the Company. However, if during any period a potential adverse contingency should become probable or resolved for an amount in excess of the established reserves and indemnification, the results of operations in that period could be materially adversely affected.

Note 9 Net Capital Requirements and Other Regulatory Matters

     As a registered broker dealer and member firm of the NYSE, Piper Jaffray is subject to the Uniform Net Capital Rule (the “Rule”) of the SEC and the net capital rule of the NYSE. Piper Jaffray has elected to use the alternative method permitted by the Rule, which requires that it maintain minimum net capital of the greater of $1.0 million or 2 percent of aggregate debit balances arising from customer transactions, as such term is defined in the Rule. The NYSE may prohibit a member firm from expanding its business or paying dividends if resulting net capital would be less than 5 percent of aggregate debit balances. Advances to affiliates, repayment of subordinated debt, dividend payments and other equity withdrawals by Piper Jaffray are subject to certain notification and other provisions of the Rule and the net capital rule of the NYSE. In addition, Piper Jaffray is subject to certain notification requirements related to withdrawals of excess net capital.

     At March 31, 2005, net capital under the Rule was $325.5 million, or 58.9 percent of aggregate debit balances, and $314.5 million in excess of the minimum net capital required under the Rule.

     Piper Jaffray is also registered with the Commodity Futures Trading Commission (“CFTC”) and therefore is subject to CFTC regulations.

     Piper Jaffray Ltd., which is a registered United Kingdom broker dealer, is subject to the capital requirements of the Financial Services Authority (“FSA”). As of March 31, 2005, Piper Jaffray Ltd. was in compliance with the capital requirements of the FSA.

Note 10 Pension and Post-retirement Medical Plans

     Certain employees participate in the Piper Jaffray Companies Non-Qualified Retirement Plan, an unfunded, non-qualified cash balance pension plan. The Company froze this plan in 2004, eliminating future benefits related to pay increases and excluding new participants from the plan.

     All employees of the Company who meet defined age and service requirements are eligible to receive post-retirement health care benefits provided under a post-retirement benefit plan established by the Company in 2004. The estimated cost of these retiree health care benefits is accrued during the employees’ active service.

8

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

     The components of the net periodic benefits costs for the three months ended March 31, 2005 and 2004, were as follows:

						Post-retirement
	Pension Benefits					Medical Benefits
(Dollars in thousands)	2005		2004			2005			2004
Service cost	$	—	$	—		$	76		$	46
Interest cost		411		341			25			17
Expected return on plan assets		—		—			—			—
Amortization of prior service cost		—		(40	)		(16	)		(12	)
Amortization of net loss		99		36			3			6
Net periodic benefit cost	$	510	$	337		$	88		$	57

     The pension plan and post-retirement medical plan do not have assets and are not funded. The Company has contributed $0.7 million to the pension plan for the three months ended March 31, 2005.

Note 11 Stock-Based Compensation and Cash Award Program

     The Company maintains one stock-based compensation plan, the Piper Jaffray Companies 2003 Amended and Restated Long-Term Incentive Plan (“the Plan”). The Plan permits the grant of share options and restricted stock to its employees and directors for up to 4.1 million shares of common stock. In 2004 and 2005, the Company granted shares of restricted stock and options to purchase Piper Jaffray Companies common stock to employees and directors. The Company believes that such awards better align the interests of employees with those of shareholders. The awards granted to employees have three-year cliff vesting periods. The director awards are fully vested upon grant. Certain option and restricted stock awards provide for accelerated vesting if there is a change in control (as defined in the Plan). The following table summarizes the Company’s stock options and restricted stock outstanding for the three months ended March 31, 2005:

				Weighted		Shares of
	Options			Average		Restricted Stock
	Outstanding			Exercise Price		Outstanding
December 31, 2004		295,683		$	47.50		531,885
Granted:
Stock options		393,786			39.62		—
Restricted stock		—			—		787,222
Exercised		—			—		—
Canceled options		(13,397	)		42.97		—
Canceled restricted stock		—			—		(3,840	)
March 31, 2005		676,072		$	43.00		1,315,267

9

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

     Additional information regarding Piper Jaffray Companies options outstanding as of March 31, 2005, is as follows:

	Options Outstanding				Exercisable Options
			Weighted
			Average				Weighted
			Remaining				Average
Range of			Contractual				Exercise
Exercise Prices	Shares		Life (Years)		Shares		Price
$39.62 - $45.95		386,231		9.9		—		N/A
$45.96 - $51.05		289,841		8.9		21,249	$	50.13

     Effective January 1, 2004, the Company elected to account for stock-based compensation under the fair value method as prescribed by SFAS 123 and as amended by SFAS 148. Therefore, employee and director stock options granted on and after January 1, 2004, are expensed by the Company on a straight-line basis over the option vesting period, based on the estimated fair value of the award on the date of grant using a Black-Scholes option-pricing model. Restricted stock expense is based on the market price of Piper Jaffray Companies stock on the date of the grant and is amortized on a straight-line basis over the vesting period. For the three months ended March 31, 2005 and 2004, the Company recorded compensation expense, net of estimated forfeitures, of $3.7 million and $1.4 million, respectively, related to employee stock option and restricted stock grants.

     The following table provides a summary of the valuation assumptions used by the Company to determine the estimated value of stock option grants in Piper Jaffray Companies common stock:

Weighted average assumptions in option valuation	2005			2004
Risk-free interest rates		3.76	%		3.20	%
Dividend yield		0.00	%		0.00	%
Stock volatility factor		38.57	%		40.00	%
Expected life of options (in years)		6.00			5.79
Weighted average fair value of options granted	$	17.28		$	21.24

     In connection with our spin-off from USB, we established a cash award program pursuant to which we granted cash awards to a broad-based group of employees. The cash award program was intended to aid in retention of employees and to compensate employees for the value of USB stock options and restricted stock lost by employees as a result of the Distribution. The cash awards are being expensed over a four-year period ending December 31, 2007. Participants must be employed on the date of payment to receive the award. Expense related to the cash award program is included as a separate line item on the Company’s Consolidated Statements of Operations.

Note 12 Shareholders’ Equity

Share Repurchase Program

     In 2005, the Company’s board of directors authorized the repurchase of up to 1.3 million shares of the Company’s common stock for a maximum aggregate purchase price of $65.0 million. The principal purpose of the share repurchase program is to manage the Company’s equity capital relative to the growth of its business and to offset the dilutive effect of employee equity-based compensation. During the first quarter, the Company repurchased 325,000 of the Company’s common stock at an average price of $40.09 per share.

Issuance of Shares

     During the first quarter, the Company issued 154,058 of the Company’s common stock and reissued 177,376 shares out of treasury stock in fulfillment of $13.2 million in obligations under the Piper Jaffray Companies Retirement Plan.

10

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

Earnings Per Share

     Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is calculated by adjusting the weighted average outstanding shares to assume vesting and, in the case of options, exercise of all potentially dilutive restricted stock and stock options. The computation of earnings per share is as follows:

	For the Three Months Ended
	March 31,
	2005		2004
(Amounts in thousands, except per share data)
Net income	$	7,335	$	13,790
Shares for basic and diluted calculations:
Average shares used in basic computation		19,378		19,333
Stock options		—		—
Restricted stock		145		33
Average shares used in diluted computation		19,523		19,366
Earnings per share:
Basic	$	0.38	$	0.71
Diluted	$	0.38	$	0.71

Note 13 Business Segments

     Within the Company, financial performance is measured by lines of business. The Company’s reportable business segments include Capital Markets, Private Client Services and Corporate Support and Other. The business segments are determined based upon factors such as the type of customers, the nature of products and services provided and the distribution channels used to provide those products and services. Certain services that the Company offers are provided to clients through more than one of our business segments. These business segments are components of the Company about which financial information is available and is evaluated on a regular basis in deciding how to allocate resources and assess performance relative to competitors.

Basis for Presentation

     In the first quarter of 2005, the Company began to more fully allocate corporate expenses, previously included in Corporate Support and Other, to Capital Markets and Private Client Services. This change in how the Company reports segment results was done as a result of the Company completing an extensive study of costs included in Corporate Support and Other to determine how these costs were related to and driven by business activities conducted in the Capital Markets and Private Client Services segments. As a result of this study, certain expenses such as finance, human resources and other corporate administration have been reclassified and included in the results of the revenue-producing segments. Internally, the Company is now managing and allocating resources to its business segments based on these reclassified results. In connection with this change, the Company has restated prior period business results to conform to the current period presentation. The restatement does not affect the Company’s aggregate financial results.

     Segment results are derived from the Company’s financial reporting systems by specifically attributing customer relationships and their related revenues and expenses to the appropriate segment. Revenue-sharing of sales credits associated with underwritten offerings is based on the distribution channel generating the sales. Expenses directly managed by the business line, including salaries, commissions, incentives, employee benefits, occupancy, marketing and business development and other direct expenses, are accounted for within each segment’s pre-tax operating income or loss. In addition, investment research, operations, technology and other business activities managed on a corporate basis are allocated based on each segment’s use of these functions to support its business. Expenses related to costs of being a stand-alone public company and long-term financing are included within Corporate Support and Other. Cash award plan charges related to the Distribution and income taxes are not assigned to the business segments. The financial management of assets, liabilities and capital is performed on an enterprise-wide basis. Net revenues from the Company’s non-U.S. operations were $2.7 million and $3.1 million for the three months ended March 31, 2005 and 2004, respectively, and are included in the Capital Markets business segment. Non-U.S. long-lived assets were $0.6 million at March 31, 2005 and December 31, 2004.

11

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

     Designations, assignments and allocations may change from time to time as financial reporting systems are enhanced and methods of evaluating performance change or segments are realigned to better serve the clients of the Company. Accordingly, prior period balances are reclassified and presented on a comparable basis.

Capital Markets (“CM”)

     CM includes institutional sales and trading services and investment banking services. Institutional sales and trading services focus on the sale of U.S. equities and fixed income products to institutions and government and non-profit entities. Investment banking services include management of and participation in underwritings, merger and acquisition services and public finance activities. Additionally, CM includes earnings on trading activities related to securities inventories held to facilitate customer transactions and net interest revenues on trading securities held in inventory.

Private Client Services (“PCS”)

     PCS principally provides individual investors with financial advice and investment products and services, including equity and fixed income securities, mutual funds and annuities. This segment also includes net interest income on customer margin loans. As of March 31, 2005, PCS had 866 financial advisors operating in 91 branch offices in 17 midwest, mountain and west coast states.

Corporate Support and Other

     Corporate Support and Other includes costs of being a stand-alone public company, long-term financing costs and the results of our private equity business, which generates revenues through the management of private equity funds. This segment also includes results related to our investments in these funds and in venture capital funds. Prior to January 1, 2005, Corporate Support and Other also included the results of our venture capital business. Effective December 31, 2004, we exited this business and the management of our venture capital funds was transitioned to an independent company.

     Reportable segment financial results are as follows:

					Private Client				Corporate Support
	Capital Markets				Services				and Other						Consolidated Company
Three Months Ended March 31,	2005		2004		2005		2004		2005			2004			2005		2004
(Dollars in thousands)
Net revenues	$	91,945	$	112,044	$	89,199	$	96,395	$	(2,076	)	$	961		$	179,068	$	209,400
Operating expense		80,418		93,142		84,388		89,375		1,647			3,640			166,453		186,157
Pre-tax operating income (loss) before unallocated charges	$	11,527	$	18,902	$	4,811	$	7,020	$	(3,723	)	$	(2,679	)	$	12,615	$	23,243
Cash award program																1,136		1,071
Consolidated operating income before taxes															$	11,479	$	22,172

Note 14 Securitizations

     In connection with its tender option bond program, the Company has securitized $279.0 million of highly rated municipal bonds. Each municipal bond is sold into a separate trust that is funded by the sale of variable rate certificates to institutional and retail customers seeking variable rate tax-free investment products. These variable rate certificates reprice weekly. Securitization transactions meeting certain SFAS 140 criteria are treated as sales, with the resulting gain included in principal transactions on the Consolidated Statements of Operations. If a securitization does not meet the sale of asset requirements of SFAS 140, the transaction is recorded as a borrowing. The Company retains a residual interest in each structure and accounts for the residual interest as a trading security, which is recorded at fair value on the Consolidated Statements of Financial Condition. The fair value of retained interests was $7.2 million at March 31, 2005, with a weighted average life of 9.9 years. Fair value of retained interests is estimated based on the present value of future cash flows using management’s best estimates of the key assumptions—expected yield, credit losses of 0 percent and a 12 percent discount rate. The Company receives a fee to remarket the variable rate certificates derived from the securitizations.

     At March 31, 2005, the sensitivity of the current fair value of retained interests to immediate 10 percent and 20 percent adverse changes in the key economic assumptions was not material. The sensitivity analysis does not include the offsetting benefit of financial instruments the Company utilizes to hedge risks inherent in its retained interests and is hypothetical. Changes in fair value based on a 10 percent or 20 percent variation in an assumption generally cannot be extrapolated because the relationship of the change in the assumption to the change in the fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interests is calculated independent of changes in any other assumption; in practice, changes in one factor may result in changes in another, which might magnify

12

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

or counteract the sensitivities. In addition, the sensitivity analysis does not consider any corrective action that the Company might take to mitigate the impact of any adverse changes in key assumptions.

     Certain cash flow activity for the municipal bond securitizations described above during 2005 includes:

(Dollars in thousands)
Proceeds from new sales	$	13,941
Remarketing fees received		38
Cash flows received on retained interests		2,918

     During 2004, two securitization transactions were designed as such that they did not meet the asset sale requirements of SFAS 140; therefore, the Company consolidated these trusts. As a result, the Company has recorded an asset for the underlying bonds of approximately $45.1 million in trading securities on the Consolidated Statement of Financial Condition and a liability for the certificates sold by the trust for approximately $44.9 million in other liabilities on the Consolidated Statement of Financial Condition as of March 31, 2005. The Company has hedged the activities of these securitizations with interest rate swaps, which have been recorded at fair value and resulted in a liability of approximately $0.2 million at March 31, 2005.

     The Company has contracted with a major third-party financial institution to act as the liquidity provider for the Company’s tender option bond securitized trusts. The Company has agreed to reimburse this party for any losses associated with providing liquidity to the trusts. The maximum exposure to loss at March 31, 2005 was $261.5 million, representing the outstanding amount of all trust certificates at those dates. This exposure to loss is mitigated by the underlying municipal bonds in the trusts, which are either AAA or AA rated. These bonds had a market value of approximately $269.8 million at March 31, 2005. The Company believes the likelihood it will be required to fund the reimbursement agreement obligation under any provision of the arrangement is remote, and accordingly, no liability for such guarantee has been recorded in the accompanying consolidated financial statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following information should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes and exhibits included elsewhere in this report. Certain statements in this report may be considered forward-looking. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward- looking statements cover, among other things, the future prospects of Piper Jaffray Companies. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including those factors identified in the document entitled “Risk Factors” filed as Exhibit 99.1 to this Form 10-Q and in our subsequent reports filed with the SEC. These reports are available at our Web site at www.piperjaffray.com and at the SEC’s Web site at www.sec.gov. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.

EXECUTIVE OVERVIEW

Our Business

     We are principally engaged in providing securities brokerage, investment banking and related financial services to individuals, corporations and public sector and non-profit entities in the United States, with limited activity in Europe. We operate through three reportable segments:

Capital Markets — This segment consists of our equity and fixed income institutional sales and trading and investment banking businesses. It generates revenues primarily through commissions and sales credits earned on equity and fixed income transactions, fees earned on investment banking and public finance activities, and net interest earned on securities inventories. While we maintain securities inventories primarily to facilitate customer transactions, our Capital Markets business also realizes profits and losses from trading activities related to these securities inventories .

Private Client Services — This segment comprises our retail brokerage business, which provides financial advice and a wide range of financial products and services to individual investors through our network of branches. It generates revenues primarily through commissions earned on equity and fixed income transactions, commissions earned for distribution of mutual funds and annuities, fees earned on fee-based investment management accounts and net interest from customers’ margin loan balances.

Corporate Support and Other — This segment includes costs of being a stand-alone public company, long-term financing costs and the results of our private equity business, which generates revenues through the management of private equity funds. This segment also includes results related to our investments in these funds and in venture capital funds. Prior to January 1, 2005, Corporate Support and Other also included the results of our venture capital business. Effective December 31, 2004, we exited this business and the management of our venture capital funds was transitioned to an independent company. We maintained our existing investments in these funds.

     The securities business is a human capital business; accordingly, compensation and benefits comprise the largest component of our expenses, and our performance is dependent upon our ability to attract, develop and retain highly skilled employees who are motivated to serve the best interests of our clients, thereby serving the best interests of our company.

External Factors Impacting Our Business

     Performance in the financial services industry in which we operate is highly correlated to the overall strength of economic conditions and financial market activity. Overall market conditions are a product of many factors, which are mostly unpredictable and beyond our control. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the volume and value of trading in securities, the volatility of the equity and fixed income markets, the level and shape of various yield curves and the demand for investment banking services as reflected by the number and size of public offerings and merger and acquisition transactions.

     Factors that differentiate our business within the financial services industry also may affect our financial results. For example, our Capital Markets business focuses primarily on specific sectors such as the consumer, financial institutions, health care and technology industries within the corporate sector and on health care, higher education, housing, and state and local government entities within the government/non-profit sector. These products and sectors may experience growth or downturns independently of general economic and market conditions, or may face market conditions that are disproportionately better or worse than those impacting the economy and markets generally. In either case, our business could be affected differently than overall market trends. Our Private Client Services business primarily operates in the midwest, mountain and west coast states, and an economic growth spurt or downturn that disproportionately impacts one or all of these regions may

14

disproportionately affect our business compared with companies operating in other regions or more nationally or globally. Given the variability of the capital markets and securities businesses, our earnings may fluctuate significantly from period to period, and results of any individual period should not be considered indicative of future results.

Recent Economic Trends

     In the first quarter of 2005, growth in the U.S. economy remained positive with improved corporate profitability and relatively low interest rates. However, investors continue to be concerned with the price of oil and other inflationary pressures, the pace of continued economic growth, the value of the dollar and record U.S. federal budget and trade deficits, and may remain risk averse. To mitigate the risk of higher inflation, the Federal Reserve Board twice increased the federal funds rate 25 basis points, the sixth and seventh 25 basis point increases since June 2004. The Dow Jones Industrial Average, the NASDAQ Composite Index and the Standard & Poor’s 500 Index all posted declines in the first quarter of 2005.

First Quarter Results

     For the three months ended March 31, 2005, our net income decreased to $7.3 million from $13.8 million for the corresponding period in the prior year, resulting in diluted earnings per share of $0.38, a 46.5 percent decrease over the prior-year period. Net revenues for the first quarter of 2005 decreased 14.5 percent to $179.1 million, compared to $209.4 million for the first quarter of 2004. Annualized return on average tangible shareholders’ equity¹ was 7.1 percent for the three-month period ended March 31, 2005, compared to 14.9 percent for the three-month period ended March 31, 2004.

     Impact of Structural Changes in the Industry. The decline in net income for the first quarter of 2005 compared to the first quarter of 2004 is largely due to reduced revenues in our fixed income and equity institutional sales and trading businesses, which are experiencing the effects of structural changes in the fixed income and equity sales and trading markets within the industry. These changes include increased price transparency in the corporate bond market and increased use of electronic and direct market access trading, which have created additional competitive downward pressure on trading margins. The magnitude of the effect of these changes on our institutional sales and trading businesses in the first quarter of 2005 was greater than anticipated, particularly in the fixed income markets. We expect to experience continued downward pressure on trading margins for the foreseeable future. We continue to review our institutional sales and trading businesses with the goal of ensuring the most effective use of our resources.

     Impact of Recent Economic Trends. Our first quarter results also reflect the cyclicality of the market. Higher interest rates compared to a year ago led to a reduction in the volume of activity related to certain fixed income products, particularly agency securities, resulting in reduced revenues. Investment banking revenues declined due to less active public finance and equity underwriting markets. We also experienced reduced transaction levels within Private Client Services.

     Initiatives. We are evaluating all of our businesses to ensure we are directing resources to areas where we can add value to our clients, achieve appropriate profitability and sustain competitive growth. Within Capital Markets, our future growth may depend on our ability to differentiate ourselves by offering more non-traditional products and services than we do today. For example, in response to increased demand for electronic trading, we added algorithmic and program trading capabilities for equity securities in the fourth quarter of 2004, and our fixed income corporate bond business added electronic trading capabilities at the end of the first quarter of 2005. We are also evaluating additional ways to grow and strengthen our Capital Markets business. For example, we are reviewing a range of alternatives to leverage our differentiated investment banking franchises. This may include providing additional products to our middle market and public finance investment banking clients, or expanding our public finance activity geographically. As we look to add new capabilities, we may build them internally, acquire them or partner with other firms to provide them. We continue our work to return our Private Client Services business to competitive performance. These efforts depend principally on our ability to increase the number of financial advisors, increase the productivity of our financial advisors, and execute on our strategy of becoming our clients’ primary advisor.

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⁽¹⁾   Tangible shareholders’ equity equals total shareholders’ equity less goodwill and identifiable intangible assets. Annualized return on average tangible shareholders’ equity is computed by dividing annualized net income by average monthly tangible shareholders’ equity. Given the significant goodwill on our balance sheet, we believe that annualized return on tangible shareholders’ equity is a meaningful measure of our performance because it reflects the tangible equity deployed in our business. This measure excludes the portion of our shareholders’ equity attributable to goodwill and identifiable intangible assets. The majority of the goodwill recorded on our balance sheet relates to U.S. Bancorp’s acquisition of our predecessor company, Piper Jaffray Companies Inc., and its subsidiaries in 1998. This goodwill reflects the premium paid by U.S. Bancorp for our business, and is reflected on our books in accordance with U.S. generally accepted accounting principles (“GAAP”). The following table sets forth a reconciliation of shareholders’ equity to tangible shareholders’ equity. Shareholders’ equity is the most directly comparable GAAP financial measure to tangible shareholders’ equity.

	Average for the
	Three Months Ended		Three Months Ended		As of
	March 31,		March 31,		March 31,
(Dollars in thousands)	2005		2004		2005
Shareholders’ Equity	$	732,787	$	676,908	$	736,618
Deduct: Goodwill and indentifiable intangible assets		321,634		305,635		321,434
Tangible shareholders’ equity	$	411,153	$	371,273	$	415,184

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RESULTS OF OPERATIONS

FINANCIAL SUMMARY FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

     The following table provides a summary of the results of our operations and the results of our operations as a percentage of net revenues for the periods indicated.

										Results of Operations
										as a Percentage of Net
	Results of Operations									Revenues
	For the Three Months Ended									For the Three Months Ended
	March 31,									March 31,
							2005
	2005			2004			v2004			2005			2004
(Amounts in thousands)
Revenues:
Commissions and fees	$	70,160		$	69,512			0.9	%		39.2	%		33.2	%
Principal transactions		34,871			52,076			(33.0	)		19.5			24.8
Investment banking		56,315			64,862			(13.2	)		31.4			31.0
Interest income		15,602			13,327			17.1			8.7			6.4
Other income		10,727			14,400			(25.5	)		6.0			6.9
Total revenues		187,675			214,177			(12.4	)		104.8			102.3
Interest expense		(8,607	)		(4,777	)		80.2			(4.8	)		(2.3	)
Net revenues		179,068			209,400			(14.5	)		100.0			100.0
Non-interest expenses:
Compensation and benefits		109,402			129,707			(15.7	)		61.1			61.9
Occupancy and equipment		14,027			13,732			2.1			7.8			6.6
Communications		10,405			10,458			(0.5	)		5.8			5.0
Floor brokerage and clearance		4,203			4,800			(12.4	)		2.4			2.3
Marketing and business development		10,650			10,662			(0.1	)		6.0			5.1
Outside services		10,639			9,158			16.2			5.9			4.4
Cash award program		1,136			1,071			6.1			0.6			0.5
Other operating expenses		7,127			7,640			(6.7	)		4.0			3.6
Total non-interest expenses		167,589			187,228			(10.5	)		93.6			89.4
Income before taxes		11,479			22,172			(48.2	)		6.4			10.6
Income tax expense		4,144			8,382			(50.6	)		2.3			4.0
Net income	$	7,335		$	13,790			(46.8	)%		4.1	%		6.6	%

N/M — Not Meaningful

     Net income decreased to $7.3 million for the three months ended March 31, 2005, down from $13.8 million for the three months ended March 31, 2004. Net revenues decreased to $179.1 million for the three months ended March 31, 2005, down 14.5 percent over the same period last year. The largest component of our revenue stream was commissions and fees, which remained essentially flat at $70.2 million for the three months ended March 31, 2005, increasing just 0.9 percent from the corresponding period of the prior year. Principal transactions revenue decreased 33.0 percent from the year-ago period, due to significant declines in both fixed income and equity institutional sales and trading revenues. Our Capital Markets sales and trading business experienced significant downward pressure on trading margins, compared to the year-ago period, and we expect this pressure to continue for the foreseeable future. Investment banking revenues decreased to $56.3 million, down 13.2 percent compared with the three months ended March 31, 2004. The decrease in investment banking revenue was driven by a decline in fixed income and equity underwriting activity, offset partially by an increase in mergers and acquisitions revenue. Net interest income for the three months ended March 31, 2005, decreased to $7.0 million, down 18.2 percent compared to the three months ended March 31, 2004. This decrease is largely due to a decline in interest income related to reduced net fixed income inventories and a flattening yield curve. In addition, we incurred increased interest expense associated with financing our business with variable-rate debt. Other income revenues for the three months ended March 31, 2005, decreased by 25.5 percent to $10.7 million, compared with $14.4 million for the corresponding period in the prior year. This decrease was largely due to gains recorded in the first quarter of 2004 on venture capital investments. Additionally, the first quarter of 2004 included revenues associated with our venture capital business, which was transitioned to an independent company effective December 31, 2004. Non-interest expenses decreased 10.5 percent to $167.6 million for the three months

17

ended March 31, 2005, from $187.2 million for the three months ended March 31, 2004. This decrease was primarily attributable to a reduction in compensation and benefits due to lower revenues and profitability.

CONSOLIDATED NON-INTEREST EXPENSES

Compensation and Benefits

     A substantial portion of compensation expense is comprised of variable incentive arrangements and commissions, the amounts of which fluctuate in proportion to the level of business activity, decreasing with lower revenues and operating profits. Other compensation costs, primarily base salaries and benefits, are more fixed in nature. Compensation and benefits expenses decreased 15.7 percent to $109.4 million for the three months ended March 31, 2005, from $129.7 million for the corresponding period in the prior year, due to a decline in revenues and lower profitability. Compensation and benefits expenses as a percentage of net revenues decreased to 61.1 percent for the three months ended March 31, 2005, versus 61.9 percent for the three months ended March 31, 2004.

Occupancy and Equipment

     Occupancy and equipment expenses increased 2.1 percent to $14.0 million for the three months ended March 31, 2005, compared with $13.7 million in the corresponding period in the prior year.

Communications

     Communication expenses include costs for telecommunication and data communication, primarily consisting of expense for obtaining third-party market data information. Communication expenses were $10.4 million for the three months ended March 31, 2005, down slightly from $10.5 million for the three months ended March 31, 2004.

Floor Brokerage and Clearance

     Floor brokerage and clearance expenses were $4.2 million for the three months ended March 31, 2005, decreasing from $4.8 million for the three months ended March 31, 2004. This reduction reflects our continued efforts to reduce expenses associated with accessing electronic communication networks, offset in part by increased costs associated with our new algorithmic and program trading (“APT”) business acquired in the fourth quarter of 2004. We expect these expenses to continue to increase as the APT business grows.

Marketing and Business Development

     Marketing and business development expenses include travel and entertainment, postage, supplies and promotional and advertising costs. Marketing and business development expenses were flat at $10.7 million for the three months ended March 31, 2005, compared with the corresponding period in the prior year.

Outside Services

     Outside services expenses include securities processing expenses, outsourced technology functions, outside legal fees and other professional fees. Outside services expenses increased to $10.6 million for the three months ended March 31, 2005, compared with $9.2 million for the corresponding period in the prior year. This increase primarily reflects the costs for outsourcing our technology help desk to a third-party vendor beginning in the third quarter of 2004, and the outsourcing of our mutual fund operations processing to a third-party vendor beginning in the fourth quarter of 2004. Previously, these services were performed in-house with the associated expense principally reflected in compensation and benefits.

Cash Award Program

     In connection with our spin-off from U.S. Bancorp, we established a cash award program pursuant to which we granted cash awards to a broad-based group of our employees. The award program was designed to aid in retention of employees and to compensate for the value of U.S. Bancorp stock options and restricted stock lost by our employees as a result of the spin-off. The cash awards are being expensed over a four-year period ending December 31, 2007, and will result in charges of approximately $4.8 million, $4.8 million and $4.6 million in 2005, 2006 and 2007, respectively. For the three months ended March 31, 2005, we recorded expense of $1.1 million, which is consistent with the corresponding period in the prior year.

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Other Operating Expenses

     Other operating expenses include insurance costs, license and registration fees, financial advisor loan loss contingencies, expenses related to our charitable giving program, and litigation-related expenses, which consist of the amounts we reserve and/or pay out related to legal and regulatory settlements, awards or judgments, and fines. Other operating expenses decreased 6.7 percent to $7.1 million for the three months ended March 31, 2005, compared with $7.6 million for the three months ended March 31, 2004. This decrease is a result of lower expenses related to corporate insurance premiums and minority interest expense recorded in the first quarter of 2004 related to our venture capital investments. These reduced costs were offset in part by intangible asset amortization expense that began to be recorded late in 2004 in conjunction with our acquisition of the new APT business.

Income Taxes

     Our provision for income taxes was $4.1 million, an effective tax rate of 36.1 percent, for the three months ended March 31, 2005, compared with $8.4 million, an effective tax rate of 37.8 percent, for the three months ended March 31, 2004. The decreased effective tax rate is attributable to an increase in the ratio of municipal interest income, which is non-taxable, to taxable income for the three months ended March 31, 2005, and the tax effect of contributing appreciated securities to the Piper Jaffray Foundation.

SEGMENT PERFORMANCE

     We measure financial performance by business segment. Our three segments are Capital Markets, Private Client Services, and Corporate Support and Other. We determined these segments based on factors such as the type of customers served, the nature of products and services provided and the distribution channels used to provide those products and services. Segment pre-tax operating income or loss and segment operating margin are used to evaluate and measure segment performance by our management team in deciding how to allocate resources and in assessing performance in relation to our competitors. Segment pre-tax operating income or loss is derived from our business unit profitability reporting systems by specifically attributing customer relationships and their related revenues and expenses. Expenses directly managed by the business unit are accounted for within each segment’s pre-tax operating income or loss. In addition, investment research, operations, technology and other business activities managed on a corporate basis are allocated based on each segment’s use of these functions to support its business. Expenses related to costs of being a stand-alone public company and long-term financing are included within Corporate Support and Other. To enhance the comparability of business segment results over time, the cash awards granted to employees in connection with our separation from U.S. Bancorp are not included in segment pre-tax operating income or loss. The presentation reflects our current management structure.

     In the first quarter of 2005, we began to more fully allocate corporate expense, previously included in Corporate Support and Other, to Capital Markets and Private Client Services. Early in 2005, we concluded an extensive study of costs included in Corporate Support and Other to determine how these costs related to and were driven by business activities conducted in Capital Markets and Private Client Services. As a result of this study, certain expenses such as finance, human resources and other corporate administration have been reclassified and included in the results of the revenue-producing segments. Internally, we are now managing and allocating resources to our business segments based on these reclassified results. This restatement does not affect our aggregate financial results. All periods presented have been restated and are presented on a comparable basis.

     Our primary revenue-producing segments, Capital Markets and Private Client Services, have different compensation plans and non-compensation cost structures that impact the operating margins of the two segments differently during periods of increasing or decreasing business activity and revenues. Compensation expense for Capital Markets is driven primarily by pre-tax operating income of the segment, whereas compensation expense for Private Client Services is driven primarily by net revenues. In addition, Capital Markets has a higher proportion of discretionary non-compensation expenses than Private Client Services.

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     The following table provides our segment performance for the periods presented:

	For the Three Months Ended March 31,
							2005
	2005			2004			v2004
(Dollars in thousands)
Net revenues
Capital Markets	$	91,945		$	112,044			(17.9	)%
Private Client Services		89,199			96,395			(7.5	)
Corporate Support and Other		(2,076	)		961			(316.0	)
Total	$	179,068		$	209,400			(14.5	)%
Pre-tax operating income (loss) before unallocated charges (a)
Capital Markets	$	11,527		$	18,902			(39.0	)%
Private Client Services		4,811			7,020			(31.5	)
Corporate Support and Other		(3,723	)		(2,679	)		39.0
Total	$	12,615		$	23,243			(45.7	)%
Pre-tax operating margin before unallocated charges
Capital Markets		12.5	%		16.9	%
Private Client Services		5.4	%		7.3	%
Total		7.0	%		11.1	%

(a) See Reconciliation to pre-tax operating income including unallocated charges for detail on expenses excluded from segment performance.

Reconciliation to pre-tax operating income including unallocated charges:
Pre-tax operating income before unallocated charges	$	12,615	$	23,243
Cash award program		1,136		1,071
Consolidated income before income tax expense	$	11,479	$	22,172

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CAPITAL MARKETS

	For the Three Months Ended March 31,
							2005
	2005			2004			v2004
(Dollars in thousands)
Net revenues:
Institutional sales and trading
Fixed income	$	16,318		$	21,603			(24.5	)%
Equities		26,320			34,511			(23.7	)
Total institutional sales and trading		42,638			56,114			(24.0	)
Investment banking
Underwriting
Fixed income		11,632			14,720			(21.0	)
Equities		20,338			26,918			(24.4	)
Mergers and acquisitions		16,574			13,152			26.0
Total investment banking		48,544			54,790			(11.4	)
Other income		763			1,140			(33.1	)
Total net revenues	$	91,945		$	112,044			(17.9	)%
Pre-tax operating income before unallocated charges	$	11,527		$	18,902			(39.0	)%
Pre-tax operating margin		12.5	%		16.9	%

     Capital Markets financial performance in the first quarter of 2005 was impacted by a combination of structural changes in the sales and trading markets and the cyclicality of the market. The structural changes in the fixed income and equity institutional sales and trading markets include increased price transparency in the corporate bond markets and increased use of electronic and direct market access trading, which have created downward pressure on trading margins. The magnitude of these changes on our institutional sales and trading business in the first quarter of 2005 was greater than anticipated, particularly in the fixed income markets.

     Institutional sales and trading revenues are comprised of all the revenues generated through trading activities. Our core revenues in this business are derived from offering clients a traditional set of products, such as cash equities and corporate bonds. These revenues, which are generated primarily through the facilitation of customer trades, include principal transaction revenues, commissions and the interest income or expense associated with financing or hedging our inventory positions. To assess the profitability of institutional sales and trading activities, we aggregate principal transactions, commissions and net interest revenues. Institutional sales and trading revenues decreased 24.0 percent for the three months ended March 31, 2005, to $42.6 million.

     Fixed income institutional sales and trading revenues declined 24.5 percent to $16.3 million for the quarter ended March 31, 2005, compared with $21.6 million for the three months ended March 31, 2004. Rising interest rates resulted in reduced volumes in certain fixed income products, particularly agency bonds, and reduced net inventories and a flattening yield curve reduced our net interest revenues on inventories. Additionally, trading margins declined in the first quarter of 2005, due largely to increased price transparency in the corporate bond markets and electronic trading. In February 2005, certain high-yield bonds in which we have proprietary research became subject to the NASD’s Trade Reporting and Compliance Engine (“TRACE”) requirement. TRACE provides public trade data on U.S. corporate bond trades on an almost real-time basis. The high-yield bonds in which we have proprietary research represent a substantial portion of our overall corporate bond sales and trading. As a result, this change resulted in significant downward pressure on trading margins.

     We also continued to experience downward pressure in the first quarter of 2005 on net commissions in the cash equities business. Despite a 10 percent increase in customer trade volume in the first quarter of 2005 compared to the first quarter of 2004, equity institutional sales and trading revenue decreased 23.7 percent for the three months ended March 31, 2005, to $26.3 million, compared to $34.5 million in the corresponding period in 2004 due largely to a decrease in the net commission per share. The decline in net commissions is the result of increased pressure from institutional clients to reduce transaction costs and our increasing need to utilize more capital to secure customer order flow.

     We believe the downward pressure on institutional sales and trading margins will continue for the foreseeable future and that the traditional model for institutional sales and trading will remain challenged.

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     Investment banking revenue decreased to $48.5 million for the three months ended March 31, 2005, compared with $54.8 million for the three months ended March 31, 2004, down 11.4 percent. This decrease was largely attributed to a decline in equity and convertible underwriting activity, which decreased 24.4 percent to $20.3 million for the three months ended March 31, 2005. Equity and convertible underwriting revenues in the first quarter of 2005 did not match the strong revenues in the first quarter of 2004, which was an industry-wide trend. During the first quarter of 2005, we completed 19 equity and convertible offerings, raising $2.1 billion in capital for our clients, compared to 27 equity and convertible offerings, raising $3.9 billion in capital, during the first quarter of 2004. Fixed income underwriting revenues also decreased when compared to the corresponding period in the prior year. For the three months ended March 31, 2005, revenues declined 21.0 percent to $11.6 million due to lower taxable underwriting and fewer public finance transactions. We completed 109 issues with a par amount of $1.3 billion, during the first quarter of 2005, compared with 129 issues with a par value of $1.5 billion, during the first quarter of 2004. Partially offsetting this decrease was an increase in merger and acquisition revenue of 26.0 percent to $16.6 million for the three months ended March 31, 2005, compared to $13.2 million for the corresponding period in the prior year. We completed nine deals valued at $1.4 billion in the first quarter of 2005, compared to 10 deals valued at $855.8 million for the same period in 2004.

     Segment pre-tax operating margin for the first quarter of 2005 decreased to 12.5 percent from 16.9 percent for the corresponding period in the prior year as a result of the decline in net revenues. In the first quarter of 2005, we also incurred start-up costs related to our new algorithmic and program trading business. This business acquired in late 2004 has been well received by our customers, but will take time to be accretive to income.

PRIVATE CLIENT SERVICES

	For the Three Months Ended March 31,
							2005
(Dollars in thousands)	2005			2004			v2004
Net revenues	$	89,199		$	96,395			(7.5	)%
Pre-tax operating income before unallocated charges	$	4,811		$	7,020			(31.5	)%
Pre-tax operating margin		5.4	%		7.3	%
Number of financial advisors (period end)		866			867			(0.1	)%

     Private Client Services financial performance in the first quarter of 2005 reflected reduced customer transaction levels and the effects of fewer seasoned financial advisors compared to the first quarter of 2004. However, we believe we have stabilized our private client business and are working to return it to competitive performance by transitioning to an advisory, rather than a transactional, model, and by growing the number of financial advisors and increasing financial advisor productivity, by selectively recruiting experienced financial advisors and training successful developing financial advisors. We currently anticipate that returning this business to competitive performance will be a multi-year process.

     Private Client Services net revenues decreased 7.5 percent to $89.2 million for the three months ended March 31, 2005, compared with a strong first quarter of 2004 where we recorded $96.4 million in net revenues. Like others in the industry, we experienced reduced activity by private clients in the first quarter. In addition, our number of seasoned financial advisors was approximately 5 percent lower than the same quarter a year ago, as we experienced some attrition of experienced advisors in 2004 that was not offset by recruiting. Offsetting these declines in part were increased revenues associated with managed account fees, which are charged as a percentage of an account’s asset balance rather than on a transaction basis. Assets under management decreased from $51 billion at March 31, 2004 to $50 billion at March 31, 2005, but managed account assets as a percentage of total assets under management increased to 16%, up from approximately 13% at the end of 2003. This increase was driven by existing clients moving into fee-based accounts and new clients opening fee-based accounts.

     Segment pre-tax operating margin for Private Client Services decreased to 5.4 percent for the first quarter of 2005 compared to 7.3 percent in the corresponding period of 2004 due to a decline in net revenues and the relatively fixed nature of non-compensation expense.

     The number of financial advisors includes both developing and experienced financial advisors. We continue to work to grow our financial advisor ranks, which we expect to accomplish over the long term primarily by training professionals to become financial advisors and by selectively recruiting experienced financial advisors. The total number of financial advisors at March 31, 2005 remained consistent with the prior-year period.

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CORPORATE SUPPORT AND OTHER

     Corporate Support and Other includes revenues primarily attributable to our private equity business and our investments in private equity funds. The Corporate Support and Other segment also includes interest expense on our subordinated debt, which is recorded as a reduction of net revenues. Prior to January 1, 2005, Corporate Support and Other also included revenues associated with our venture capital business. Effective December 31, 2004, the management of our venture capital funds was transitioned to an independent company. For the three months ended March 31, 2005, Corporate Support and Other recorded negative net revenues of $2.1 million, compared with net revenues of $1.0 million for the corresponding period in the prior year. This change was due primarily to gains recorded in the first quarter of 2004 pertaining to our private equity investments and an increase in our long-term financing costs. Our subordinated debt is variable-rate debt based on LIBOR, which has increased by approximately 150 basis points from the first quarter of 2004 to the first quarter of 2005.

CRITICAL ACCOUNTING POLICIES

     Our accounting and reporting policies comply with GAAP and conform to practices within the securities industry. The preparation of financial statements in compliance with GAAP and industry practices requires us to make estimates and assumptions that could materially affect amounts reported in our consolidated financial statements. Critical accounting policies are those policies that we believe to be the most important to the portrayal of our financial condition and results of operations and that require us to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by us to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical, including, among others, whether the estimates are significant to the consolidated financial statements taken as a whole, the nature of the estimates, the ability to readily validate the estimates with other information, including third-party or independent sources, the sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be used under GAAP.

     For a full description of our significant accounting policies, see Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004. We believe that of our significant policies, the following are our critical accounting policies.

Valuation of Financial Instruments

     Substantially all of our financial instruments are recorded at fair value or contract amounts that approximate fair value. Financial instruments carried at contract amounts that approximate fair value either have short-term maturities (one year or less), are repriced frequently or bear market interest rates and, accordingly, are carried at amounts approximating fair value. Financial instruments carried at contract amount on our Consolidated Statements of Financial Condition include receivables from and payables to brokers, dealers and clearing organizations, securities purchased under agreements to resell, securities sold under agreements to repurchase, receivables from and payables to customers, short-term financing and subordinated debt. Financial instruments recorded at fair value are generally priced based upon independent sources such as listed market prices or dealer price quotations. Unrealized gains and losses related to these financial instruments are reflected on our Consolidated Statements of Operations.

     For investments in illiquid or privately held securities that do not have readily determinable fair values, the determination of fair value requires us to estimate the value of the securities using the best information available. Among the factors considered by us in determining the fair value of financial instruments are the cost, terms and liquidity of the investment, the financial condition and operating results of the issuer, the quoted market price of publicly traded securities with similar quality and yield, and other factors generally pertinent to the valuation of investments. In instances where a security is subject to transfer restrictions, the value of the security is based primarily on the quoted price of a similar security without restriction but may be reduced by an amount estimated to reflect such restrictions. In addition, even where the value of a security is derived from an independent source, certain assumptions may be required to determine the security’s fair value. For instance, we generally assume that the size of positions in securities that we hold would not be large enough to affect the quoted price of the securities if we sell them, and that any such sale would happen in an orderly manner. The actual value realized upon disposition could be different from the currently estimated fair value.

     Fair values for derivative contracts represent amounts estimated to be received from or paid to a third party in settlement of these instruments. These derivatives are valued using quoted market prices when available or pricing models based on the net present value of estimated future cash flows. Management deemed the net present value of estimated future cash flows model to be the best estimate of fair value as most of our derivative products are interest rate swaps. The valuation models used require inputs including contractual terms, market prices, yield curves, credit curves and measures of volatility. The valuation models are monitored over the life of the derivative product. If there are any changes in the underlying inputs, the model is updated for those new inputs.

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Goodwill and Intangible Assets

     We record all assets and liabilities acquired in purchase acquisitions, including goodwill, at fair value as required by Statement of Financial Accounting Standards No. 141, “Business Combinations.” At March 31, 2005, we had goodwill of $317.2 million, principally as a result of the 1998 acquisition of our predecessor, Piper Jaffray Companies Inc., and its subsidiaries by U.S. Bancorp.

     The initial recognition of goodwill and other intangible assets and the subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired assets or businesses will perform in the future using valuation methods including discounted cash flow analysis. Additionally, estimated cash flows may extend beyond ten years and, by their nature, are difficult to determine over an extended time period. Events and factors that may significantly affect the estimates include, among others, competitive forces and changes in revenue growth trends, cost structures, technology, discount rates and market conditions. To assess the reasonableness of cash flow estimates and validate assumptions used in our estimates, we review historical performance of the underlying assets or similar assets.

     In assessing the fair value of our operating segments, the volatile nature of the securities markets and our industry requires us to consider the business and market cycle and assess the stage of the cycle in estimating the timing and extent of future cash flows. In addition to estimating the fair value of an operating segment based on discounted cash flows, we consider other information to validate the reasonableness of our valuations, including public market comparables, multiples of recent mergers and acquisitions of similar businesses and third-party assessments. Valuation multiples may be based on revenues, price-to-earnings and tangible capital ratios of comparable public companies and business segments. These multiples may be adjusted to consider competitive differences including size, operating leverage and other factors. We determine the carrying amount of an operating segment based on the capital required to support the segment’s activities, including its tangible and intangible assets. The determination of a segment’s capital allocation requires management judgment and considers many factors, including the regulatory capital requirements and tangible capital ratios of comparable public companies in relevant industry sectors. In certain circumstances, we may engage a third party to validate independently our assessment of the fair value of our operating segments. If during any future period it is determined that an impairment exists, the results of operations in that period could be materially adversely affected.

Stock-Based Compensation

     As part of our compensation to employees, we use stock-based compensation, including stock options and restricted stock. Compensation paid to employees in the form of stock options or restricted stock is amortized on a straight-line basis over the requisite service period of the award, which is generally three years, and is included in our results of operations as compensation, net of estimated forfeitures. Stock-based compensation granted to our non-employee directors is in the form of stock options. Stock-based compensation paid to directors is immediately vested and is included in our results of operations. For a more detailed description of our stock incentive program, see Note 11 of our unaudited consolidated financial statements.

     In determining the estimated fair value of stock options, we use the Black-Scholes option-pricing model, which requires judgment regarding certain assumptions, including the expected life of the options granted, dividend yields and stock volatility. Certain assumptions are estimated using industry comparisons due to lack of historical data. For instance, the volatility of the stock is not known for a period greater than fifteen months, therefore, to develop a reasonable estimate, we used industry comparisons to determine an appropriate volatility. Also, we do not have historical data regarding employee exercising or post-termination behaviors, therefore, industry comparisons were also used to estimate the expected life of the options. Additional information regarding assumptions used in the Black-Scholes pricing model can be found in Note 11 of our unaudited consolidated financial statements.

     Effective January 1, 2004, we elected to account for stock-based employee compensation on a prospective basis under the fair value method, as prescribed by Statement of Financial Accounting Standards No. 123, “Accounting and Disclosure of Stock-Based Compensation,” and as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” The fair value method requires an estimate of the value of stock options to be recognized as compensation over the vesting period of the awards. The amended standard provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, we are required to present prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation utilized and its effect on the reported results.

Contingencies

     We are involved in various pending and potential legal proceedings related to our business, including litigation, arbitration and regulatory proceedings. Some of these matters involve claims for substantial amounts, including claims for punitive and other special damages. The number of these legal proceedings has increased in recent years. We have, after consultation with outside legal counsel and consideration of facts currently known by management, recorded estimated losses in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” to the extent that claims are probable of loss and the amount of the loss can be reasonably estimated. The

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determination of these reserve amounts requires significant judgment on the part of management. In making these determinations, we consider many factors, including, but not limited to, the loss and damages sought by the plaintiff or claimant, the basis and validity of the claim, the likelihood of a successful defense against the claim, and the potential for, and magnitude of, damages or settlements from such pending and potential litigation and arbitration proceedings, and fines and penalties or orders from regulatory agencies.

     Under the terms of our separation and distribution agreement with U.S. Bancorp and ancillary agreements entered into in connection with the spin-off, we generally will be responsible for all liabilities relating to our business, including those liabilities relating to our business while it was operated as a segment of U.S. Bancorp under the supervision of its management and board of directors and while our employees were employees of U.S. Bancorp servicing our business. Similarly, U.S. Bancorp generally will be responsible for all liabilities relating to the businesses U.S. Bancorp retained. However, in addition to our established reserves, U.S. Bancorp has agreed to indemnify us in an amount up to $17.5 million for losses that result from third-party claims relating to research analyst independence, regulatory investigations regarding the allocation of initial public offering shares to directors and officers of public companies, and regulatory investigations of mutual fund practices. U.S. Bancorp has the right to terminate this indemnification obligation in the event of a change in control of our company. As of March 31, 2005, $13.5 million of the indemnification remained.

     Subject to the foregoing, we believe, based on our current knowledge, after appropriate consultation with outside legal counsel and after taking into account our established reserves and the U.S. Bancorp indemnity agreement, that pending litigation, arbitration and regulatory proceedings will be resolved with no material adverse effect on our financial condition. However, if, during any period, a potential adverse contingency should become probable or resolved for an amount in excess of the established reserves and indemnification, the results of operations in that period could be materially adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

     We have a liquid balance sheet. Most of our assets consist of cash and assets readily convertible into cash. Securities inventories are stated at fair value and are generally readily marketable. Customers’ margin loans are collateralized by securities and have floating interest rates. Other receivables and payables with customers and other brokers and dealers usually settle within a few days. As part of our liquidity strategy, we emphasize diversification of funding sources. We utilize a mix of funding sources and, to the extent possible, maximize our lower-cost financing associated with securities lending and repurchase agreements. Our assets are financed by our cash flows from operations, equity capital, subordinated debt, bank lines of credit and proceeds from securities lending and securities sold under agreements to repurchase. The fluctuations in cash flows from financing activities are directly related to daily operating activities from our various businesses.

     We do not intend to pay cash dividends on our common stock for the foreseeable future.

     To optimize our use of capital, our board of directors authorized the repurchase of up to 1.3 million shares of our common stock for a maximum aggregate purchase price of $65 million. The program commenced in the first quarter of 2005 and is authorized through December 31, 2005. During the first quarter of 2005, we repurchased 325,000 shares of common stock at an average price per share of $40.09 per share.

Funding Sources

     We have available discretionary short-term financing on both a secured and unsecured basis. Secured financing is obtained through the use of securities lending agreements, repurchase agreements and secured bank loans. Securities lending agreements are secured by client collateral pledged for margin loans while bank loans and repurchase agreements are typically collateralized by the firm’s securities inventory. Short-term funding is generally obtained at rates based upon the federal funds rate.

     Average short-term bank loans of $43 million and $76 million in the first quarter of 2005 and first quarter of 2004, respectively, and average securities lending arrangements of $222 million and $207 million in the first quarter of 2005 and first quarter of 2004, respectively, were primarily used to finance customer receivables. Average repurchase agreements of $174 million and $237 million in first quarter of 2005 and first quarter of 2004, respectively, were primarily used to finance inventory. Growth in margin loans to customers is generally financed through increases in securities lending to third parties while growth in our securities inventory is generally financed through repurchase agreements. Bank financing supplements these sources as necessary.

     As of March 31, 2005, we had uncommitted credit agreements with banks totaling $650 million, comprising $530 million in discretionary secured lines and $120 million in discretionary unsecured lines. We have been able to obtain necessary short-term borrowings in the past and believe that we will continue to be able to do so in the future. We have also established arrangements to obtain financing using as collateral our securities held by our clearing bank or by another broker dealer at the end of each business day.

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     In addition to the $650 million of credit agreements described above, our broker dealer subsidiary is party to a $180 million subordinated debt facility with an affiliate of U.S. Bancorp, which has been approved by the New York Stock Exchange, Inc. (“NYSE”) for regulatory net capital purposes as allowable in our broker dealer subsidiary’s net capital computation. The interest on the $180 million subordinated debt facility is variable based on the three-month London Interbank Offer Rate. The entire amount outstanding matures in 2008. We have an additional committed, but undrawn, temporary subordinated debt facility of $40 million. The interest on the $40 million subordinated debt facility is based on the prime rate, and the facility expires in December 2005.

Capital Requirements

     As a registered broker dealer and member firm of the NYSE, our broker dealer subsidiary is subject to the uniform net capital rule of the SEC and the net capital rule of the NYSE. We have elected to use the alternative method permitted by the uniform net capital rule, which requires that we maintain minimum net capital of the greater of $1.0 million or 2 percent of aggregate debit balances arising from customer transactions, as this is defined in the rule. The NYSE may prohibit a member firm from expanding its business or paying dividends if resulting net capital would be less than 5 percent of aggregate debit balances. Advances to affiliates, repayment of subordinated liabilities, dividend payments and other equity withdrawals are subject to certain notification and other provisions of the uniform net capital rule and the net capital rule of the NYSE. We expect these provisions will not impact our ability to meet current and future obligations. We also are subject to certain notification requirements related to withdrawals of excess net capital from our broker dealer subsidiary. In addition, our broker dealer subsidiary is registered with the Commodity Futures Trading Commission (“CFTC”) and therefore is subject to CFTC regulations. Piper Jaffray Ltd., our registered United Kingdom broker dealer subsidiary, is subject to the capital requirements of the U.K. Financial Services Authority.

     At March 31, 2005, net capital under the SEC’s uniform net capital rule was $325.5 million, or 58.9 percent, of aggregate debit balances, and $314.5 million in excess of the minimum required net capital.

OFF-BALANCE SHEET ARRANGEMENTS

     We enter into various types of off-balance sheet arrangements in the ordinary course of business. We hold retained interests in nonconsolidated entities, incur obligations to commit capital to nonconsolidated entities, enter into derivative transactions, enter into nonderivative guarantees and enter into other off-balance sheet arrangements.

     We enter into arrangements with special-purpose entities (“SPE’s”), also known as variable interest entities (“VIE’s”). SPE’s are corporations, trusts or partnerships that are established for a limited purpose. SPE’s, by their nature, generally are not controlled by their equity owners, as the establishing documents govern all material decisions. Our primary involvement with SPE’s relates to securitization transactions in which highly rated fixed rate municipal bonds are sold to an SPE. We follow Statement of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a Replacement of FASB Statement No. 125,” to account for securitizations and other transfers of financial assets. Therefore, we derecognize financial assets transferred in securitizations provided that such transfer meets all of the SFAS 140 criteria.

     We have investments in various entities, typically partnerships or limited liability companies, established for the purpose of investing in emerging growth companies. We commit capital or act as the managing partner or member of these entities. These entities are reviewed under variable interest entity and voting interest entity standards. If we determine that an entity should not be consolidated, we record these investments on the equity method of accounting. The cost method of accounting is applied to investments where we do not have the ability to exercise significant influence over the operations of an entity.

     We use derivative products in a principal capacity as a dealer to satisfy the financial needs of clients. We also use derivative products to manage the interest rate and market value risks associated with our security positions.

     Our other types of off-balance-sheet arrangements include leases, letters of credit and other commitments or guarantees.

     For a complete discussion of our activities related to our off-balance sheet arrangements, see our Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.

ENTERPRISE RISK MANAGEMENT

     Risk is an inherent part of our business. In the course of conducting business operations, we are exposed to a variety of risks. Market risk, credit risk, liquidity risk, operational risk, and legal, regulatory and compliance risk are the principal risks we face in operating our business. We seek to identify, assess and monitor each risk in accordance with defined policies and procedures. The extent to which we properly identify and effectively manage each of these risks is critical to our financial condition and profitability. For a full discussion of our risk management framework, see Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2004.

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     Value-at-Risk (“VaR”) is the potential loss in value of Piper Jaffray’s trading positions due to adverse market movements over a defined time horizon with a specified confidence level. We perform a daily VaR analysis on substantially all of our trading positions, including fixed income, equities, convertible bonds and all associated hedges. We use a VaR model because it provides a common metric for assessing market risk across business lines and products. The modeling of the market risk characteristics of our trading positions involves a number of assumptions and approximations. While we believe that these assumptions and approximations are reasonable, different assumptions and approximations could produce materially different VaR estimates. For example, we include the risk-reducing diversification benefit between various securities because it is highly unlikely that all securities would have an equally adverse move on a typical trading day.

     Consistent with industry practice, when calculating VaR we use a 95 percent confidence level and a one-day time horizon for calculating the VaR numbers reported below. This means there is a 1 in 20 chance that daily net trading revenues will fall below the expected daily trading net revenues by an amount at least as large as the reported VaR. As a result, shortfalls from expected trading net revenues on a single trading day greater than the reported VaR would be anticipated to occur, on average, about once a month.

     VaR has inherent limitations, including reliance on historical data to predict future market risk and the parameters established in creating the models that limit quantitative risk information outputs. There can be no assurance that actual losses occurring on any given day arising from changes in market conditions will not exceed the VaR amounts shown below or that such losses will not occur more than once in a 20-day period. In addition, different VaR methodologies and distribution assumptions could produce materially different VaR numbers. Changes in VaR between reporting periods are generally due to changes in levels of risk exposure, volatilities and/or correlations among asset classes.

     In addition to daily VaR estimates, we calculate the potential market risk to our trading positions under selected stress scenarios. We calculate the daily 99.9 percent VaR estimates both with and without diversification benefits for each risk category and firmwide. These stress tests allow us to measure the potential effects on net revenue from adverse changes in market volatilities, correlations and trading liquidity.

     The following table quantifies the estimated VaR for each component of market risk for the periods presented:

	March 31,			December 31,
(Dollars in thousands)	2005			2004
Interest Rate Risk	$	353		$	381
Equity Price Risk		581			232
Aggregate Undiversified Risk		934			613
Diversification Benefit		(356	)		(242	)
Aggregate Diversified Value-at-Risk	$	578		$	371

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     The table below illustrates the high, low and average value-at-risk calculated on a daily basis for each component of market risk during the three months ended March 31, 2005 and the year ended December 31, 2004.

For the Three Months Ended March 31, 2005
(Dollars in thousands)	High		Low		Average
Interest Rate Risk	$	546	$	294	$	397
Equity Price Risk		730		201		465
Aggregate Undiversified Risk		1,130		551		862
Aggregate Diversified Value-at-Risk		638		253		469

For the Year Ended December 31, 2004
(Dollars in thousands)	High		Low		Average
Interest Rate Risk	$	1,446	$	238	$	557
Equity Price Risk		578		209		312
Aggregate Undiversified Risk		1,695		482		869
Aggregate Diversified Value-at-Risk		945		267		421

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The information under the caption “Enterprise Risk Management” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Form 10-Q is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Control and Procedures

     As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Internal Control Over Financial Reporting

     During our most recently completed fiscal quarter, there was no change in our system of internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     Due to the nature of our business, we are involved in a variety of legal proceedings on a continuous basis. These proceedings include litigation, arbitration and regulatory proceedings, which may arise from, among other things, client account activity, underwriting or other transactional activity, employment matters, regulatory examinations of our broker dealer business and investigations of securities industry practices by governmental agencies and self-regulatory organizations. The securities industry is highly regulated, and the regulatory scrutiny applied to securities firms has increased dramatically in recent years, resulting in a higher number of regulatory investigations and enforcement actions and significantly greater uncertainty regarding the likely outcome of these matters. The number of litigation and arbitration proceedings also has increased in recent years. Accordingly, in recent years we have incurred, and may incur in the future, higher expenses for legal proceedings than previously.

     At the time of our spin-off from U.S. Bancorp, we assumed liability for certain legal proceedings that named U.S. Bancorp as a defendant but related to the business we managed when Piper Jaffray was a subsidiary of U.S. Bancorp. In those situations, we generally have agreed with U.S. Bancorp that we will manage the proceedings and indemnify U.S. Bancorp for the related expenses, including the amount of any

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judgment. In turn, U.S. Bancorp agreed at the time of the spin-off to indemnify us for certain legal proceedings relating to our business prior to the spin-off (as described in Note 8 to our unaudited consolidated financial statements, included in this Form 10-Q).

     Litigation-related expenses include amounts we reserve and/or pay out as legal and regulatory settlements, awards or judgments, and fines. Parties who initiate litigation and arbitration proceedings against us may seek substantial or indeterminate damages, and regulatory investigations can result in substantial fines being imposed on us. We reserve for contingencies related to legal proceedings at the time and to the extent we determine the amount to be probable and reasonably estimable. However, it is inherently difficult to predict accurately the timing and outcome of legal proceedings, including the amounts of any settlements, judgments or fines. We assess each proceeding based on its particular facts, our outside advisors’ and our past experience with similar matters, and expectations regarding the current legal and regulatory environment and other external developments that might affect the outcome of a particular proceeding or type of proceeding. We believe, based on our current knowledge, after appropriate consultation with outside legal counsel, in light of our established reserves and the indemnification available from U.S. Bancorp, that pending litigation, arbitration and regulatory proceedings, including those described below, will be resolved with no material adverse effect on our financial condition. Of course, there can be no assurance that our assessments will reflect the ultimate outcome of pending proceedings, and the outcome of any particular matter may be material to our operating results for any particular period, depending, in part, on the operating results for that period and the amount of established reserves and indemnification. We generally have denied, or believe that we have meritorious defenses and will deny, liability in all significant litigation and arbitration proceedings currently pending against us, and we intend to vigorously defend such actions.

Litigation Regarding Equity Research Conflicts of Interest

     Together with the other firms involved in the 2003 equity research conflicts of interest settlement, we have been named as a defendant in a pending lawsuit based, in part, on allegations regarding violations of a number of different NASD and NYSE rules and Section 17(b) of the Securities Act. This action, entitled State of West Virginia v. Bear, Stearns & Company, Inc., et al., Case No. 03-C-133M, Circuit Court of Marshall County, West Virginia, was filed on June 23, 2003, and seeks unspecified civil penalties under the West Virginia Consumer Protection Act. The defendants filed a motion to dismiss all claims. The circuit court indicated a desire to certify certain legal questions raised by the defendants’ motion for appeal to the West Virginia Supreme Court. The court entered its order denying the motions to dismiss and certifying a question of law to the Supreme Court of Appeals of West Virginia on July 23, 2004. On September 21, 2004, the defendants filed a petition in the West Virginia Supreme Court seeking certification and review of the denial of the motions to dismiss. On January 19, 2005, the West Virginia Supreme Court entered an order granting defendants’ petition and the parties are submitting briefs to the court. Defendants’ opening brief was filed on February 23, 2005. Plaintiff’s response was filed on March 25, 2005, and defendants’ reply was filed on April 18, 2005. Oral argument on the petition is currently scheduled for June 8, 2005. We did not settle any other litigation regarding equity research conflicts of interest as part of the research settlement with securities regulators.

Initial Public Offering Allocation Litigation

     We have been named, along with other leading securities firms, as a defendant in many putative class actions filed in 2001 and 2002 in the U.S. District Court for the Southern District of New York involving the allocation of securities in certain initial public offerings. The court’s order, dated August 8, 2001, transferred all related class action complaints for coordination and pretrial purposes as In re Initial Public Offering Allocation Securities Litigation, Master File No. 21 MC 92 (SAS). These complaints assert claims pursuant to Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The claims are based, in part, upon allegations that between 1998 and 2000, in connection with acting as an underwriter of certain initial public offerings of technology and Internet-related companies, we obtained excessive compensation by allocating shares in these initial public offerings to preferred customers who, in return, purportedly agreed to pay additional compensation to us in the form of excess commissions that we failed to disclose. The complaints also allege that our customers who received favorable allocations of shares in initial public offerings agreed to purchase additional shares of the same issuer in the secondary market at pre-determined prices. These complaints seek unspecified damages. The defendants’ motions to dismiss the complaints were filed on July 1, 2002, and oral argument on the motions to dismiss was heard on November 14, 2002. The court entered its order largely denying the motions to dismiss on February 19, 2003. On October 13, 2004, the court issued an opinion largely granting plaintiffs’ motions for class certification in seven focus cases. Discovery is proceeding with respect to seventeen focus cases at this time. We are a defendant in two of the seventeen focus cases.

Initial Public Offering Fee Antitrust Litigation

     We have been named, along with other leading securities firms, as a defendant in several putative class actions filed in the U.S. District Court for the Southern District of New York in 1998. The court’s order, dated February 11, 1999, consolidated these purported class actions for all purposes as In re Public Offering Fee Antitrust Litigation, Case No. 98 CV 7890 (LMM). The consolidated amended complaint seeks unspecified compensatory damages, treble damages and injunctive relief. The consolidated amended complaint was filed on behalf of

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purchasers of shares issued in certain initial public offerings for U.S. companies and alleges that defendants conspired in offerings of an amount between $20 million and $80 million to fix the underwriters’ discount at 7.0 percent of the offering amount in violation of Section 1 of the Sherman Act. The court dismissed this consolidated action with prejudice and denied plaintiffs’ motion to amend the complaint and include an issuer plaintiff. The court stated that its decision did not affect any class actions filed on behalf of issuer plaintiffs. The Second Circuit Court of Appeals reversed the district court’s decision on December 13, 2002 and remanded the action to the district court. A motion to dismiss was filed with the district court on March 26, 2003 seeking dismissal of this action and the issuer plaintiff action described below in their entirety, based upon the argument that the determination of underwriting fees is implicitly immune from the antitrust laws because of the extensive federal regulation of the securities markets. Plaintiffs filed their opposition to the motion to dismiss on April 25, 2003. The underwriter defendants filed a motion for leave to file a supplemental memorandum of law in further support of their motion to dismiss on June 10, 2003. The court denied the motion to dismiss based upon implied immunity in its memorandum and order dated June 26, 2003. A supplemental memorandum in support of the motion to dismiss, applicable only to this action because the purported class consists of indirect purchasers, was filed on June 24, 2003 and seeks dismissal based upon the argument that the proposed class members cannot state claims upon which relief can be granted. Plaintiffs filed a supplemental memorandum in opposition to defendants’ motion to dismiss on July 9, 2003. Defendants filed a reply in further support of the motion to dismiss on July 25, 2003. The court entered its memorandum and order granting in part and denying in part the motion to dismiss on February 24, 2004. Plaintiffs’ damage claims were dismissed because they were indirect purchasers. The motion to dismiss was denied with respect to plaintiffs’ claims for injunctive relief. We filed our answer to the consolidated amended complaint on April 22, 2004. Plaintiffs filed a motion for class certification and supporting memorandum of law on September 16, 2004. Class discovery concluded on April 11, 2005. Defendants are required to file their brief in opposition to plaintiffs’ motion for class certification on or before May 11, 2005.

     Similar purported class actions have also been filed against us in the U.S. District Court for the Southern District of New York on behalf of issuer plaintiffs asserting substantially similar antitrust claims based upon allegations that 7.0 percent underwriters’ discounts violate the Sherman Act. These purported class actions were consolidated by the district court as In re Issuer Plaintiff Initial Public Offering Fee Antitrust Litigation, Case No. 00 CV 7804 (LMM), on May 23, 2001. These complaints also seek unspecified compensatory damages, treble damages and injunctive relief. Plaintiffs filed a consolidated class action complaint on July 6, 2001. The district court denied defendants’ motion to dismiss the complaint on September 30, 2002. Defendants filed a motion to certify the order for interlocutory appeal on October 15, 2002. On March 26, 2003, the motion to dismiss based upon implied immunity was also filed in connection with this action. The court denied the motion to dismiss on June 26, 2003. Plaintiffs filed a motion for class certification and supporting memorandum of law on September 16, 2004. Class discovery concluded on April 11, 2005. Defendants are required to file their brief in opposition to plaintiffs’ motion for class certification on or before May 11, 2005. Discovery is proceeding at this time.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     The table below sets forth the information with respect to purchases made by or on behalf of Piper Jaffray Companies or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the three months ended March 31, 2005.

     In addition, a third-party trustee makes open-market purchases of our common stock from time to time pursuant to the Piper Jaffray Companies Retirement Plan, under which participating employees may allocate assets to a company stock fund.

					Total Number of Shares
	Total Number				Purchased as Part of		Maximum Number of Shares
	of Shares		Average Price		Publicly Announced		that May Yet Be Purchased
	Purchased		Paid per Share		Plans or Programs		Under the Plans or Programs
Period
Month #1 (January 1, 2005 to January 31, 2005)		0		N/A		0		1,300,000
Month #2 (February 1, 2005 to February 28, 2005)		131,600	$	40.29		131,600		1,168,400
Month #3 (March 1, 2005 to March 31, 2005)		193,400	$	39.95		193,400		975,000
Total		325,000	$	40.09		325,000

(1) On January 26, 2005, we announced that our board of directors had authorized us to repurchase up to 1.3 million shares of our outstanding common stock for a maximum aggregate purchase price of $65.0 million. The repurchase program is authorized through December 31, 2005. Purchases under the program are made on the open market pursuant to a 10b5-1 plan established with an independent agent. The 10b5-1 plan is a formula-based plan, with the formula based primarily on the trading volume of our shares in the open market. Accordingly, the timing of repurchases under the plan will accelerate or decelerate based on high or low trading volumes, respectively.

ITEM 6. EXHIBITS

Exhibit		Method of
Number	Description	Filing
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.	Filed herewith
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.	Filed herewith
32.1	Certifications furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith
99.1	Risk Factors.	Filed herewith

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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 on April 27, 2005.

PIPER JAFFRAY COMPANIES
By	/s/ Andrew S. Duff
Its	Chairman and CEO
By	/s/ Sandra G. Sponem
Its	Chief Financial Officer

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Exhibit Index

Exhibit		Method of
Number	Description	Filing
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.	Filed herewith
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.	Filed herewith
32.1	Certifications furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith
99.1	Risk Factors.	Filed herewith

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EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Andrew S. Duff, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Piper Jaffray Companies;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 27, 2005

/s/ Andrew S. Duff  

Andrew S. Duff  

Chairman and Chief Executive Officer 

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Sandra G. Sponem, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Piper Jaffray Companies;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 27, 2005

/s/ Sandra G. Sponem  

Sandra G. Sponem  

Chief Financial Officer 

EX-32.1

EXHIBIT 32.1

Certification Under Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned certifies that this periodic report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this periodic report fairly presents, in all material respects, the financial condition and results of operations of Piper Jaffray Companies.

Dated: April 27, 2005

/s/ Andrew S. Duff  

Andrew S. Duff  

Chairman and Chief Executive Officer 

/s/ Sandra G. Sponem  

Sandra G. Sponem  

Chief Financial Officer 

EX-99.1

Exhibit 99.1

RISK FACTORS

Risk Factors Relating to Establishing Our Company as Independent from U.S. Bancorp

We have agreed to certain restrictions to preserve the tax treatment of our spin-off from U.S. Bancorp, which will reduce our strategic and operating flexibility.

     U.S. Bancorp obtained an opinion from Wachtell, Lipton, Rosen & Katz, its special counsel, to the effect that the spin-off qualifies as a transaction that is generally tax-free under Sections 355 and/or 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended. Current tax law generally creates a presumption that the spin-off would be taxable to U.S. Bancorp but not to its shareholders if we engage in, or enter into an agreement to engage in, a transaction that would result in a 50 percent or greater change by vote or by value in our stock ownership during the four-year period beginning on the date that begins two years before the spin-off date, unless it is established that the transaction is not pursuant to a plan or series of transactions related to the spin-off.

     Temporary U.S. Treasury regulations currently in effect generally provide that whether an acquisition transaction and a spin-off are part of a plan is determined based on all of the facts and circumstances, including but not limited to those specific factors listed in the regulations. In addition, the regulations provide several “safe harbors” for acquisition transactions that are not considered to be part of a plan.

     Under the tax sharing agreement entered into between U.S. Bancorp and us, generally we may not (1) take or fail to take any action that would cause any representations, information or covenants in the separation documents or documents relating to the opinion to be untrue, (2) take or fail to take any action that would cause the spin-off to lose its tax-free status, (3) sell, issue, redeem or otherwise acquire our equity securities or equity securities of members of our group except in certain specified transactions for a period of two years following the spin-off, and (4) sell or otherwise dispose of a substantial portion of our assets, liquidate, merge or consolidate with any other person for a period of two years following the spin-off. During that two-year period, we may take certain actions prohibited by these covenants if we provide U.S. Bancorp with an Internal Revenue Service ruling or an unqualified opinion of counsel to the effect that these actions will not affect the tax-free nature of the spin-off. During the two-year period, these restrictions could substantially limit our strategic and operational flexibility, including our ability to finance our operations by issuing equity securities, make acquisitions using equity securities, repurchase our equity securities, raise money by selling assets or enter into business combination transactions.

We have agreed to indemnify U.S. Bancorp for taxes and related losses resulting from any actions we take that cause the spin-off to fail to qualify as a tax-free transaction.

     We have agreed to indemnify U.S. Bancorp for any taxes and related losses (including any applicable interest and penalties, all related accounting, legal and other professional fees, all related court costs and all costs, expenses and damages associated with related shareholder litigation or controversies and any amount paid in respect of the liability of shareholders) resulting from (1) any act or failure to act described in the covenants above, (2) any acquisition of equity securities or assets of Piper Jaffray or any member of its group, and (3) any breach by Piper Jaffray or any member of its group of certain of our representations in the separation documents between U.S. Bancorp and us or documents relating to the opinion notwithstanding the receipt of an Internal Revenue Service ruling or an unqualified opinion of counsel. The amount of any indemnification payments could be substantial. The amount of U.S. Bancorp’s taxes for which we are agreeing to indemnify U.S. Bancorp will be based on the excess of the aggregate fair market value of our stock over U.S. Bancorp’s tax basis in our stock.

Risk Factors Relating to Our Business

Developments in market and economic conditions have in the past adversely affected, and may in the future adversely affect, our business and profitability.

     The securities industry is heavily influenced by the performance of the economy and the business cycle, making it somewhat cyclical with relatively volatile results. Economic and financial market conditions generally have a direct and material impact on our results of operations and financial condition, and uncertain or unfavorable market or economic conditions adversely affect our business. For example:

•   Prior to 2004, we were operating in a low or declining interest rate environment for several years. Continued increases in interest rates or high interest rates, especially if such changes are rapid, or uncertainty regarding the future direction of interest rates, may create a less favorable environment for certain of our businesses, particularly our fixed income business.

•   Our investment banking revenue, in the form of underwriting discounts and financial advisory fees, is directly related to the volume and value of the transactions in which we are involved. In an environment of uncertain or unfavorable market or economic conditions, the volume and size of capital-raising transactions and acquisitions and dispositions typically decrease, thereby reducing the demand for our investment banking services and increasing price competition among financial services companies seeking such engagements.

•   A downturn in the financial markets may result in a decline in the volume and value of trading transactions and, therefore, may lead to a decline in the revenue we receive from commissions on the execution of trading transactions and, in respect of our market-making activities, a reduction in the value of our trading positions and commissions and spreads.

•   Our private client services revenue generated from commissions and fees and net interest on margin loan balances may decline if a market downturn results in decreased transactions or a decrease in assets under management.

     Although performance in our industry is highly correlated to the overall strength of economic conditions and financial market activity as a general matter, our results for a particular period may not reflect this generalization. For example:

•   Our business typically experiences some seasonality, slowing down somewhat during the summer months when financial market participants have tended to be less active than during other times of the year.

•   Many of our private client services clients are, and have historically been, concentrated in the midwestern states of the United States and, to a lesser extent, the mountain and western states. Accordingly, our private client services revenue is derived primarily from our individual investor clients in these regions. Because of this concentration, a significant downturn in the economy in any of these regions independent of general economic and market conditions could materially and adversely affect our overall private client services business.

•   In our fixed income business, we do not participate in every market that could be identified as a fixed income market, and therefore, the results of our fixed income business may not necessarily correlate with the results of other firms or the fixed income market generally.

•   Our equities and investment banking business focuses primarily on the consumer, financial institutions, health care and technology industries. Such industries may face market conditions that are disproportionately worse than those impacting the economy and markets generally, or they may experience a downturn independently of general economic and market conditions. In either case, our business may be adversely affected.

•   Block trades are increasingly being effected without an opportunity for us to pre-market the transaction. This increases the risk that we may be unable to resell the purchased securities at favorable prices, and concentration of risk may result in losses to us even when economic and market conditions are generally favorable for others in our industry.

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     The cyclical nature of this industry also leads to volatility in our operating margins, due to the fixed nature of many non-compensation expenses and the possibility that we will be unable to scale back other costs in a timeframe to match any decreases in revenue relating to changes in market and economic conditions.

We may not be able to compete successfully with other companies in the financial services industry.

     The financial services industry is extremely competitive, and our overall business will be adversely affected if we are unable to compete successfully. We compete generally on the basis of such factors as quality of advice and service, reputation, price, product selection, transaction execution and financial resources. In recent years we have experienced significant price competition in areas of our business, including pressure on debt underwriting discounts as well as on trading margins and commissions in debt and equity trading. In the fixed income market, there has been a movement towards greater price transparency, which has resulted in increased price competition and decreased trading margins. In the equity trading market, price competition has increased as mutual funds and other institutions continue recent efforts to reduce costs, including by seeking to “unbundle” the cost of trade execution from the cost of research and other services historically provided by broker-dealers and included in the cost of trading commissions. If successful, efforts to unbundle trading commissions could further increase price competition and potentially reduce our revenue from institutional trading activity. Even if unbundling efforts are unsuccessful, we believe that price competition and pricing pressures in these and other areas will continue as institutional investors continue to reduce the amounts they are willing to pay and some of our competitors seek to obtain market share by reducing fees, commissions or spreads. Many of these competitors are larger than our company, have greater financial resources and may be more willing to engage in lending activities to businesses in connection with the provision of financial advisory services. With respect to our private client services business, competition is particularly intense for the desirable, yet relatively small, population of high net worth clients.

     Further, consolidation in the financial services industry fostered in part by changes in the regulatory framework in the United States also has increased competition, bolstering the geographic reach and the capital base of some of our competitors, affording them greater capacity for risk and potential for innovation than is possible with a comparatively small capital base. Finally, the emergence of alternative trading systems via the Internet and other mediums through which securities and futures transactions are effected has increased competition. It appears that this trend toward using alternative trading systems is continuing to grow, which may adversely affect our commission and trading revenue, reduce our participation in the trading markets and our ability to access market information and result in the creation of new and stronger competitors.

     Moreover, the securities industry currently is in a state of flux, which could adversely affect our business if we are unable to respond to changes quickly or effectively. For example, the investment research model is undergoing significant changes as a result of the global equity research settlement in 2003 that limits the role research analysts can play in investment banking transactions. In addition, the movement towards the unbundling of trading commissions may result in new pressures to produce research that others are explicitly willing to pay for, and it is not entirely clear how the industry will respond to these pressures. Other changes we have observed in our capital markets businesses that increase business pressures include a move towards new investment banking products with shorter shelf lives due to fast-changing markets or products quickly being copied by competitors, and decreasing fees for traditional services such as underwriting and mergers and acquisitions advice. Changes in the private client services business include a move away from traditional brokerage services towards broader financial advisory services.

     Our ability to compete successfully also is highly dependent upon our ability to attract, develop and retain highly skilled and motivated employees. We face intense competition for qualified employees from businesses in the financial services industry, and the performance of our business may be adversely affected to the extent we are unable to attract and retain employees effectively, particularly given the relatively small size of both our company and our employee base compared to some of our competitors and the geographic locations in which we

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operate. For example, some specialized areas of our business are operated by a relatively small number of employees, the loss of any of whom could jeopardize the continuation of that business following the employee’s departure. Similarly, the primary sources of revenue in our private client services business are commissions and fees earned on customer accounts managed by our financial advisors, who are regularly recruited by other firms and are able to change firms and take their client relationships with them. The future performance of our private client services business will depend, in part, on our ability to increase the number of our financial advisors and leverage our expense base, and our inability to do so successfully could materially and adversely affect our overall private client services business.

Our underwriting and market-making activities may place our capital at risk.

     We may incur losses and be subject to reputational harm to the extent that, for any reason, we are unable to sell securities we purchased as an underwriter at the anticipated price levels. In addition, as an underwriter, we are subject to heightened standards regarding liability for material misstatements or omissions in prospectuses and other offering documents relating to offerings we underwrite. As a market maker, we may own large positions in specific securities. These undiversified holdings concentrate the risk of market fluctuations and may result in greater losses than would be the case if our holdings were more diversified.

An inability to readily divest or transfer trading positions may result in financial losses to our business.

     Timely divestiture or transfer of our trading positions can be impaired by decreased trading volume, increased price volatility, concentrated trading positions, limitations on the ability to transfer positions in highly specialized or structured transactions to which we may be a party and changes in industry and government regulations. Our reliance on timely divestiture or transfer increases our vulnerability to price fluctuations or losses, since we may be forced to remain in a position longer than we anticipated if, for example, trading volume in that security declines due to significant company specific, market or geopolitical events.

Use of derivative instruments as part of our risk management techniques may place our capital at risk, while our risk management techniques themselves may not fully mitigate our market risk exposure.

     Our capital markets businesses may use futures, options and swaps to hedge inventory. We do not use derivative instruments for speculative purposes. Our fixed income area manages a portfolio of interest rate swaps that hedge the residual cash flows resulting from a tender option bond program. Our fixed income area also provides swaps and other interest rate hedging products to public finance entities. Derivative products provided to customers are hedged. However, there are risks inherent in our use of these products, including counterparty exposure and basis risk. Counterparty exposure refers to the risk that the amount of collateral in our possession on any given day may not be sufficient to fully cover the current value of the swaps if a counterparty were to suddenly default. Basis risk refers to risks associated with swaps used in connection with the tender option bond program, where changes in the value of the swaps may not exactly mirror changes in the value of the cash flows they are hedging. It is possible that losses may occur from our current exposure to derivative and interest rate hedging products and expected increasing use of these products in the future.

     We continue to refine our risk management techniques, strategies and assessment methods on an ongoing basis. However, our risk management techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we might fail to identify or anticipate. Some of our strategies for managing risk are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to quantify our risk exposure. Any failures in our risk management techniques and strategies to accurately quantify our risk exposure could limit our ability to manage risks. In addition, any risk management failures could cause our losses to be significantly greater than the historical measures indicate. Further, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses.

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An inability to access capital readily or on terms favorable to us could impair our ability to fund operations and could jeopardize our financial condition.

     Ready access to funds is essential to our business. In the future we may need to incur debt or issue equity in order to fund our working capital requirements, as well as to make acquisitions and other investments. In addition to maintaining a cash position, we rely on bank financing as well as other funding sources such as the repurchase and securities lending markets for funds. Our access to funding sources could be hindered by many factors. Those factors that are specific to our business include the possibility that lenders could develop a negative perception of our long-term or short-term financial prospects if we incurred large trading losses or if the level of our business activity decreased due to a market downturn. Similarly, our access to funds may be impaired if regulatory authorities took significant action against us, or if we discovered that one of our employees had engaged in serious unauthorized or illegal activity.

We may make strategic acquisitions of businesses, engage in joint ventures or divest or exit existing businesses, which could cause us to incur unforeseen expense and have disruptive effects on our business but may not yield the benefits we expect.

     From time to time, we may consider acquisitions of other businesses or joint ventures with other businesses. Any acquisition or joint venture that we determine to pursue will be accompanied by a number of risks. After we announce or complete an acquisition or joint venture, our share price could decline if investors view the transaction as too costly or unlikely to improve our competitive position. Costs or difficulties relating to such a transaction, including integration of products, employees, technology systems, accounting systems and management controls, may be greater than expected. We may be unable to retain key personnel after the transaction, and the transaction may impair relationships with customers and business partners. These difficulties could disrupt our ongoing business, increase our expenses and adversely affect our operating results and financial condition. In addition, we may be unable to achieve anticipated benefits and synergies from the transaction as fully as expected or within the expected time frame. Divestitures or elimination of existing businesses or products could have similar effects.

Our technology systems are critical components of our operations, and failure of those systems may disrupt our business, cause financial loss and constrain our growth.

     We typically transact thousands of securities trades on a daily basis across multiple markets. Our data processing, financial, accounting and other technology systems are essential to this task. A system malfunction or mistake made relating to the processing of our clients’ transactions could result in financial loss, liability to clients, regulatory intervention, reputational damage and constraints on our ability to grow. We outsource a substantial portion of our critical data processing activities, including trade processing and back office data processing. For example, we have entered into contracts with Thomson Financial, Inc. pursuant to which Thomson Financial handles our trade and back office processing, and Unisys Corporation, pursuant to which Unisys supports our data center and network management technology needs. We also contract with other third parties for our market data services, which constantly broadcast news, quotes, analytics and other relevant information to our employees. We contract with other vendors to produce and mail our customer statements. In the event that any of these service providers fails to adequately perform such services or that the relationship between that service provider and us is terminated, we may experience a significant disruption in our operations, including our ability to timely and accurately process our clients’ transactions or maintain complete and accurate records of those transactions.

     Adapting or developing our technology systems to meet new regulatory requirements, client needs and industry demands also is critical for our business. The growth of the Internet and the introduction of new technologies present new challenges on a regular basis. We have an ongoing need to upgrade and improve our various technology systems, including our data processing, financial, accounting and trading systems. This need could present operational issues or require significant capital spending. It also may require us to make additional investments in technology systems and may require us to reevaluate the current value and/or expected useful lives of our technology systems, which could negatively impact our results of operations.

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     Secure processing, storage and transmission of confidential and other information in our computer systems and networks also is critically important to our business. We take protective measures and endeavor to modify them as circumstances warrant. However, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.

Our business is subject to extensive regulation that limits our business activities, and a significant regulatory action against our company may have a material adverse financial effect or cause significant reputational harm to our company.

     As a participant in the financial services industry, we are subject to complex and extensive regulation of many aspects of our business by U.S. federal and state regulatory agencies, securities exchanges and other self-regulatory organizations and by foreign governmental agencies, regulatory bodies and securities exchanges. Generally, the requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with us. These requirements are not designed to protect our shareholders. Consequently, these regulations often serve to limit our activities, through net capital, customer protection and market conduct requirements and restrictions on the businesses in which we may operate or invest. Compliance with many of these regulations entails a number of risks, particularly in areas where applicable regulations may be unclear. In addition, regulatory authorities in all jurisdictions in which we conduct business may intervene in our business and we and our employees could be fined or otherwise disciplined for violations or prohibited from engaging in some of our business activities.

     With the integrity of the financial markets having been called into question in recent years, the current environment poses heightened risk of regulatory action, which could adversely affect our ability to conduct our business or could result in fines or reputational damage to our company. Additionally, many of the issues that face the financial services industry are complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with them. Moreover, new laws or regulations or changes in the interpretation or enforcement of existing laws or regulations may also adversely affect our business. For example, the Sarbanes-Oxley Act and the rules of the SEC, the NYSE and the NASD have necessitated significant changes to corporate governance and public disclosure. These provisions generally apply to companies with securities listed on U.S. securities exchanges and some provisions apply to non-U.S. issuers with securities traded on U.S. securities exchanges. To the extent that private companies forgo initial public offerings, non-U.S. issuers decline to list their securities in the United States or undertake merger or acquisition transactions, in order to avoid being listed in the United States and subject to these regulations, or companies fail to undertake merger or acquisition transactions due to such provisions, our business may be adversely affected.

Regulatory capital requirements may adversely affect our ability to expand or maintain present levels of our business or impair our ability to meet our financial obligations.

     We are subject to the SEC’s uniform net capital rule, Rule 15c3-1 and the net capital rule of the NYSE, which may limit our ability to make withdrawals of capital from Piper Jaffray & Co., our broker dealer subsidiary. The uniform net capital rule sets the minimum level of net capital a broker dealer must maintain and also requires that a portion of its assets be relatively liquid. The NYSE may prohibit a member firm from expanding its business or paying cash dividends if resulting net capital falls below its requirements. Our London-based broker dealer subsidiary is also subject to similar limitations under United Kingdom laws. As Piper Jaffray Companies is a holding company, we depend on dividends, distributions and other payments from our subsidiaries to fund dividend payments, if any, and to fund all payments on our

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obligations, including any debt obligations. These regulatory restrictions may impede access to funds that Piper Jaffray Companies needs to make payments on obligations, including debt obligations, or dividend payments. In addition, underwriting commitments require a charge against net capital and, accordingly, our ability to make underwriting commitments may be limited by the requirement that we must at all times be in compliance with the applicable net capital regulations. Piper Jaffray & Co. also is subject to certain notification requirements related to withdrawals of excess net capital.

Our exposure to legal liability is significant, and could lead to substantial damages and restrictions on our business going forward.

     We face significant legal risks in our businesses. These risks include potential liability under securities laws and regulations in connection with our investment banking and other corporate finance transactions. The volume and amount of damages claimed in litigation, arbitrations, regulatory enforcement actions and other adversarial proceedings against financial services firms have increased in recent years, and companies in our industry increasingly are exposed to claims for recommending investments that are not consistent with a client’s investment objectives or engaging in unauthorized or excessive trading. Our experience has been that adversarial proceedings against financial services firms typically increase during a market downturn. We also are subject to claims from disputes with our employees and our former employees under various circumstances. Risks associated with legal liability often are difficult to assess or quantify and their existence and magnitude can remain unknown for significant periods of time. Legal or regulatory matters involving our directors, officers or employees in their individual capacities also may create exposure for us because we may be obligated or may choose to indemnify the affected individuals against liabilities and expenses they incur in connection with such matters to the extent permitted under applicable law. In addition, like other financial services companies, we may face the possibility of employee fraud or misconduct. The precautions we take to prevent and detect this activity may not be effective in all cases and we cannot assure you that we will be able to deter or prevent fraud or misconduct. Exposures from and expenses incurred related to any of the foregoing actions or proceedings could have a negative impact on our results of operations, financial condition and credit rating.

We may suffer losses if our reputation is harmed.

     Our ability to attract and retain customers and employees may be adversely affected to the extent our reputation is damaged. If we fail to deal, or appear to fail to deal, with various issues that may give rise to reputational risk, we could harm our business prospects. These issues include, but are not limited to, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, privacy, record-keeping, sales and trading practices and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products. Failure to appropriately address these issues could also give rise to additional legal risk to us, which could, in turn, increase the size and number of claims and damages asserted against us or subject us to regulatory enforcement actions, fines and penalties.

Provisions in our certificate of incorporation and bylaws and of Delaware law may prevent or delay an acquisition of our company, which could decrease the market value of our common stock.

     Our certificate of incorporation and bylaws and Delaware law contain provisions that are intended to deter abusive takeover tactics by making them unacceptably expensive to the raider and to encourage prospective acquirors to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include a classified board of directors and limitations on actions by our shareholders by written consent. In addition, our board of directors has the right to issue preferred stock without shareholder approval, which could be used to dilute the stock ownership of a potential hostile acquiror. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15 percent or more of our outstanding common stock. In connection with our spin-off from U.S. Bancorp we adopted a rights agreement, which would impose a significant penalty on any person or group that acquires 15 percent or more of our outstanding common stock without the approval of our board of directors. We believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal, and are not intended to make our company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our board of directors determines is not in the best interests of our company and our shareholders.

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