UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission File No. 001-31720

PIPER JAFFRAY COMPANIES

(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 o        NO þ

     As of October 22, 2004, the Registrant had 19,864,242 shares of Common Stock outstanding.

Piper Jaffray Companies

Index to Quarterly Report on Form 10-Q

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Piper Jaffray Companies
Consolidated Statements of Financial Condition

See Notes to Consolidated Financial Statements

Piper Jaffray Companies
Consolidated Statements of Operations
(Unaudited)

See Notes to Consolidated Financial Statements

Piper Jaffray Companies
Consolidated Statements of Cash Flows
(Unaudited)

See Notes to Consolidated Financial Statements

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 Ventures Inc. (“Piper Jaffray Ventures”), a private equity venture capital firm managing investments in emerging growth companies; 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.

     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”) based on a distribution ratio of one share of Piper Jaffray Companies common stock for every 100 shares of USB common stock owned (the “Distribution Ratio”).

     Prior to the Distribution, the consolidated financial statements included the accounts and operations of Piper Jaffray Companies and its subsidiaries as well as certain assets, liabilities and related operations transferred to Piper Jaffray Companies from USB immediately prior to the Distribution. The consolidated financial statements, for periods prior to the Distribution, include the adjustments necessary to reflect the Company’s operations as if the organizational changes had been consummated prior to the Distribution. However, the consolidated financial statements for periods prior to the Distribution included herein may not necessarily be indicative of Piper Jaffray Companies’ results of operations, financial position and cash flows in the future or what its results of operations, financial position and cash flows would have been had Piper Jaffray Companies been a stand-alone company prior to 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. The Company’s policy is to consolidate all entities in which it owns more than 50 percent of the outstanding voting stock unless it does not control the entity and any variable interest entities (“VIEs”) for which it is the primary beneficiary. 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, 2003.

     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.

     Special purpose entities (“SPEs”) are trusts, partnerships or corporations established for a particular limited purpose. The Company follows the accounting guidance in Statement of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” to determine whether or not such SPEs are required to be consolidated. The Company engages in transactions with SPEs for the purpose of securitizing fixed rate municipal bonds. These SPEs generally meet the SFAS 140 definition of a qualifying special purpose entity (“QPSE”). A QSPE can generally be described as an entity with significantly limited powers, which are intended to limit it to passively holding financial assets and distributing cash flows based upon predetermined criteria. Based upon the guidance in SFAS 140, the Company does not consolidate QSPEs. The Company accounts for its involvement with QSPEs under a financial components approach in which the Company recognizes only its retained residual interest in the QSPE, which it accounts for at fair value.

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

Note 2 Summary of Significant Accounting Policies

Stock-Based Compensation

     Prior to the Distribution, certain employees of the Company were eligible to participate in USB employee incentive plans pursuant to which they received stock options and restricted stock that are described more fully in Note 10. The Company accounted for these stock option grants under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and accordingly, recognized no compensation expense for the stock option grants as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

     Effective January 1, 2004, the Company adopted the fair value based method of accounting for grants of stock-based compensation, as prescribed by Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting and Disclosure of Stock-Based Compensation,” as amended by Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS 148 provided alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amended the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

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. Because Piper Jaffray Companies common stock was not publicly issued until December 31, 2003, the date of the Distribution, the weighted average number of common shares outstanding for the three months and nine months ended September 30, 2003, was calculated by applying the Distribution Ratio to the historical USB weighted average number of common shares outstanding for the same periods presented. Diluted earnings per common share is calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive restricted stock and stock options.

Note 3 Recent Accounting Pronouncements

     In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on recognition and measurement guidance previously discussed under EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The consensus clarifies the meaning of other-than-temporary impairment and its application to investments in debt and equity securities, in particular investments within the scope of Statement of Financial Accounting Standards No. 115 (“SFAS 115”), “Accounting for Certain Investments in Debt and Equity Securities,” and investments accounted for under the cost method. This consensus guidance is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2005. The adoption of EITF Issue No. 03-01 is not expected to have an impact on the Company’s consolidated financial statements because all of the Company’s securities are classified as trading securities as defined by SFAS 115.

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 transactions to facilitate customer transactions and as a means to manage risk in certain inventory positions. 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 September 30, 2004 and December 31, 2003, the Company was counterparty to notional/contract amounts of $2.0 billion and $0.8 billion, respectively, of derivative instruments.

     The market or fair values related to derivative contract transactions are reported on the Consolidated Statements of Financial Condition and any unrealized gain or loss resulting from changes in fair values of derivatives is recognized on the Consolidated

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

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, measures of volatility, and correlations of inputs. The net fair value of derivative contracts was approximately ($0.7) million and ($2.2) million as of September 30, 2004, and December 31, 2003, 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:

     At September 30, 2004, and December 31, 2003, trading securities owned in the amounts of $95.9 million and $314.6 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 and listed options. It is the Company’s practice to hedge a significant portion of its trading securities owned.

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

Note 6 Goodwill

     As reflected in the following table, there were no changes in the carrying value of goodwill by reportable segments for the nine months ended September 30, 2004:

     The Company had no indefinite-lived or other intangible assets at September 30, 2004 or December 31, 2003.

Note 7 Short-Term Financing

     The Company has uncommitted credit agreements with banks totaling $650 million at September 30, 2004, composed of $530 million in discretionary secured lines 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. At September 30, 2004 and December 31, 2003, the Company had $93.1 million and $153.9 million, respectively, in repurchase agreements outstanding for financing purposes. The value of collateral received from securities loaned transactions was $233.6 million and $181.1 million at September 30, 2004 and December 31, 2003, respectively.

     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.

     The Company’s outstanding borrowings bear interest at rates based on the London Interbank Offered Rate or federal funds rate. At September 30, 2004 and December 31, 2003, the weighted average interest rate on borrowings was 3.10 percent and 2.07 percent, respectively. At September 30, 2004 and December 31, 2003, 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 actions 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. The Company’s reserves totaled $40.2 million and $41.7 million at September 30, 2004 and December 31, 2003, respectively, and are included within other liabilities and accrued expenses on the Consolidated Statements of Financial Condition. In addition to the established reserves, USB has agreed to indemnify the Company in an amount up to $17.5 million for certain legal and regulatory matters. Approximately $14.7 million of this amount remained available as of September 30, 2004. In July 2004, the Company reached a $2.4 million settlement with the NASD in connection with its investigation of the allocation of initial public offering shares to directors and officers of existing or potential investment banking clients. The full amount of this settlement was covered by the indemnity agreement with USB.

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

     Given uncertainties regarding the timing, scope, volume and outcome of pending and potential complaints, legal actions, investigations and 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, 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 an SEC 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. In addition, Piper Jaffray is subject to certain notification requirements related to withdrawals of excess net capital. Piper Jaffray is also registered with the Commodity Futures Trading Commission (“CFTC”) and therefore is subject to the CFTC regulations.

     At September 30, 2004, net capital under the Rule was $243.7 million, or 46.5 percent of aggregate debit balances, and $233.2 million in excess of the minimum required net capital.

     Advances to affiliates, repayment of subordinated debt, dividend payments and other equity withdrawals are subject to certain notification and other provisions of the net capital rule of the SEC and regulatory bodies.

     Piper Jaffray Ltd., which is a registered United Kingdom broker dealer, is subject to the capital requirements of the Financial Services Authority (“FSA”) of the United Kingdom. As of September 30, 2004, Piper Jaffray Ltd. was in compliance with the requirements of the FSA.

Note 10 Stock-Based Compensation and Cash Award Program

     In 2004, the Company has granted shares of restricted stock and options to purchase Piper Jaffray Companies common stock to employees and directors. These awards principally have three-year cliff vesting periods. The following table summarizes the Company’s stock options and restricted stock outstanding for the nine months ended September 30, 2004:

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

     Additional information regarding Piper Jaffray Companies options outstanding as of September 30, 2004 is as follows:

     Effective January 1, 2004, the Company elected to account for stock-based employee compensation under the fair value based 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 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 continues to be amortized on a straight-line basis over the vesting period. For the three months and nine months ended September 30, 2004, the Company recorded compensation expense, net of estimated forfeitures, of $2.5 million and $6.6 million, respectively, related to 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:

     Certain of the Company’s employees are eligible to participate in a cash award program established in connection with the Distribution from USB on December 31, 2003. The program is 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. No Company employees, officers or directors received Piper Jaffray Companies options or restricted stock as part of the Distribution. The cash award program has an aggregate maximum value of approximately $47.0 million. The Company incurred a $24.0 million charge at the time of the Distribution for the portion of the cash awards that were paid within 120 days of the Distribution. The remaining cash awards will vest and be paid out over the next four years. 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.

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

     While part of USB, the Company applied APB 25 in accounting for employee incentive plans that provided for the award of stock options and restricted stock. Because the exercise price of USB employee stock options equaled the market price of the underlying stock on the date of the grant, under APB 25, no compensation expense was recognized. Pro forma information regarding compensation expense and net income has been determined as if the Company had accounted for employee stock option plans under the fair value method of SFAS 123 for the periods prior to the Distribution. The fair value of the options was estimated at the grant date using a Black-Scholes option-pricing model. The pro forma disclosure that follows is for USB options granted to the Company’s employees while employed by USB and is not representative of periods subsequent to the Distribution.

     Restricted shares of USB common stock granted under USB employee incentive plans vested over three to five years. Expense for restricted stock was based on the market price of USB stock at the time of the grant and amortized on a straight-line basis over the vesting period. Expense related to grants of USB restricted stock was $1.0 million and $2.9 million for the three months and nine months ended September 30, 2003.

Note 11 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 conversion of all potentially dilutive restricted stock and stock options. Because Piper Jaffray Companies common stock was not publicly issued until December 31, 2003, the date of Distribution, the weighted average number of common shares outstanding for the three months and nine months ended September 30, 2003 was calculated by applying the Distribution Ratio to USB’s historical weighted average number of common shares outstanding for the applicable period. The computation of earnings per share is as follows:

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

Note 12 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 are evaluated on a regular basis in deciding how to allocate resources and assess performance relative to competitors.

Basis for Presentation

     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 segment, including salaries, commissions, incentives, employee benefits, occupancy, marketing and business development and other direct expenses, are accounted for within each segment’s financial results in a manner similar to the consolidated financial results. Investment research, operations, technology and compliance costs are allocated based on the segment’s use of these areas to support their businesses. General and administrative expenses incurred by centrally managed corporate support functions are included in Corporate Support and Other and are not allocated. To enhance the comparability of segment results, cash award program charges related to the Distribution, royalty fees previously assessed by USB and income taxes are not assigned to the segments, but are accounted for on an enterprise-wide basis. 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 $3.0 million and $2.0 million for the three months ended September 30, 2004 and 2003, respectively, and $9.1 million and $5.8 million for the nine months ended September 30, 2004 and 2003, respectively, and are included in the Capital Markets business segment. Non-U.S. long-lived assets were $0.6 million at September 30, 2004, and December 31, 2003.

     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 September 30, 2004, PCS had 853 financial advisers operating in 92 branch offices in 18 Midwest, Mountain and West Coast states.

Corporate Support and Other

     Corporate Support and Other includes the Company’s private equity and venture capital businesses and activities managed on a corporate basis, such as enterprise-wide administrative support functions. Results for this segment primarily reflect management fees generated by the Company’s private equity and venture capital businesses and investments in private equity and venture capital funds managed by these businesses, as well as interest expense on the Company’s subordinated debt and the expenses of other business activities managed on a corporate basis.

Piper Jaffray Companies
Notes to Consolidated Financial Statements
(Unaudited)

     Reportable segment financial results are as follows:

Note 13 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

     The Company, in connection with its tender option bond program, has securitized $200.6 million of highly rated fixed rate municipal bonds. Each municipal bond is sold into a separate trust that is funded by the sale of variable rate certificates to institutional customers seeking variable rate, tax-free investment products. These variable rate certificates reprice weekly. The Company retains a residual interest in each trust, with such interest accounted for as a trading security, recorded at fair value on the Consolidated Statements of Financial Condition. The fair value of retained interests was $10.9 million at September 30, 2004, with a weighted average life of 10.2 years. Securitization transactions are treated as sales with the resulting gain included in principal transactions on the Consolidated Statements of Operations. 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 — forward yield curves, credit losses of 0 percent, and a 15 percent discount rate. The Company receives a fee to remarket the variable rate certificates derived from the securitizations. The Company enters into interest rate swaps to minimize any interest rate risk associated with the retained interests.

     At September 30, 2004, the sensitivity of the current fair value of retained interests to an immediate 10 percent or 20 percent adverse change in the key assumptions was not material.

     Certain cash flow activity for the municipal bond securitizations described above during 2004 includes:

     The Company has contracted with a major third-party financial institution to act as the liquidity provider to the 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 September 30, 2004 was approximately $200 million, which represents the outstanding amount of all trust certificates. 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 $200 million at September 30, 2004. The Company believes the likelihood it will be required to fund the reimbursement agreement obligation under any provision of the arrangement is remote and no liability for such guarantee has been recorded in the accompanying consolidated financial statements.

Note 14 Definitive Agreement to Acquire Vie Securities, LLC

     In September 2004, the Company signed a definitive agreement to acquire Vie Securities, LLC, the broker dealer subsidiary of parent Vie Financial Group, Inc., for a cash purchase price of $15 million. Vie Securities provides algorithm-based, electronic execution services. The transaction, which is expected to close in the fourth quarter of 2004, has been approved by holders of more than 96 percent of the outstanding shares of common stock of Vie Financial Group and is subject to receipt of certain approvals from the NYSE and the National Association of Securities Dealers, Inc. The allocation of the purchase price and determination of goodwill will be made once the transaction closes.

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

     We are a focused securities firm dedicated to delivering superior financial advice, investment products and transaction execution within targeted sectors of the financial services marketplace. Our employees seek to build long-term relationships and use their expertise to provide value to our clients. We operate through three reportable segments: Capital Markets, Private Client Services, and Corporate Support and Other. Our Capital Markets business consists of equity and fixed income institutional sales and trading and investment banking services and 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 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. Our Private Client Services business provides financial advice and a wide range of financial products and services to individual investors through our branch distribution network. 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. Our Corporate Support and Other segment includes the results of our private equity and venture capital businesses, which generate revenues through the management of private equity and venture capital funds. This segment also includes results related to our 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 and motivated employees.

     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 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 industries 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 disproportionately affect our business compared with companies operating in other regions or more nationally or globally. In addition, our private client and equity trading businesses typically experience seasonality, slowing down somewhat during the summer months. 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.

     In the third quarter of 2004, general economic factors of note for our business included the Federal Reserve’s decision to continue to gradually increase the federal funds rate, raising the target for short-term interest rate by 25 basis points in both August and September. The increase in short-term interest rates has helped ease inflation expectations, pushing down the yield on longer term U.S. Treasury bonds in the third quarter. Continued concern about the sustainability of the economic recovery and corporate profits left the broad equity indices down slightly for the quarter.

     Some of the key challenges currently facing securities firms, including our own business, include the following:

•

Intense competition and pricing pressures in the securities trading industry and marketplace pressure to provide more price transparency;

•

Technological developments, which allow investors to execute trades directly with one another rather than working through a securities firm and to execute trades through electronic execution channels, reducing the fees that investors are willing to pay for execution;

•

Continued regulatory scrutiny of the industry, leading to changes in the way securities firms operate and increased operating costs.

     We are focused on these challenges as we manage our business, and the impact of these challenges on the securities industry and our company may affect our results of operations.

RECENT DEVELOPMENTS

     On September 22, 2004, we signed a definitive agreement to acquire Vie Securities, LLC, the broker dealer subsidiary of parent Vie Financial Group Inc., for a cash purchase price of $15 million. Vie Securities provides algorithm-based, electronic execution services. We believe this new capability will allow us to meet the increased demand of institutional clients for automated, cost-effective execution services. The transaction is expected to close in the fourth quarter of 2004, subject to certain regulatory approvals, and is expected to have an immaterial effect on our earnings in 2004 and 2005, and be accretive in 2006.

     On October 13, 2004, we announced plans to transition our venture capital business to an independent firm. This transition is expected to be completed during the fourth quarter of 2004 and will not have a material impact on our results of operations. Following the transition, all of the venture capital funds currently managed by our venture capital business will be managed by the independent firm, and we plan to retain our existing ownership interests in those venture capital funds.

RESULTS OF OPERATIONS

FINANCIAL SUMMARY FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

     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.

     Net income decreased to $11.8 million for the three months ended September 30, 2004, down from $16.0 million for the three months ended September 30, 2003. Net revenues decreased to $186.2 million for the three months ended September 30, 2004, down 11.6 percent over the same period last year. The difficult market environment that developed in the latter half of the second quarter of 2004, reflecting uncertainty regarding interest rates, inflation and geopolitical events, continued through the third quarter. This environment was exacerbated by a slowdown in activity during the summer months. The largest component of our revenue stream was investment banking at $65.2 million, down 13.1 percent from the corresponding period of the prior year. The decrease in investment banking revenue was driven by a decline in equity underwriting activity due to the difficult market environment. Commissions and fees decreased 4.1 percent for the three months ended September 30, 2004, compared with the three months ended September 30, 2003, as a result of reduced equity and mutual fund commissions, partly offset by an increase in managed account fees. Profits on principal transactions decreased 22.8 percent from the year-ago period, largely due to the decline in our fixed income institutional sales and trading business. Our fixed income institutional sales and trading revenues hit near record levels in the third quarter of 2003, but rising interest rates have created a more challenging fixed income environment in 2004. Non-interest expenses decreased 9.3 percent to $167.7 million for the three months ended September 30, 2004, from $184.8 million for the three months ended September 30, 2003. This decrease was primarily attributable to a reduction in compensation and benefits due to lower revenues and operating income.

CONSOLIDATED NON-INTEREST EXPENSES

Compensation and Benefits

     Compensation and benefits decreased 11.8 percent to $114.2 million for the three months ended September 30, 2004, from $129.5 million for the corresponding period in the prior year. This decrease resulted from reduced variable compensation costs due to the decline in revenues and operating income. Compensation and benefits as a percentage of net revenues remained relatively consistent at 61.3 percent for the three months ended September 30, 2004, decreasing just slightly from 61.5 percent for the three months ended September 30, 2003.

Occupancy and Equipment

     Occupancy and equipment expenses were $15.0 million for the three months ended September 30, 2004, compared with $13.6 million for the three months ended September 30, 2003. This increase was due primarily to approximately $1.0 million of expense relating to a system conversion. We expect this conversion to be completed in the first quarter of 2005. Additionally, we incurred higher software amortization costs associated with the implementation of a new fixed income trading system in late 2003.

Communications

     Communication expenses include costs for telecommunication and data communication, primarily from third-party market data information providers. Communication expenses were $10.6 million for the three months ended September 30, 2004, compared with $9.1 million for the three months ended September 30, 2003. This increase was due primarily to higher communication infrastructure costs as a result of our separation from U.S. Bancorp and increased costs to support the expansion of our fixed income sales and trading capabilities.

Floor Brokerage and Clearance

     Floor brokerage and clearance expenses were $4.1 million for the three months ended September 30, 2004, compared with $5.7 million for the three months ended September 30, 2003, a decrease of 28.6 percent. This decrease was due to our continued effort to reduce expenses associated with accessing electronic communication networks and our effort to execute a greater number of trades through our own trading desks. As a result of these efforts, floor brokerage and clearance expense as a percentage of net revenues was reduced to 2.2 percent for the three months ended September 30, 2004, from 2.7 percent in the corresponding period of the prior year.

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 $9.7 million for the three months ended September 30, 2004, compared with $8.6 million for the three months ended September 30, 2003. This increase was attributable to increased travel costs and the timing of advertising costs.

Outside Services

     Outside services expenses include securities processing expenses, outsourced technology functions, legal and other professional fees. Outside services expenses increased to $11.2 million for the three months ended September 30, 2004, compared with $9.8 million for the corresponding period in the prior year. This increase primarily reflects the costs for outsourcing our mainframe and network processing to a third-party vendor, new public company costs and increased investments in technology.

Cash Award Program

     A broad-based group of our employees was granted cash awards pursuant to a program that we established in connection with our spin-off from U.S. Bancorp. The award program is intended to aid in retention and compensate employees for the value of U.S. Bancorp stock options and restricted stock lost as a result of the spin-off. The cash award program has an aggregate value of approximately $47.0 million. We incurred a $24.0 million charge in connection with this program at the time of the spin-off. This charge is included in our results of operations for the fourth quarter of 2003. The balance of the cash awards will vest and be paid out over the next four years.

Royalty Fee

     As a subsidiary of U.S. Bancorp, we were charged royalty fees for the use of U.S. Bancorp tradenames and trademarks. These charges were discontinued at the time of the spin-off from U.S. Bancorp.

Other Operating Expenses

     Other operating expenses include insurance costs, license and registration fees, and the expenses associated with legal contingencies, financial advisor loan loss contingencies, and our charitable giving program. Other operating expenses decreased to $1.7 million for the three months ended September 30, 2004, compared with $7.5 million for the three months ended September 30, 2003, a decrease of 77.2 percent. This decrease is a result of lower expenses related to legal contingencies, offset in part by increased costs for corporate insurance as a result of being a stand-alone public company and increased expenses associated with our charitable giving program.

Income Taxes

     The provision for income taxes was $6.8 million, an effective tax rate of 36.6 percent, for the three months ended September 30, 2004, compared with $9.8 million, an effective tax rate of 38.0 percent, for the three months ended September 30, 2003. 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 September 30, 2004.

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. Investment research, operations, technology and compliance costs are allocated based on each segment’s use of these functions to support its business. General and administrative expenses incurred by centrally managed corporate support functions are included within Corporate Support and Other. To enhance the comparability of business segment results over time, royalty fees previously assessed by U.S. Bancorp and 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. We may change designations, assignments and allocations from time to time as our financial reporting systems are enhanced and methods of evaluating performance change or business segments are realigned to better serve our customer base. The presentation reflects our current management structure and, accordingly, all periods 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.

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

(a)

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

CAPITAL MARKETS

     Institutional sales and trading revenues are comprised of all the revenues generated through trading activities. These revenues, which primarily are generated 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 23.4 percent for the three months ended September 30, 2004, to $39.5 million. Equity institutional sales and trading decreased 11.7 percent for the three months ended September 30, 2004, to $26.3 million, compared to $29.8 million in the corresponding period in 2003. Fixed income institutional sales and trading revenues decreased 39.4 percent to $13.2 million for the quarter ended September 30, 2004. The significant decline in fixed income revenues from the year-ago period is primarily attributable to substantially reduced institutional client order flow and reduced trading profits. Our fixed income business achieved near record revenues in the third quarter of 2003 driven by high-yield corporate bonds where we have proprietary research capabilities. The rising interest rate environment in 2004 has created a more challenging fixed income environment. As a result of this challenging environment, we have taken steps to reduce our Value-at-Risk. This reduction limits both the risk and the potential return associated with principal transactions. We anticipate the trend in fixed income sales and trading activity to continue through 2004 as continued uncertainty regarding interest rates may continue to dampen demand for fixed income products.

     Investment banking revenue decreased to $58.1 million for the three months ended September 30, 2004, compared with $66.2 million for the three months ended September 30, 2003, down 12.2 percent. This decrease was primarily attributable to a decline in equity underwriting activity, which decreased 32.8 percent to $16.8 million for the three months ended September 30, 2004. Equity underwriting revenues in the third quarter of 2004 could not match the strong revenues in the third quarter of 2003 when the equity underwriting market rebounded after a soft equity underwriting environment in the first half of 2003. During the third quarter of 2004, we completed 19 equity offerings, raising $3.2 billion in capital for our clients, compared to 24 equity offerings, raising $3.5 billion in capital, during the third quarter of 2003. Fixed income underwriting stayed relatively consistent with the corresponding period in the prior year driven by strong public finance underwriting activity. Mergers and acquisitions activity increased slightly from the year-ago period as we completed 13 deals valued at $2.0 billion in the third quarter of 2004, compared to 13 deals valued at $1.9 billion for the same period in 2003.

     Segment pre-tax operating margin for the third quarter of 2004 decreased to 17.1 percent from 20.8 percent for the corresponding period in the prior year as a result of the decline in net revenues, which was offset somewhat by an accompanying decrease in variable compensation costs.

PRIVATE CLIENT SERVICES

     Private Client Services net revenues decreased 6.6 percent to $83.7 million for the three months ended September 30, 2004, compared with $89.7 million for the corresponding period in the prior year. This decrease is due to a decline in transactional business, partially offset by increased managed account fees resulting from higher managed account assets. The reduction in transactional business was due primarily to increased investor uncertainty, which led to reduced trading volumes in both the U.S. equity and bond markets and, to a smaller extent, to a decline in the number of our financial advisors when compared to September 30, 2003. Assets under management increased from $47.6 billion at September 30, 2003 to $49.0 billion at September 30, 2004, largely due to the improved equity market during the latter half of 2003.

     Despite the decline in net revenues, segment pre-tax operating margin for Private Client Services increased slightly to 14.5 percent for the third quarter of 2004 compared to 14.0 percent in the corresponding period of 2003 due to cost management.

     The number of financial advisors includes both developing and experienced financial advisors. The decline in the number of financial advisors from the year-ago period was due in part to the implementation of a new compensation plan in mid-2003, which

contributed to significant attrition among lower-end producers. The attrition among our financial advisors due to the new compensation plan has largely ended, and the number of financial advisors slightly increased from the second to third quarter of 2004. 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.

CORPORATE SUPPORT AND OTHER

     Corporate Support and Other includes revenues primarily attributable to our private equity and venture capital businesses and our investments in private equity and venture capital funds. On October 13, 2004, we announced plans to transition our venture capital business to an independent firm. For further information regarding this change in our business, see Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments. The Corporate Support and Other segment also includes interest expense on our subordinated debt, which is recorded as a reduction of net revenues. Net revenues increased to $1.2 million for the three months ended September 30, 2004, compared with $0.7 million for the corresponding period in the prior year. This change was due primarily to revenue recorded in the quarter ended September 30, 2004, pertaining to our investments in two limited partnerships that are consolidated for financial statement purposes. In addition, interest expense on our subordinated debt decreased as we reduced our subordinated debt balance by $35.0 million in the fourth quarter of 2003.

FINANCIAL SUMMARY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

     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.

     Except as discussed below, the underlying reasons for variances to the prior year are substantially the same as the comparative quarterly discussion and the statements contained in the foregoing discussion also apply to the nine month comparison.

     Net income increased to $38.5 million for the nine months ended September 30, 2004, up from $29.3 million for the nine months ended September 30, 2003. Net revenues increased to $602.9 million for the nine months ended September 30, 2004, up 3.1 percent over the same period last year. The largest driver of this increase was investment banking, as revenues increased 16.1 percent for the nine months ended September 30, 2004, when compared to the corresponding period in the prior year. This increase was driven by substantially higher levels of equity underwriting and merger and acquisition activity during the first half of 2004 when compared to the corresponding period in 2003. Commissions and fees increased to $196.5 million, up 3.9 percent from the corresponding period of the prior year. Commissions and fees rose due to increased managed account balances during the first nine months of 2004, which led to increased managed account fees. Profits on principal transactions decreased 12.3 percent from the year-ago period, largely due to the decline in fixed income institutional sales and trading. Non-interest expenses increased to $541.5 million for the nine months ended September 30, 2004, from $538.7 million for the nine months ended September 30, 2003. This increase was primarily due to higher variable compensation costs resulting from increases in revenue and improved financial performance. Additionally, we have incurred increased costs associated with being a stand-alone public company.

CONSOLIDATED NON-INTEREST EXPENSES

Compensation and Benefits

     Compensation and benefits increased to $371.6 million for the nine months ended September 30, 2004, from $365.4 million for the corresponding period in the prior year, or up 1.7 percent. The increase in compensation and benefits expense was due primarily to increases in the variable portion of our compensation expense as a result of increased revenues and operating profits. Our compensation and benefits as a percentage of net revenues decreased from 62.5 percent for the nine months ending September 30, 2003, to 61.6 percent for the corresponding period in 2004, reflecting the leveraging of higher revenues and operating profits on our fixed compensation costs.

Other Operating Expenses

     Other operating expenses decreased 43.5 percent to $17.0 million for the nine months ended September 30, 2004, from $30.1 million for the nine months ended September 30, 2003. In the second quarter of 2003, we increased by $8.8 million our allowance for loan losses related to certain forgivable loans made to financial advisors, in conjunction with implementing a new compensation plan that we expected would cause attrition among our lower-end financial advisors. Because we believe we are largely through the attrition of financial advisors related to this new compensation plan and because attrition was lower than originally expected, we reduced our financial advisor loan loss reserve by $2.1 million in the first nine months of 2004. Further contributing to the decrease in other operating expenses were lower expenses in the first nine months of 2004 related to legal contingencies. These decreases in other operating expenses were offset in part by increased costs for corporate insurance as a result of being a stand-alone public company and expenses associated with our charitable giving program.

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