10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2005

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)

Securities registered pursuant to Section 12(b) of the Act:

	Name of Each Exchange
Title of Each Class	On Which Registered
Common Stock, par value $0.01 per share	The New York Stock Exchange
Preferred Share Purchase Rights	The New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer þ Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the 19,953,546 shares of the Registrant’s Common Stock, par value $0.01 per share, held by non-affiliates based upon the last sale price, as reported on the New York Stock Exchange, of the Common Stock on June 30, 2005 was approximately $607.2 million.

As of February 27, 2006, the Registrant had 20,716,713 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Parts I, II, and IV of this Annual Report on Form 10-K incorporate by reference information from the Registrant’s 2005 Annual Report to Shareholders that is included in Exhibit 13.1 to this Annual Report on Form 10-K.

     Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the Registrant’s Proxy Statement for its 2006 Annual Meeting of Shareholders to be held on May 2, 2006.

TABLE OF CONTENTS

PART I
	ITEM 1. BUSINESS
		Our results for a particular period may not reflect the overall strength of general economic conditions and financial market activity, due to factors that differentiate our business within the financial services industry. For example:
	ITEM 1A. RISK FACTORS
	ITEM 1B. UNRESOLVED STAFF COMMENTS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
	ITEM 6. SELECTED FINANCIAL DATA
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	ITEM 9A. CONTROLS AND PROCEDURES
	ITEM 9B. OTHER INFORMATION
PART III
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
	ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
Exhibit Index
Form of Stock Option Agreement
Summary of Non-Employee Director Compensation Program
Selected Portions of the 2005 Annual Report to Shareholders
Subsidiaries
Consent of Ernst & Young LLP
Power of Attorney
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Section 1350 Certifications

PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Form 10-K contains forward-looking statements. 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 discussed below under “Risk Factors” in Item 1A, and in our subsequent reports filed with the Securities and Exchange Commission (“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.

ITEM 1. BUSINESS.

Overview

     Piper Jaffray Companies is a focused securities firm dedicated to delivering superior financial advice, investment products and transaction execution within targeted sectors of the financial services marketplace. Through our chief operating subsidiary, Piper Jaffray & Co., we have served corporations, government and non-profit entities, institutional investors and the financial advisory needs of private individuals since 1895. Our employees seek to build long-term relationships and to use their expertise to provide value to our clients. Our goals are to be a primary advisor to our investment banking and individual investor clients and to be a leading provider of advice, research and trading execution capabilities to institutional investors. We are headquartered in Minneapolis, Minnesota and have 104 offices in 23 states across the United States and in London, England. We compete nationally in serving corporations, government and non-profit entities, and institutional investors. We compete predominantly across the western half of the United States in serving the financial advisory needs of private individuals. We market our products and services under a single name—Piper Jaffray—which gives us a consistent brand across our businesses.

     Prior to 1998, Piper Jaffray was an independent public company. In 1998, the Piper Jaffray business was acquired by U.S. Bancorp and operated through various subsidiaries and divisions of U.S. Bancorp through 2003. On December 31, 2003, following U.S. Bancorp’s transfer of substantially all of the assets and liabilities of its capital markets business to us, Piper Jaffray again became an independent public company as a result of the tax-free distribution by U.S. Bancorp of our common stock to all of U.S. Bancorp’s shareholders. Our new holding company, Piper Jaffray Companies, was incorporated in Delaware on April 28, 2003, in anticipation of this distribution. In the distribution, each U.S. Bancorp shareholder received one share of our common stock for every 100 shares of U.S. Bancorp common stock held as of the December 22, 2003 record date. A total of 19,334,261 shares was distributed.

     We operate through three reportable segments: Capital Markets, Private Client Services, and Corporate Support and Other. For the year ended December 31, 2005, Capital Markets and Private Client Services contributed approximately 56.2 percent, or $435.8 million, and 44.8 percent, or $347.0 million, of our total net revenues, respectively. Corporate Support and Other recorded negative net revenues of $7.7 million. For financial information regarding each of our reportable segments, see Note 23 to our consolidated financial statements included in our 2005 Annual Report to Shareholders, which is incorporated herein by reference and is included in Exhibit 13.1 to this Form
10-K.

     Our principal executive offices are located at 800 Nicollet Mall, Suite 800, Minneapolis, Minnesota 55402, and our general telephone number is (612) 303-6000. We maintain an Internet Web site at http://www.piperjaffray.com. The information contained on and connected to our Web site is not incorporated into this report. We make available free of charge on or through our Web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and all other reports we file with the SEC, as soon as reasonably practicable after we electronically file these reports with, or furnish them to, the SEC. “Piper Jaffray,” the “Company,” “registrant,” “we,” “us” and “our” refer to Piper Jaffray Companies and our subsidiaries. The Piper Jaffray logo and the other trademarks, tradenames and service marks of Piper Jaffray mentioned in this report, including Piper Jaffray^®, are the property of Piper Jaffray.

Capital Markets

     Our Capital Markets business principally consists of two components:

• Investment Banking Activities – We raise capital through equity and debt offerings for our corporate clients in four focus industries, namely, the consumer, financial institutions, health care and technology industries, primarily focusing on middle-market clients. In addition, we provide financial advisory services relating to mergers and acquisitions to clients in these focus industries, as well as to companies in other industries. For our government and non-profit clients, we underwrite debt issuances and provide financial advisory and interest rate risk management services.

• Equity and Fixed Income Institutional Sales and Trading – We offer both equity and fixed income financial advisory and trade execution services for public and private corporations, public entities, non-profit clients, institutional investors and individual investor clients. Integral to our capital markets efforts, we have equity sales and trading relationships with institutional investors in the United States and Europe that invest in our focus industries. Our fixed income sales and trading professionals have expertise in corporate, mortgage, agency and municipal securities and cover a range of institutional investors.

Private Client Services

     Our Private Client Services business principally provides individual investors with financial advice and a wide range of financial products and services, including equity and fixed income securities, mutual funds and annuities. We provide these services through our network of branches in the Midwest, Mountain and West Coast states. Our financial advisors work to listen to our clients, understand their needs and deliver individualized advice designed to help clients achieve their financial goals. Our financial advisors use a suite of financial planning, portfolio performance reporting and fixed income portfolio management software tools to help clients with wealth management, retirement planning, education funding, tax-advantaged investing and estate planning strategies.

Corporate Support and Other

     Our Corporate Support and Other segment principally represents business activities not allocated to Capital Markets and Private Client Services, including the costs of being a public company and long-term financing costs. This segment also includes our private equity activities and investments and our venture capital investments.

Financial Information About Geographic Areas

     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. We also provide sales and trading and investment banking services to selected companies in international jurisdictions, primarily in Europe, through Piper Jaffray Ltd., our brokerage and investment banking subsidiary domiciled in London, England. In September 2005, Piper Jaffray Ltd. commenced trading as a member firm of the London Stock Exchange. Piper Jaffray Ltd. makes markets in, and provides research coverage of, U.K. domestic securities in support of its institutional sales activities, and also provides a full range of investment banking services, including underwriting, to its corporate clients. Net revenues and long-lived assets that are attributable to domestic and foreign operations, primarily representing premises and equipment, are summarized in Note 23 to our consolidated financial statements, which are included in our 2005 Annual Report to Shareholders and incorporated herein by reference and also included in Exhibit 13.1 to this Form 10-K.

Competition

     Our Capital Markets business is subject to intense competition. The industry is dominated by large Wall Street and international firms. We also compete with regional broker dealers and in some cases with small boutique firms. In addition, we compete with alternative trading systems that effect securities transactions through the Internet and other electronic media. Competition is principally based on price, quality of advice and service, reputation, product selection, transaction execution and financial resources. Many of our large competitors have greater financial resources than we have and may have more flexibility to offer a broader set of products and services than we can.

     Our Private Client Services business also is subject to intense competition. Our primary competition is national full-service firms and regional broker dealers in local geographic markets. We also compete for individual clients with discount brokerage services and online financial services firms, which typically provide lower levels of service for a lower price. In addition, we compete against registered investment advisors and, increasingly, more recent market entrants such as insurance companies, commercial banks, savings and loan associations and other firms offering financial services. Competition principally is based on personal relationships with the financial advisor, quality of advice and service, reputation and price.

     In addition, there is significant competition within the securities industry for obtaining and retaining the services of qualified employees. Our business is a human capital business; the performance of our business is dependent on the skills, expertise and performance of our employees. Therefore, our ability to compete effectively is dependent upon attracting and retaining qualified individuals who are motivated to serve the best interests of our clients, thereby serving the best interests of our company. Our ability to attract and retain such employees depends, among other things, on our company’s culture, management, work environment, geographic locations and compensation.

Seasonality

     Our private client and equity trading businesses typically experience something of a slowdown during the summer months. However, seasonality was not a significant factor affecting our results in the third quarter of 2005.

Employees

     As of February 27, 2006, we had approximately 2,830 employees, of whom approximately 880 were registered with the National Association of Securities Dealers (“NASD”) as financial advisors involved in our retail and institutional sales activities.

Regulation

     As a participant in the financial services industry, our business is regulated by U.S. federal and state regulatory agencies, self-regulatory organizations and securities exchanges, and by foreign governmental agencies, regulatory bodies and securities exchanges. We are subject to complex and extensive regulation of most aspects of our business, including the manner in which securities transactions are effected, net capital requirements, recordkeeping and reporting procedures, relationships with customers, the handling of cash and margin accounts, experience and training requirements for certain employees, the manner in which we prevent and detect money-laundering activities, and business procedures with firms that are not members of the self-regulatory organizations in which we participate. The regulatory framework of the financial services industry is designed primarily to safeguard the integrity of the capital markets and to protect customers, not creditors or shareholders. The laws, rules and regulations comprising this regulatory framework can (and do) change frequently, as can the interpretation and enforcement of existing laws, rules and regulations. The timing and effects of such changes are difficult to predict accurately, but may directly affect the manner in which we operate our company, as well as our profitability.

     Our broker dealer subsidiary is registered as a securities broker dealer and as an investment advisor with the SEC and is registered with the Commodity Futures Trading Commission as a futures commission merchant under the Commodity Exchange Act. Our broker dealer subsidiary also is a member of various securities exchanges (including the New York Stock Exchange (“NYSE”)), the NASD and the National Futures Association (“NFA”). The securities exchanges, the NASD, and the NFA are voluntary, self-regulatory bodies composed of members who have agreed to abide by these regulatory organizations’ respective rules and regulations. Each of these organizations can expel, fine and otherwise discipline member firms and their employees.

     Our broker dealer subsidiary is subject to the uniform net capital rule of the SEC (Rule 15c3-1), and the net capital rule of the NYSE. Both rules set a minimum level of net capital a broker dealer must maintain and also require that a portion of the broker dealer’s assets be relatively liquid. Under the NYSE’s rule, the NYSE may prohibit a member firm from expanding its business or paying cash dividends if resulting net capital falls below NYSE requirements. In addition, our broker dealer subsidiary is subject to certain notification requirements related to withdrawals of excess net capital. As a result of these rules, our ability to make withdrawals of capital from our broker dealer subsidiary may be limited.

     Our broker dealer subsidiary is subject to anti-money laundering regulation related to federal prevention efforts aimed at terrorist financing. The USA PATRIOT Act of 2001 contains anti-money laundering and financial transparency laws and mandated the implementation of various regulations that require us to implement standards for verifying client identification at account opening, monitor client transactions and report suspicious activity. Certain of our businesses also are subject to compliance with laws and regulations of U.S. federal and state governments, non-U.S. governments, their respective agencies and/or various self-regulatory organizations or exchanges in the area of privacy of client information. Any failure with respect to our practices, procedures and controls in these areas could subject us to regulatory consequences, including fines, and potentially other liabilities.

     Our broker dealer subsidiary is also licensed as a broker dealer in each of the 50 states, requiring us to comply with the laws, rules and regulations of each state. Any state may revoke a license to conduct a securities business and fine or otherwise discipline broker dealers and their employees.

     Piper Jaffray Ltd., our United Kingdom brokerage and investment banking subsidiary, is registered under the laws of England and Wales and is authorized and regulated by the U.K. Financial Services Authority. As a result, Piper Jaffray Ltd. is subject to regulations regarding, among other things, capital adequacy, customer protection and business conduct.

Executive Officers

     Information regarding our executive officers (all of whom have held their current positions with us since December 31, 2005), and their ages as of February 27, 2006, are as follows:

Name	Age	Position(s)
Andrew S. Duff	48	Chairman and Chief Executive Officer
Addison L. Piper	59	Vice Chairman
James L. Chosy	42	General Counsel and Secretary
Francis E. Fairman	48	Head of Public Finance Services
R. Todd Firebaugh	43	Chief Administrative Officer
Robert W. Peterson	38	Head of Private Client Services
Thomas P. Schnettler	49	Head of Corporate and Institutional Services
Sandra G. Sponem	48	Chief Financial Officer

     Andrew S. Duff is our chairman and chief executive officer. Mr. Duff became chairman and chief executive officer of Piper Jaffray Companies following completion of our spin-off from U.S. Bancorp on December 31, 2003. He has served as chief executive officer of our broker dealer subsidiary since 2000 and as president of our broker dealer subsidiary since 1996. He has been with Piper Jaffray since 1980. Prior to the spin-off from U.S. Bancorp, Mr. Duff also was a vice chairman of U.S. Bancorp from 1999 through 2003.

     Addison L. Piper is our vice chairman. Mr. Piper has worked for Piper Jaffray since 1969, serving as assistant equity syndicate manager, director of securities trading, and director of sales and marketing. He served as chief executive officer from 1983 to 2000 and served as chairman from 1988 to 2003. Since 1998, Mr. Piper also has had responsibility for our venture and private capital fund activities. Mr. Piper also is a member of the board of directors of Renaissance Learning Corporation.

     James L. Chosy is our general counsel and secretary. Mr. Chosy has served in these roles since joining Piper Jaffray in March 2001. From 1995 until joining Piper Jaffray, he was vice president, associate general counsel of U.S. Bancorp. He also served as assistant secretary of U.S. Bancorp from 1995 through 2000 and as secretary in 2001 until his move to Piper Jaffray.

     Francis E. Fairman is head of our Public Finance Services business, a position he has held since July 2005. Prior to that, he served as head of the firm’s public finance investment banking group from 1991 to 2005, as well as the head of the firm’s municipal derivative business from 2002 to 2005. He has been with Piper Jaffray since 1983.

     R. Todd Firebaugh is our chief administrative officer. Mr. Firebaugh joined Piper Jaffray as head of planning and communications in December 2003 after serving Piper Jaffray as a consultant since March 2002. He was named chief administrative officer in November 2004. Prior to joining us, he spent 17 years in marketing and strategy within the financial services industry. Most recently, from 1999 to 2001, he was executive vice president of the corporate management office at U.S. Bancorp, and previously served U.S. Bancorp as senior vice president of small business, insurance and investments.

     Robert W. Peterson is head of our Private Client Services business. Mr. Peterson joined Piper Jaffray in 1993 and attained his current position in April 2005, after serving as head of investment research from April 2003 through March 2005. Mr. Peterson served as our head of equity research from November 2000 until April 2003 and as co-head of equity research from May 2000 until November 2000. From 1993 until May 2000, he was a senior research analyst for Piper Jaffray.

     Thomas P. Schnettler is head of our Corporate and Institutional Services business. He has been with Piper Jaffray since 1986 and has held his current position since July 2005, after serving for three years as head of our Equities and Investment Banking group. Mr. Schnettler previously served as co-head of our investment banking department from 2000 to October 2001, and as head of this department from October 2001 to June 2002. From 1988 to 2000, he served Piper Jaffray as a managing director in our investment banking department.

     Sandra G. Sponem is our chief financial officer. Ms. Sponem joined Piper Jaffray in 1992 as accounting manager and was promoted to controller in 1995. She has served as our chief financial officer since 1999.

     Each of our executive officers is a member of our management committee. Our management committee is composed of business line and department heads who report directly to our chief executive officer. Our management committee meets regularly to discuss matters of interest to its respective members and to review firmwide strategy and other issues.

ITEM 1A. RISK FACTORS.

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

          Performance in the financial services industry is heavily influenced by the overall strength of economic conditions and financial market activity, which generally have a direct and material impact on our results of operations and financial condition. These conditions are a product of many factors, which are mostly unpredictable and beyond our control, and may affect the decisions made by financial market participants. Uncertain or unfavorable market or economic conditions could result in reduced transaction volumes, reduced revenue and reduced profitability in any or all of our principal businesses. For example:

• Our investment banking revenue, in the form of underwriting, placement and financial advisory fees, is directly related to the volume and value of the transactions as well as our role in these transactions. 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, which may reduce the amount of business we do, the size of underwriting, placement and advisory fees we receive and our role in the transactions generating these fees.

• 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.

• Changes in interest rates, especially if such changes are rapid, high interest rates 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, resulting in reduced business volume and reduced revenues.

• Our revenue generated from commissions and fees paid by individual investors and net interest on their margin loan balances may decline if a market downturn results in decreased transactions, a decrease in assets under management or a decrease in margin loan balances.

          The cyclical nature of the economy and this industry also leads to volatility in our operating margins, due to the fixed nature of a portion of our compensation expenses and many of our non-compensation expenses, as well as 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. As a result, our financial performance may vary significantly from quarter to quarter and year to year.

Developments in specific sectors of the economy have in the past adversely affected, and may in the future adversely affect, our business and profitability.

          Our results for a particular period may not reflect the overall strength of general economic conditions and financial market activity, due to factors that differentiate our business within the financial services industry. For example:

• Volatility in the business environment for the consumer, financial institutions, health care and technology industries, including but not limited to challenging market conditions for these industries that are disproportionately worse than those impacting the economy and markets generally or downturns in these industries that are independent of general economic and market conditions, may adversely affect our capital markets business.

• A relatively small number of institutional clients generate a meaningful portion of our institutional sales and trading revenues, and failure to replace lost business from our larger institutional clients could materially adversely affect our business and results of operations.

• Our fixed income activities within our capital markets business are centered on public finance investment banking and municipal sales, and we do not participate in every market that could be identified as a fixed income market. As a result, our results in this area may not correlate with the results of other firms or the fixed income market generally.

• Clients of our Private Client Services business are, and historically have been, concentrated in the midwestern states of the United States and, to a lesser extent, the mountain and western states. Because of this concentration, a significant downturn in the economy in any of these regions independent of general economic and market conditions could result in decreased private client activity and a decrease in assets under management, leading to lower revenues and reduced profitability in this business.

We may not be able to compete successfully with other companies in the financial services industry who are often larger and better capitalized than we are.

          The financial services industry is extremely competitive, and our revenues and profitability will suffer if we are unable to compete effectively. We compete generally on the basis of such factors as quality of advice and service, reputation, price, product selection, transaction execution and financial resources. With respect to a number of these factors, we may be at a competitive disadvantage because of our relatively small size compared to some of our competitors. Consolidation in the financial services industry has bolstered 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. Larger financial services firms typically have greater resources than we have, giving them flexibility to offer a broader set of products than we can. For example, larger firms have grown their fixed income businesses by investing in, developing and offering non-traditional products. Because we are smaller, it is more difficult for us to diversify and differentiate our product set, and our fixed income business mix currently is concentrated in traditional categories, potentially with less opportunity for growth than other firms may have. Firms with a larger capital base also have greater flexibility to offer credit products to corporate clients, which can be a significant competitive advantage. To the extent we offer credit products, we expose ourselves to the risk that the counterparty will be unable to meet its obligations, which could lead to financial losses that could adversely affect our business.

          Larger firms may be better able than we are to leverage their fixed cost structure to expand and grow their private client services business. This growth will add to the already intense competitive environment for the desirable, yet relatively small, population of high net worth clients. In addition, changes we are making to our Private Client Services business have resulted in increased business pressures. These changes include a move away from traditional brokerage services where revenues tend to be transactionally based towards broader financial advisory services where there may be greater use of fee-based accounts. Such changes could result in changes in the composition and amount of our private client revenues during the transition period.

We have experienced significant pricing pressure in areas of our business, which may impair our revenues and profitability.

          In recent years we have experienced significant pricing pressures on trading margins and commissions in debt and equity trading. In the fixed income market, regulatory requirements have resulted in greater price transparency, leading to increased price competition and decreased trading margins. In the equity market, we have experienced increased pricing pressure from institutional clients to reduce commissions, and this pressure has been augmented by the increased use of electronic and direct market access trading, which has created additional competitive downward pressure on trading margins. The trend toward using alternative trading systems is continuing to grow, which may result in decreased commission and trading revenue, reduce our participation in the trading markets and our ability to access market

information, and lead to the creation of new and stronger competitors. Institutional clients also have pressured financial services firms to alter “soft dollar” practices under which brokerage firms bundle the cost of trade execution with research products and services, and the SEC is considering additional rulemaking in the soft dollar area. Some institutions are entering into arrangements that separate (or “unbundle”) payments for research products or services from sales commissions. These arrangements have increased the competitive pressures on sales commissions and have affected the value our clients place on high-quality research. Additional pressure on sales and trading revenue may impair the profitability of our capital markets business. Moreover, our inability to reach agreement regarding the terms of unbundling arrangements with institutional clients who are actively seeking such arrangements could result in the loss of those clients, which would likely reduce our institutional commissions. 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, including by reducing the number of brokerage firms they use, and some of our competitors seek to obtain market share by reducing fees, commissions or margins.

Our ability to attract, develop and retain highly skilled and productive employees is critical to the success of our business.

          We face intense competition for qualified employees from other businesses in the financial services industry, and the performance of our business may suffer to the extent we are unable to attract and retain employees effectively, particularly given the relatively small size of our company and our employee base compared to some of our competitors and the geographic locations in which we operate. The primary sources of revenue in each of our business lines are commissions and fees earned on advisory and underwriting transactions and customer accounts managed by our employees, who are regularly recruited by other firms and in most cases are able to take their client relationships with them when they change firms. 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.

          In our Private Client Services business, the mix of experienced and developing financial advisors may affect our results, especially to the extent we replace lost financial advisors with developing financial advisors rather than hiring seasoned advisors who already are highly productive. The future performance of our Private Client Services business will depend, in part, on our ability to retain experienced and highly productive financial advisors, replace lost financial advisors with new recruits of comparable production, increase both the number and productivity of our financial advisors generally and leverage our expense base, and our inability to do so successfully could cause Private Client Services revenues to decline without a comparable decline in expenses.

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. As an underwriter, we also 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, and 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. While we hold a security, we are vulnerable to price and value fluctuations and may experience financial losses to the extent the value of the security decreases and we are unable to timely divest, hedge or transfer our trading position in that security. The value may decline as a result of many factors, including company-specific, market or geopolitical events. Changing market practices also are increasing the risks associated with trading positions. For example, in order to win

business, firms increasingly are committing to purchase large blocks of stock from issuers or significant shareholders, and block trades increasingly are being effected without an opportunity for us to pre-market the transaction, which increases the risk that we may be unable to resell the purchased securities at favorable prices. In addition, increasing reliance on revenues from hedge funds and hedge fund advisors, which are less regulated than many investment company and advisor clients, may expose us to greater risk of financial loss from unsettled trades than is the case with other types of institutional investors. Concentration of risk may result in losses to us even when economic and market conditions are generally favorable for others in our industry.

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. Our fixed income business manages a portfolio of interest rate swaps that hedge the residual cash flows resulting from a tender option bond program. Our fixed income business also provides swaps and other interest rate hedging products to public finance clients, which our company in turn hedges through a counterparty. 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.

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, including outsourced systems, are critical components of our operations, and failure of those systems or other aspects of our operations infrastructure 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 and operating 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 and to provide other services. In the event that any of these service providers fails to adequately perform such services or 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. 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.

          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.

          A disruption in the infrastructure that supports our business due to fire, natural disaster, power or communication failure, act of terrorism or war may affect our ability to service and interact with our clients. If we are not able to implement contingency plans effectively, any such disruption could harm our results of operations.

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. In addition, the scope of new legal and regulatory requirements could require us to invest in additional resources to ensure compliance, and new accounting and disclosure requirements could adversely affect our business.

Regulatory capital requirements may limit 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 U.K.-based broker dealer subsidiary is also subject to similar limitations under U.K. laws. As Piper Jaffray Companies is a holding company, we depend on dividends, distributions and other payments from our subsidiaries to fund all payments on our obligations, including any share repurchases that we may make. These regulatory restrictions may impede access to funds our holding company needs to make payments on any such obligations. 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.

Our exposure to legal liability is significant, and could lead to substantial damages.

          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 and financial condition.

The business operations that we conduct outside of the United States subject us to unique risks.

          To the extent we conduct business outside the United States, we are subject to risks including, without limitation, the risk that we will be unable to provide effective operational support to these business activities, the risk of non-compliance with foreign laws and regulations, the general economic and political conditions in countries where we conduct business and currency fluctuations. If we are unable to manage these risks effectively, our reputation and results of operations could be harmed.

We may suffer losses if our reputation is harmed.

          Our ability to attract and retain customers and employees may be diminished to the extent our reputation is damaged. If we fail, or are perceived to fail, to address 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, customer privacy, record-keeping, sales and trading practices, and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products and services. Failure to appropriately address these issues could give rise to additional complaints, claims and enforcement proceedings against us, which could, in turn, subject us to fines, judgments and other penalties.

Our stock price may fluctuate as a result of several factors, including but not limited to changes in our revenues and operating results.

          We have experienced, and expect to experience in the future, fluctuations in the market price of our common stock due to factors that relate to the nature of our business, including but not limited to changes in our revenues and operating results. We may not achieve steady and predictable earnings on a quarterly basis, which could cause fluctuations in our stock price. Other factors that may affect our stock price include changes in competitive conditions in the securities industry, developments in regulation affecting our business, failure to meet the expectations of market analysts and changes in recommendations by market analysts.

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.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

     Not applicable.

ITEM 2. PROPERTIES.

     As of February 27, 2006, we conducted our operations through more than 102 offices, of which 91 included Private Client Services operations and 22 included Capital Markets operations, in 22 states and in London, England. All of our offices are leased. Our principal executive offices are located at 800 Nicollet Mall, Suite 800, Minneapolis, Minnesota and, as of February 27, 2006, comprise approximately 320,000 square feet of leased space. We have entered into a sublease arrangement with U.S. Bancorp, as lessor, for our offices at 800 Nicollet Mall, the term of which expires on May 29, 2014.

ITEM 3. 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 businesses 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 judgment. In turn, U.S. Bancorp agreed to indemnify us for certain legal proceedings relating to our business prior to the spin-off (as described in Note 14 to our consolidated financial statements, included in this Form 10-K).

     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.

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. A status conference was held with the court on July 11, 2003, for purposes of establishing a case management plan setting forth discovery deadlines, selecting focus cases and briefing class certification. Seventeen focus cases were selected, including eleven cases for purposes of merits discovery and six cases for purposes of class certification. We are named defendants in two of the merits focus cases and none of the class certification focus cases. On October 13, 2004, the court issued an opinion largely granting plaintiffs’ motions for class certification in the six class certification focus cases. Defendants filed a petition seeking leave to appeal the class certification ruling on October 27, 2004. Plaintiffs filed their opposition to the petition on November 8, 2004, and defendants filed their reply in further support of the petition on November 15, 2004. The United States Court of Appeals for the Second Circuit granted the defendants’ petition on June 30, 2005. Defendants filed their brief on October 3, 2005. Plaintiffs’ response was filed on December 19, 2005, and defendants filed their reply on January 27, 2006. Oral arguments were scheduled for February 28, 2006 but subsequently have been postponed. Discovery is proceeding at this time with respect to the remaining eleven focus cases selected for merits discovery.

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 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 sought 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, and 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, but 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, and defendants filed their brief in opposition to plaintiffs’ motion for class certification on May 25, 2005. Plaintiffs’ reply brief in support of their motion for class certification was filed on October 20, 2005, and defendants filed a surreply brief in opposition to class certification on November 15, 2005. Oral argument with respect to the class certification motion has not yet been scheduled. Plaintiffs filed a summary judgment motion on liability on October 25, 2005. Discovery is proceeding at this time.

     Similar purported class actions also have 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, a 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 filed their brief in opposition to plaintiffs’ motion for class certification on May 25, 2005, and plaintiffs’ reply brief in support of their motion for class certification was filed on October 20, 2005. Defendants filed a surreply brief in opposition to class certification on November 15, 2005. Oral argument with respect to the class certification motion has not yet been scheduled. Plaintiffs filed a summary judgment motion on liability on October 25, 2005. Discovery is proceeding at this time.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     During the fourth quarter of 2005, we did not submit any matters to a vote of our shareholders.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

     The section of our 2005 Annual Report to Shareholders entitled “Market for Piper Jaffray Common Stock and Related Shareholder Matters” is incorporated herein by reference and also is included in Exhibit 13.1 to this Form 10-K.

     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.

     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 quarter ended December 31, 2005.

					Total Number of Shares
	Total Number of				Purchased as Part of		Maximum Number of Shares
	Shares		Average Price		Publicly Announced		that May Yet Be Purchased
Period	Purchased(1)		Paid per Share		Plans or Programs		Under the Plans or Programs
Month #1 (October 1, 2005 to October 31, 2005)		7,608	$	30.31		7,608		0

⁽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 was authorized through December 31, 2005. On October 4, 2005, we completed the purchase of the 1.3 million shares authorized by the board of directors. Purchases under the program were made in the open market pursuant to a 10b5-1 plan established with an independent agent. The 10b5-1 plan was 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 accelerated or decelerated based on high or low trading volumes, respectively.

ITEM 6. SELECTED FINANCIAL DATA.

     The section of our 2005 Annual Report to Shareholders entitled “Selected Financial Data” is incorporated herein by reference and also is included in Exhibit 13.1 to this Form 10-K.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     The section of our 2005 Annual Report to Shareholders entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference and also is included in Exhibit 13.1 to this Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

     The section of our 2005 Annual Report to Shareholders entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Enterprise Risk Management” is incorporated herein by reference and also is included in Exhibit 13.1 to this Form
10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The consolidated financial statements and notes thereto included in our 2005 Annual Report to Shareholders are incorporated herein by reference and also are included in Exhibit 13.1 to this Form 10-K. The section of our 2005 Annual Report to Shareholders entitled “Supplemental Information—Quarterly Information” is incorporated herein by reference and also is included in Exhibit 13.1 to this Form
10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

     Not applicable.

ITEM 9A. CONTROLS 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. During the fourth quarter of our fiscal year ended December 31, 2005, there was no change in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

     Management’s Report on Internal Control Over Financial Reporting and the attestation report of our independent registered public accounting firm on management’s assessment of internal control over financial reporting are included in our 2005 Annual Report to Shareholders and are incorporated herein by reference, and these reports also are included in Exhibit 13.1 to this Form 10-K.

ITEM 9B. OTHER INFORMATION.

     Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information regarding our executive officers included in Part I of this Form 10-K under the caption “Executive Officers” is incorporated herein by reference. The information in the definitive proxy statement for our 2006 annual meeting of shareholders to be held on May 2, 2006, under the captions “Class III Directors—Nominees for Terms Ending in 2009,” “Class I Directors—Terms Ending in 2007,” “Class II Directors—Terms Ending in 2008,” “Information Regarding the Board of Directors and Corporate Governance—Committees of the Board—Audit Committee,” “Information Regarding the Board of Directors and Corporate Governance—Codes of Ethics and Business Conduct” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

     The information in the definitive proxy statement for our 2006 annual meeting of shareholders to be held on May 2, 2006, under the captions “Executive Compensation” (excluding information under the caption “Executive Compensation—Report of the Compensation Committee”), “Certain Relationships and Related Transactions—Compensation Committee Interlocks and Insider Participation” and “Information Regarding the Board of Directors and Corporate Governance—Compensation Program for Non-Employee Directors” is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS.

     The information in the definitive proxy statement for our 2006 annual meeting of shareholders to be held on May 2, 2006, under the captions “Security Ownership—Beneficial Ownership of Directors, Nominees and Executive Officers,” “Security Ownership—Beneficial Owners of More than Five Percent of Our Common Stock” and “ Item 2—Outstanding Equity Awards” are incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information in the definitive proxy statement for our 2006 annual meeting of shareholders to be held on May 2, 2006, under the caption “Certain Relationships and Related Transactions—Related Transactions Involving Our Directors and Executive Officers” is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

     The information in the definitive proxy statement for our 2006 annual meeting of shareholders to be held on May 2, 2006, under the captions “Audit Committee Report and Payment of Fees to Our Independent Auditor—Auditor Fees” and “Audit Committee Report and Payment of Fees to Our Independent Auditor—Auditor Services Pre-Approval Policy” is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)(1) FINANCIAL STATEMENTS OF THE COMPANY.

     The Consolidated Financial Statements incorporated herein by reference and included in Exhibit 13.1 to this Form 10-K are listed on page F-1 by reference to the corresponding page numbers in our 2005 Annual Report to Shareholders.

(a)(2) FINANCIAL STATEMENT SCHEDULES.

     The financial statement schedule required to be filed hereunder is listed on page F-1. All other financial statement schedules are not required under the related instructions or are inapplicable and therefore have been omitted.

     (a)(3) EXHIBITS.

Exhibit		Method of
Number	Description	Filing
2.1	Separation and Distribution Agreement, dated as of December 23, 2003, between U.S. Bancorp and Piper Jaffray Companies. #		(1	)
3.1	Amended and Restated Certificate of Incorporation.		(1	)
3.2	Amended and Restated Bylaws.		(1	)
4.1	Form of Specimen Certificate for Piper Jaffray Companies Common Stock.		(2	)
4.2	Rights Agreement, dated as of December 31, 2003, between Piper Jaffray Companies and Mellon Investor Services LLC, as Rights Agent. #		(1	)
10.1	Employee Benefits Agreement, dated as of December 23, 2003, between U.S. Bancorp and Piper Jaffray Companies. #		(1	)
10.2	Tax Sharing Agreement, dated as of December 23, 2003, between U.S. Bancorp and Piper Jaffray Companies. #		(1	)
10.3	Insurance Matters Agreement, dated as of December 23, 2003, between U.S. Bancorp and Piper Jaffray Companies. #		(1	)
10.4	Subordinated Loan Agreement, dated as of December 22, 2003, between USB Holdings, Inc. and U.S. Bancorp Piper Jaffray Inc.		(1	)
10.5	Sublease Agreement, dated as of September 18, 2003, between U.S. Bancorp and U.S. Bancorp Piper Jaffray Inc.		(3	)
10.6	Summary of Employment Arrangement with Addison L. Piper.*		(4	)
10.7	Form of Cash Award Agreement.*		(1	)
10.8	U.S. Bancorp Piper Jaffray Inc. Second Century 2000 Deferred Compensation Plan.*		(1	)
10.9	U.S. Bancorp Piper Jaffray Inc. Second Century Growth Deferred Compensation Plan (As Amended and Restated Effective September 30, 1998).*		(1	)
10.10	Piper Jaffray Companies Amended and Restated 2003 Annual and Long-Term Incentive Plan (“LTIP”).*		(5	)
10.11	Form of Stock Option Agreement for Annual Employee Grant under the LTIP.*	Filed herewith

Exhibit		Method of
Number	Description	Filing
10.12	Form of Restricted Stock Agreement for Annual Employee Grant under the LTIP.*		(5	)
10.13	Form of Stock Option Agreement for Non-Employee Director Grants under the LTIP.*		(5	)
10.14	Piper Jaffray Companies Deferred Compensation Plan for Non-Employee Directors.*		(6	)
10.15	Summary of Non-Employee Director Compensation Program.*	Filed herewith
10.16	Summary of 2006 Annual Incentive Program for Certain Executive Officers.*		(7	)
13.1	Selected Portions of the 2005 Annual Report to Shareholders.	Filed herewith
21.1	Subsidiaries of Piper Jaffray Companies.	Filed herewith
23.1	Consent of Ernst & Young LLP.	Filed herewith
24.1	Power of Attorney.	Filed herewith
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	Section 1350 Certifications.	Filed herewith

*	Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit to this report.
#	The Company hereby agrees to furnish supplementally to the Commission upon request any omitted exhibit or schedule.
(1)	Filed as an exhibit to the Company’s Form 10-K for the fiscal year end December 31, 2003, filed with the Commission on March 8, 2004, and incorporated herein by reference.
(2)	Filed as an exhibit to the Company’s Form 10, filed with the Commission on June 25, 2003, and incorporated herein by reference.
(3)	Filed as an exhibit to the Company’s Amendment No. 2 to Form 10, filed with the Commission on October 23, 2003, and incorporated herein by reference.
(4)	Filed as an exhibit to the Company’s Amendment No. 1 to Form 10, filed with the Commission on August 22, 2003, and incorporated herein by reference.
(5)	Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended June 30, 2004, filed with the Commission on August 4, 2004.
(6)	Incorporated herein by reference to Item 1.01 of the Company’s Form 8-K, filed with the Commission on December 15, 2004.
(7)	Incorporated herein by reference to Item 1.01 of the Company’s Form 8-K, filed with the Commission on February 23, 2006.

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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 March 1, 2006.

PIPER JAFFRAY COMPANIES
 

By /s/ Andrew S. Duff  

Its Chairman and Chief Executive Officer 

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 1, 2006.

SIGNATURE	TITLE
/s/ Andrew S. Duff	Chairman, Chief Executive Officer and Director
Andrew S. Duff	(Principal Executive Officer)
/s/ Sandra G. Sponem	Chief Financial Officer (Principal Financial and
Sandra G. Sponem	Accounting Officer)
/s/ Addison L. Piper	Vice Chairman and Director
Addison L. Piper
/s/ Michael R. Francis	Director
Michael R. Francis
/s/ B. Kristine Johnson	Director
B. Kristine Johnson
/s/ Samuel L. Kaplan	Director
Samuel L. Kaplan
/s/ Frank L. Sims	Director
Frank L. Sims
/s/ Jean M. Taylor	Director
Jean M. Taylor
/s/ Richard A. Zona	Director
Richard A. Zona

PIPER JAFFRAY COMPANIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

	Page
	Form		Annual
	10-K		Report
Consolidated Financial Statements
Management’s Report on Internal Control Over Financial Reporting				32
Report of Independent Registered Public Accounting Firm				33
Report of Independent Registered Public Accounting Firm				34
Consolidated Financial Statements
Consolidated Statements of Financial Condition				35
Consolidated Statements of Operations				36
Consolidated Statements of Changes in Shareholders’ Equity				37
Consolidated Statements of Cash Flows				38
Notes to Consolidated Financial Statements				39
Financial Statement Schedule
Schedule I — Piper Jaffray Companies (Parent Company Only) Financial Statements
Report of Independent Registered Public Accounting Firm		F-2
Statements of Financial Condition		F-3
Statements of Operations		F-4
Statements of Cash Flows		F-5
Notes to Financial Statements		F-6

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
of Piper Jaffray Companies (Parent Company Only)

We have audited the accompanying statements of financial condition of Piper Jaffray Companies (Parent Company Only) as of December 31, 2005 and 2004, and the related statements of operations and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Piper Jaffray Companies (Parent Company Only) at December 31, 2005 and 2004, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

                    /s/ Ernst & Young LLP

Minneapolis, Minnesota
February 24, 2006

F-2

Piper Jaffray Companies
(Parent Company Only)
Statements of Financial Condition

	December 31,
(Amounts in thousands)	2005		2004
Assets
Cash and cash equivalents	$	1,906	$	—
Investment in and advances to subsidiaries		752,921		726,932
	$	754,827	$	726,932
Liabilities and Shareholders’ Equity
Other liabilities and accrued expenses	$	—	$	1,504
Shareholders’ equity		754,827		725,428
Total liabilities and shareholders’ equity	$	754,827	$	726,932

See Notes to Financial Statements

F-3

Piper Jaffray Companies
(Parent Company Only)
Statements of Operations

	Year Ended December 31,
(Dollars in thousands)	2005			2004
Revenues:
Dividends from subsidiaries	$	1,900		$	2,368
Interest income		24			—
Total revenues		1,924			2,368
Interest expense		—			—
Net revenues		1,924			2,368
Non-interest expenses:
Total non-interest expenses		4,774			5,852
Loss before income tax benefit and equity in undistributed income of subsidiaries		(2,850	)		(3,484	)
Income tax benefit		(980	)		(1,280	)
Loss of parent company		(1,870	)		(2,204	)
Equity in undistributed income of subsidiaries		41,953			52,552
Net income	$	40,083		$	50,348

See Notes to Financial Statements

F-4

Piper Jaffray Companies
(Parent Company Only)
Statements of Cash Flows

	Year Ended December 31,
(Dollars in thousands)	2005			2004
Operating Activities:
Net income	$	40,083		$	50,348
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Stock-based compensation		292			300
Equity in undistributed income of subsidiaries		(41,953	)		(52,552	)
Net cash used in operating activities		(1,578	)		(1,904	)
Financing Activities:
Advances from subsidiaries		46,096			1,904
Repurchase of common stock		(42,612	)		—
Net cash provided by financing activities		3,484			1,904
Net increase in cash and cash equivalents		1,906			—
Cash and cash equivalents at beginning of year		—			—
Cash and cash equivalents at end of year	$	1,906		$	—
Supplemental disclosures of cash flow information
Cash received during the year for:
Interest	$	24		$	—
Income taxes	$	980		$	1,280

See Notes to Financial Statements

F-5

Piper Jaffray Companies
(Parent Company Only)
Notes to Financial Statements

Note 1 Background

Background

     Piper Jaffray Companies (“Parent Company”) 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; Piper Jaffray Financial Products Inc. and Piper Jaffray Financial Products II Inc., two entities that facilitate Piper Jaffray Companies customer derivative transactions; and Piper Jaffray Ventures Inc. (“Piper Jaffray Ventures”), which served until December 31, 2004, as a venture capital firm managing funds that invested in emerging growth companies. Effective December 31, 2004, the management of these funds transitioned to an independent company.

     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”).

     The Parent Company had no operating activity during the period from its date of incorporation on April 28, 2003, through December 31, 2003, and thus, no Statement of Operations or Statement of Cash Flows are presented for this period.

General

     The financial information of the Parent Company should be read in conjunction with the consolidated financial statements of Piper Jaffray Companies and the notes thereto in the Piper Jaffray Companies 2005 Annual Report to Shareholders and also included in Exhibit 13.1 to this Form 10-K.

Use of Estimates

     The preparation of the financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 2 Dividend Restrictions

     As a registered broker dealer and member firm of the NYSE, Piper Jaffray is subject to the Uniform Net Capital Rule of the SEC and the net capital rule of the NYSE. Piper Jaffray has elected to use the alternative method permitted by the SEC 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 SEC rule. Under the NYSE 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. As of December 31, 2005, Piper Jaffray exceeded 5 percent of aggregate debits by $286.4 million. Advances to affiliates, repayment of subordinated debt, dividend payments and other equity withdrawals

F-6

Piper Jaffray Companies
(Parent Company Only)
Notes to Financial Statements

by Piper Jaffray are subject to certain notification and other provisions of the SEC and NYSE rules. In addition, Piper Jaffray is subject to certain notification requirements related to withdrawals of excess net capital.

Note 3 Guarantees

     The Parent Company has guaranteed certain obligations and activities of Piper Jaffray Ltd. related to lease obligations, underwriting activities and custody and clearance arrangements with counterparties. In addition, the Parent Company has guaranteed the performance of certain of its subsidiaries derivatives activities.

Note 4 Reclassifications

     Certain prior period amounts have been reclassified to conform to the current year presentation.

Exhibit Index

Exhibit		Method of
Number	Description	Filing
2.1	Separation and Distribution Agreement, dated as of December 23, 2003, between U.S. Bancorp and Piper Jaffray Companies. #		(1	)
3.1	Amended and Restated Certificate of Incorporation.		(1	)
3.2	Amended and Restated Bylaws.		(1	)
4.1	Form of Specimen Certificate for Piper Jaffray Companies Common Stock.		(2	)
4.2	Rights Agreement, dated as of December 31, 2003, between Piper Jaffray Companies and Mellon Investor Services LLC, as Rights Agent. #		(1	)
10.1	Employee Benefits Agreement, dated as of December 23, 2003, between U.S. Bancorp and Piper Jaffray Companies. #		(1	)
10.2	Tax Sharing Agreement, dated as of December 23, 2003, between U.S. Bancorp and Piper Jaffray Companies. #		(1	)
10.3	Insurance Matters Agreement, dated as of December 23, 2003, between U.S. Bancorp and Piper Jaffray Companies. #		(1	)
10.4	Subordinated Loan Agreement, dated as of December 22, 2003, between USB Holdings, Inc. and U.S. Bancorp Piper Jaffray Inc.		(1	)
10.5	Sublease Agreement, dated as of September 18, 2003, between U.S. Bancorp and U.S. Bancorp Piper Jaffray Inc.		(3	)
10.6	Summary of Employment Arrangement with Addison L. Piper.*		(4	)
10.7	Form of Cash Award Agreement.*		(1	)
10.8	U.S. Bancorp Piper Jaffray Inc. Second Century 2000 Deferred Compensation Plan.*		(1	)
10.9	U.S. Bancorp Piper Jaffray Inc. Second Century Growth Deferred Compensation Plan (As Amended and Restated Effective September 30, 1998).*		(1	)
10.10	Piper Jaffray Companies Amended and Restated 2003 Annual and Long-Term Incentive Plan (“LTIP”).*		(5	)
10.11	Form of Stock Option Agreement for Annual Employee Grant under the LTIP.*	Filed herewith
10.12	Form of Restricted Stock Agreement for Annual Employee Grant under the LTIP.*		(5	)
10.13	Form of Stock Option Agreement for Non-Employee Director Grants under the LTIP.*		(5	)
10.14	Piper Jaffray Companies Deferred Compensation Plan for Non-Employee Directors.*		(6	)
10.15	Summary of Non-Employee Director Compensation Program.*	Filed herewith
10.16	Summary of 2006 Annual Incentive Program for Certain Executive Officers.*		(7	)
13.1	Selected Portions of the 2005 Annual Report to Shareholders.	Filed herewith

Exhibit		Method of
Number	Description	Filing
21.1	Subsidiaries of Piper Jaffray Companies.	Filed herewith
23.1	Consent of Ernst & Young LLP.	Filed herewith
24.1	Power of Attorney.	Filed herewith
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	Section 1350 Certifications.	Filed herewith

*	Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit to this report.
#	The Company hereby agrees to furnish supplementally to the Commission upon request any omitted exhibit or schedule.
(1)	Filed as an exhibit to the Company’s Form 10-K for the fiscal year ended December 31, 2003, filed with the Commission on March 8, 2004, and incorporated herein by reference.
(2)	Filed as an exhibit to the Company’s Form 10, filed with the Commission on June 25, 2003, and incorporated herein by reference.
(3)	Filed as an exhibit to the Company’s Amendment No. 2 to Form 10, filed with the Commission on October 23, 2003, and incorporated herein by reference.
(4)	Filed as an exhibit to the Company’s Amendment No. 1 to Form 10, filed with the Commission on August 22, 2003, and incorporated herein by reference.
(5)	Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended June 30, 2004, filed with the Commission on August 4, 2004.
(6)	Incorporated herein by reference to Item 1.01 of the Company’s Form 8-K, filed with the Commission on December 15, 2004.
(7)	Incorporated herein by reference to Item 1.01 of the Company’s Form 8-K, filed with the Commission on February 23, 2006.

EX-10.11

Exhibit 10.11

PIPER JAFFRAY COMPANIES
AMENDED AND RESTATED
2003 ANNUAL AND LONG-TERM INCENTIVE PLAN

NON-QUALIFIED STOCK OPTION AGREEMENT
(Employee)

Full Name of Optionee:
No. of Shares Covered:	Date of Grant:
Exercise Price Per Share:	Expiration Date:
Exercise Schedule pursuant to Section 4:
	No. of Shares as to Which Option
Date of Vesting	Becomes Exercisable as of Such Date

     This is a Non-Qualified Stock Option Agreement (this “Agreement”) between Piper Jaffray Companies, a Delaware corporation (the “Company”), and the optionee identified above (the “Optionee”) effective as of the date of grant specified above.

Recitals

     WHEREAS, the Company maintains the Piper Jaffray Companies Amended and Restated 2003 Annual and Long-Term Incentive Plan, as amended from time to time (the “Plan”);

     WHEREAS, the Board of Directors of the Company has appointed the Compensation Committee (the “Committee”) with the authority to determine the awards to be granted under the Plan; and

     WHEREAS, the Committee or its delegee has determined that the Optionee is eligible to receive an award under the Plan in the form of a Non-Qualified Stock Option (this “Option”) and has set the terms thereof;

     NOW, THEREFORE, the Company hereby grants this Option to the Optionee under the terms set by the Committee as follows:

Terms and Conditions^*

     1. Grant. Subject to the terms of the Plan, the Optionee is granted this Option to purchase the number of Shares specified at the beginning of this Agreement on the terms set forth herein.

     2. Exercise Price. The price to the Optionee of each Share subject to this Option is the exercise price specified at the beginning of this Agreement.

     3. Not an Incentive Stock Option. This Option is not intended to be an “incentive stock option” within the meaning of Section 422 of the Code.

     4. Exercise Schedule. Subject to the terms of the Plan and Sections 7 and 8 of this Agreement, this Option shall become exercisable as to the number of Shares and on the dates specified in the Exercise Schedule at the beginning of this Agreement. The Exercise Schedule shall be cumulative; thus, to the extent this Option has not already been exercised and has not expired, terminated, or been canceled, the Optionee may at any time, and from time to time, purchase any portion of the Shares then purchasable under the Exercise Schedule.

     This Option may be exercised in full (notwithstanding the Exercise Schedule) under the circumstances described in Section 8 of this Agreement if it has not expired prior thereto.

     5. Expiration. This Option shall expire at 4:00 p.m. Central Time on the earliest of:

          (a) the expiration date specified at the beginning of this Agreement;

          (b) termination of the Optionee’s employment with the Company or an Affiliate if such termination is for “Cause” (as defined below), in which event this Option shall immediately expire. “Cause” means (i) the Employee’s continued failure to substantially perform his or her duties with the Company or an Affiliate after demand for substantial performance is delivered to the Employee, (ii) the Employee’s conviction of a crime (including misdemeanors) that, in the Company’s determination, impairs the Employee’s ability to perform his or her duties with the Company or an Affiliate, (iii) the Employee’s violation of any policy of the Company or an Affiliate that the Company deems material, (iv) the Employee’s violation of any securities law, rule or regulation that the Company deems material, (v) the Employee’s engagement in conduct that, in the Company’s determination, exposes the Company or an Affiliate to civil or regulatory liability or injury to their reputations, (vi) the Employee’s engagement in conduct that would subject the Employee to statutory disqualification pursuant to Section 15(b) of the Exchange Act and the regulations promulgated thereunder, or (vii) the Employee’s gross or willful misconduct, as determined by the Company; or

          (c) the last day of the period as of or following the termination of employment of the Optionee during which this Option can be exercised, as specified in Section 7 of this Agreement.

^* Unless the context indicates otherwise, capitalized terms that are not defined in this Agreement have the meanings set forth in the Plan.

2

No one may exercise this Option after it has expired, notwithstanding any other provision of this Agreement. This Option will continue to vest and be exercisable during the continuance of any leave of absence approved by the Company or an Affiliate.

     6. Procedure to Exercise Option.

          (a) Notice of Exercise. Subject to the terms of this Agreement, this Option may be exercised by delivering written notice of exercise to the Company at its headquarters in a form provided by the Company or a similar form containing substantially the same information and addressed or delivered to the attention of Executive Compensation. The notice shall state the election to exercise this Option, the number of Shares to be purchased, and shall be signed by the person exercising this Option. If the person exercising this Option is not the Optionee, he or she also must submit appropriate proof of his or her right to exercise this Option.

          (b) Tender of Payment. Any notice of exercise shall be accompanied by:

          (i) payment (by wire transfer, check, bank draft or money order, or, if the purchase price is paid from a client account maintained by the Company’s broker dealer subsidiary, through an internal transfer of funds to an account designated by the Company) of the full purchase price of the Shares being purchased;

          (ii) by delivery to the Company of unencumbered Shares, which have been held by the person exercising this Option for at least 6 months prior to the date of exercise, having an aggregate Fair Market Value on the date of exercise equal to the purchase price of such Shares; or

          (iii) any combination of (i) or (ii) above.

Notwithstanding the other terms of this subparagraph, the Optionee shall not be permitted to pay any portion of the purchase price of the Shares being purchased with Shares if the Committee believes that payment in such manner is undesirable.

          (c) Delivery of Shares. As soon as practicable after the Company receives a properly executed notice from the person exercising this Option and the purchase price provided for above, it shall cause a book entry to be made by the Company’s transfer agent in the name of such person evidencing the Shares being purchased (unless such person requests a stock certificate evidencing such Shares). The Company shall pay any original issue or transfer taxes with respect to the issue or transfer of the Shares and all fees and expenses incurred by it in connection therewith. All Shares so issued shall be fully paid and nonassessable. Notwithstanding anything to the contrary in this Agreement, the Company shall not be required to issue or deliver any Shares before the completion of such registration or other qualification of such Shares under any state law, rule, or regulation as the Company determines to be necessary or desirable.

3

     7. Employment Requirement. This Option may be exercised only while the Optionee remains employed with the Company or an Affiliate, and only if the Optionee has been continuously so employed since the date of this Agreement; provided that:

          (a) this Option may be exercised for 90 days after the date the Optionee’s employment by the Company or an Affiliate ceases if such cessation of employment is for a reason other than death, Disability (as defined below), Qualifying Retirement (as defined below) or termination for Cause, but only to the extent that it was exercisable immediately prior to cessation of employment;

          (b) this Option may be exercised within three years after the Optionee’s employment by the Company or an Affiliate ceases if (i) (A) such cessation of employment is because of the Employee’s death or (B) the Optionee dies within 90 days after cessation of employment by the Company or an Affiliate for any reason other than for Cause and (ii) the Optionee’s employment by the Company or an Affiliate has been continuous between the date of this Option and a date not more than 90 days prior to death;

          (c) this Option may be exercised within one year after the Optionee’s employment by the Company or an Affiliate ceases if such cessation of employment is because of the Optionee’s long-term disability (as defined in the Company’s long-term disability plan, a “Disability”) and the Optionee’s employment by the Company or an Affiliate has been continuous between the date of this Option and the date of such cessation. During the one-year exercise period provided by this Section, this Option may be exercised only to the extent that it was exercisable immediately prior to the Optionee’s cessation of employment; and

          (d) this Option may be exercised until the expiration date specified at the beginning of this Agreement, and shall continue to vest in accordance with the Exercise Schedule at the beginning of this Agreement, if the Optionee’s employment by the Company or an Affiliate ceases in connection with a Qualifying Retirement. A “Qualifying Retirement” means cessation of the Optionee’s employment by the Company or an Affiliate (excluding termination for Cause) when (i) such Optionee is 55 years of age or older and (ii) such Optionee has five (5) or more years of qualifying service (as defined in the Piper Jaffray Companies Retirement Plan) with the Company or an Affiliate.

Notwithstanding the above, this Option may not be exercised after it has expired.

     8. Acceleration of Option.

          (a) Death. If (i) the Optionee’s employment with the Company or an Affiliate is terminated because of the Optionee’s death or (ii) the Optionee dies within 90 days after termination of employment by the Company or an Affiliate for any reason other than for Cause, then any portion of this Option that was not previously exercisable shall become immediately exercisable in full.

          (b) Discretionary Acceleration. Notwithstanding any other provisions of this Agreement to the contrary, the Committee may, in its sole discretion, declare at any time that this Option shall be immediately exercisable.

4

     9. Limitation on Transfer. While the Optionee is alive, only the Optionee (or his or her legal representative) may exercise this Option. Unless otherwise permitted by the Committee in accordance with the terms of the Plan, this Option may not be assigned or transferred other than by will or the laws of descent and distribution and shall not be subject to pledge, hypothecation, execution, attachment, or similar process. Any attempt to assign, transfer, pledge, hypothecate, or otherwise dispose of this Option contrary to the provisions hereof, and the levy of any attachment or similar process upon this Option, shall be void.

     10. No Stockholder Rights Before Exercise. No person shall have any of the rights of a stockholder of the Company with respect to any Share subject to this Option until the Share actually is issued to him or her upon exercise of this Option.

     11. Discretionary Adjustment. The Committee may make appropriate adjustments in the number of Shares subject to this Option and in the purchase price per Share to give effect to any adjustments made in the number of outstanding Shares through a Change in Control, recapitalization, reclassification, stock dividend, stock split, reverse stock split, stock combination or other relevant change; provided that fractional Shares shall be rounded to the nearest whole Share. Notwithstanding the foregoing, to the extent that any Option is otherwise considered to be deferred compensation under Section 409A of the Code, any adjustment to such Option will comply with Section 409A of the Code (including current and future guidance issued by the Department of Treasury and/or Internal Revenue Service).

     12. Tax Withholding. Delivery of Shares upon exercise of this Option shall be subject to any required withholding taxes. As a condition precedent to receiving Shares upon exercise of this Option, the Optionee may be required to pay to the Company, in accordance with the provisions of the Plan, an amount equal to the amount of any required withholdings. The Optionee acknowledges that the Company has directed the Optionee to seek independent advice regarding the applicable provisions of the Code, the income tax laws of any municipality, state or foreign country in which the Optionee may reside, and the tax consequences of the Optionee’s death.

     13. Interpretation of This Agreement. All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the Company and the Optionee. If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.

     14. Discontinuance of Employment. This Agreement shall not give the Optionee a right to continued employment with the Company or any Affiliate, and the Company or Affiliate employing the Optionee may terminate his or her employment and otherwise deal with the Optionee without regard to the effect it may have upon him or her under this Agreement.

     15. Obligation to Reserve Sufficient Shares. The Company shall at all times during the term of this Option reserve and keep available a sufficient number of Shares to satisfy this Agreement.

     16. Binding Effect. This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Optionee.

5

     17. Choice of Law. This Agreement is entered into under the laws of the State of Delaware and shall be construed and interpreted thereunder (without regard to its conflict-of-law principles).

     18. Entire Agreement. This Agreement and the Plan set forth the entire agreement and understanding of the parties hereto with respect to the grant and exercise of this Option and the administration of the Plan and supersede all prior agreements, arrangements, plans, and understandings relating to the grant and exercise of this Option and the administration of the Plan.

     19. Amendment and Waiver. Except as provided in the Plan, this Agreement may be amended, waived, modified, or canceled only by a written instrument executed by the parties or, in the case of a waiver, by the party waiving compliance.

     20. Acknowledgment of Receipt of Copy. By execution hereof, the Optionee acknowledges having received a copy of the prospectus related to the Plan and instructions on how to access a copy of the Plan.

6

     IN WITNESS WHEREOF, the Optionee and the Company have executed this Agreement as of the date of grant specified at the beginning of this Agreement.

OPTIONEE
PIPER JAFFRAY COMPANIES
By
	Its

7

EX-10.15

Exhibit 10.15

PIPER JAFFRAY COMPANIES
SUMMARY OF NON-EMPLOYEE DIRECTOR COMPENSATION PROGRAM

     Directors who are not Piper Jaffray employees receive an annual cash retainer of $50,000 for service on our Board of Directors and the committees of the Board. No separate meeting fees are paid. The lead director and the chairperson of the Audit Committee each receives an additional annual cash retainer of $8,000. The chairperson of each other standing committee of the Board each receives an additional annual cash retainer of $5,000.

     In addition to the cash retainer, each non-employee director receives a grant of stock options with a fair market value of $20,000 on the date of the director’s initial election to the Board. Non-employee directors who will continue their service on the Board following an annual meeting of shareholders receive a grant of stock options valued at $50,000 on the date of the annual meeting. In both cases, the number of shares underlying the option is determined using the Black-Scholes option-pricing model, and the option is exercisable immediately, has a 10-year term and has an exercise price equal to the closing price of our common stock on the date of grant. The options are granted under our Amended and Restated 2003 Annual and Long-Term Incentive Plan. These equity awards are intended to help align the interests of our directors with those of our shareholders. Non-employee directors who join our Board after the first month of a calendar year are paid pro rata annual retainers and are awarded pro rata equity awards based on the period in which they serve as directors during the year.

     Beginning with the 2005 calendar year, non-employee directors became eligible to participate in the Piper Jaffray Companies Deferred Compensation Plan for Non-Employee Directors, which was adopted by the Board in December 2004 as a way to facilitate increased equity ownership in the company. The plan permits our non-employee directors to defer all or a portion of the cash fees payable to them for their service as a director of Piper Jaffray for any calendar year. Amounts deferred by a participating director are credited to a recordkeeping account established for the director and deemed invested in shares of our common stock as of the date the deferred fees otherwise would have been paid to the director. This deemed investment is measured in phantom stock, and no shares of common stock are reserved, repurchased or issued pursuant to the plan. The fair market value of all phantom stock credited to a director’s account will be paid out to the director (or, in the event of the director’s death, to his or her beneficiary) in a single lump-sum cash payment following the director’s cessation of service as a non-employee director. The amount paid out will be determined based on the fair market value of the stock on the last day of the year in which the director’s service with us terminates. Directors who elect to participate in the plan are not required to pay income taxes on amounts deferred but will instead pay income taxes on the amount of the lump-sum cash payment paid to the director (or his or her beneficiary) at the time of such payment. Our obligations under the plan are unsecured general obligations to pay in the future the value of the participant’s account pursuant to the terms of the plan.

     Non-employee directors also may participate in our charitable gift matching program, pursuant to which we will match an employee’s or director’s gifts to eligible organizations dollar for dollar from a minimum of $50 up to an aggregate maximum of $1,000 per year. In addition, our non-employee directors are reimbursed for reasonable out-of-pocket expenses incurred in connection with their service on the Board and committees of the Board.

EX-13.1

Piper Jaffray Companies

SELECTED FINANCIAL DATA

The following table presents our selected consolidated financial data for the periods and dates indicated. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto.

FOR THE YEAR ENDED DECEMBER 31,
(Dollars and Shares in Thousands, Except Per Share Data)			2005		2004		2003		2002		2001
Revenues:
	Commissions and fees		$	283,481	$	263,730	$	256,747	$	275,682	$	302,289
	Principal transactions			143,391		188,526		215,191		171,957		181,469
	Investment banking			270,758		257,932		229,945		208,740		247,929
	Interest			71,471		54,784		50,536		61,898		95,436
	Other income			45,688		57,967		59,082		47,303		52,865
		Total revenues		814,789		822,939		811,501		765,580		879,988
	Interest expense			39,736		25,441		24,771		36,528		79,216
		Net revenues		775,053		797,498		786,730		729,052		800,772
Non-interest expenses:
	Compensation and benefits			471,674		488,394		482,397		449,329		513,623
	Cash award program			4,206		4,717		24,000		–		–
	Regulatory settlement			–		–		–		32,500		–
	Amortization of acquisition-related compensation and goodwill			–		–		–		–		17,641
	Merger and restructuring			8,595		–		–		7,976		65,697
	Royalty fee			–		–		3,911		7,482		55,753
	Other			229,472		224,766		235,539		226,966		221,940
		Total non-interest expenses		713,947		717,877		745,847		724,253		874,654
Income (loss) before income tax expense (benefit)				61,106		79,621		40,883		4,799		(73,882	)
	Income tax expense (benefit)			21,023		29,273		14,884		4,693		(23,831	)
Net income (loss)			$	40,083	$	50,348	$	25,999	$	106	$	(50,051	)
Earnings per common share
	Basic		$	2.13	$	2.60	$	1.35	$	0.01	$	(2.60	)
	Diluted		$	2.10	$	2.60	$	1.35	$	0.01	$	(2.60	)
Weighted average number of common shares
	Basic			18,813		19,333		19,237		19,160		19,279
	Diluted			19,081		19,399		19,237		19,160		19,279
Other data
	Total assets		$	2,354,191	$	2,828,257	$	2,380,647	$	2,032,452	$	2,734,370
	Long-term debt		$	180,000	$	180,000	$	180,000	$	215,000	$	475,000
	Shareholders’ equity		$	754,827	$	725,428	$	669,795	$	609,857	$	378,724
	Total employees			2,871		3,027		2,991		3,227		3,255
	Total Private Client Services offices			90		91		96		103		107

Piper Jaffray Annual Report 2005        9

Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the accompanying 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 discussed below under “External Factors Impacting Our Business” as well as “Risk Factors” in Part 1, item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005, as updated in our subsequent reports filed with the SEC. These reports are available at our Web site at www.piperjaffray.com and at the SEC 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 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, trading and research and investment banking businesses. Revenues are generated 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 branch offices. Revenues are generated primarily through commissions earned on equity and fixed income transactions and for distribution of mutual funds and annuities, fees earned on fee-based client accounts and net interest from customers’ margin loan balances.

• Corporate Support and Other – This segment includes the costs of being a public company, long-term financing costs and the results of our private equity businesses, which generate 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.

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 trading margin on principal transactions, 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-

10       Piper Jaffray Annual Report 2005

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 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.

MARKET DATA

The following table provides a summary of relevant market data over the past three years.

										2005			2004
YEAR ENDED DECEMBER 31,	2005			2004			2003			v 2004			v 2003
Dow Jones Industrials a		10,718			10,783			10,454			(0.6	)%		3.1	%
NASDAQ a		2,205			2,175			2,003			1.4			8.6
NYSE Average Daily Value Traded ($ billions)	$	56.1		$	46.1		$	38.5			21.7			19.7
NASDAQ Average Daily Value Traded ($ billions)	$	39.5		$	34.6		$	28.0			14.2			23.6
Mergers and Acquisitions (number of transactions) b		8,645			8,188			7,130			5.6			14.8
Public Equity Offerings (number of transactions) c e		811			1,005			861			(19.3	)		16.7
Initial Public Offerings (number of transactions) c		183			214			79			(14.5	)		170.9
Managed Municipal Underwritings (number of transactions) d		13,827			13,603			15,033			1.6			(9.5	)
Managed Municipal Underwritings (value of transactions in billions) d	$	407.0		$	360.1		$	383.7			13.0			(6.2	)
10-Year Treasuries Average Rate		4.29	%		4.27	%		4.02	%		0.5			6.2
3-Month Treasuries Average Rate		3.15	%		1.37	%		1.01	%		129.9			35.6

(a)	Data provided is at period end.
(b)	Source: Securities Data Corporation.
(c)	Source: Dealogic (offerings with reported market value greater than $10 million).
(d)	Source: Thomson Financial.
(e)	Number of transactions includes convertible offerings.

RESULTS FOR THE YEAR ENDED DECEMBER 31, 2005

For the year ended December 31, 2005, our net income was $40.1 million, or $2.10 per diluted share, down from net income of $50.3 million, or $2.60 per diluted share, for the year-ago period. Net revenues for the year ended December 31, 2005 decreased to $775.1 million, a decline of 2.8 percent compared to the prior year. For the year ended December 31, 2005, return on average tangible shareholders’ equity¹ was 9.7 percent, compared to 12.9 percent for the year ended December 31, 2004.

Our full-year performance reflects mixed results for the year. Strong advisory services revenue and increased fixed income underwriting offset a decline in equity underwriting and decreased institutional sales and trading revenues. Reduced revenues in our fixed income and equity institutional sales and trading businesses were affected by structural changes in the industry, primarily increased price transparency, which created downward pressure on trading margins. Additionally, higher interest rates and a flattened yield curve compared to a year ago, led to a further reduction in the volume of trading activity related to fixed income products, resulting in reduced revenues. Throughout the year, Private Client Services results remained relatively flat. In the second quarter of 2005, we implemented certain expense reduction measures throughout our businesses as a means to better align our cost infrastructure with our revenues, resulting in an $8.6 million restructuring charge.

Piper Jaffray Annual Report 2005        11

Management’s Discussion and Analysis of Financial Condition and Results of Operations

⁽¹⁾  Tangible shareholders’ equity equals total shareholders’ equity less goodwill and identifiable intangible assets. For the period presented, return on average tangible shareholders’ equity is computed by dividing net income by the average monthly tangible shareholders’ equity. Given the significant goodwill on our balance sheet, we believe that 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. The 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
	Year Ended		Year Ended		As of
	December 31,		December 31,		December 31,
(Dollars in Thousands)	2005		2004		2005
Shareholders’ equity	$	735,580	$	699,747	$	754,827
Deduct: Goodwill and identifiable intangible assets		321,034		308,122		320,234
Tangible shareholders’ equity	$	414,546	$	391,625	$	434,593

Information Regarding Our
Spin-Off from U.S. Bancorp

On February 19, 2003, U.S. Bancorp announced its intention to organize its capital markets business unit into a new company and to effect a tax-free distribution of its shares in that company to U.S. Bancorp’s shareholders. This type of distribution is commonly referred to as a “spin-off.” On April 28, 2003, Piper Jaffray Companies was incorporated in Delaware as a subsidiary of U.S. Bancorp to effect the proposed spin-off of U.S. Bancorp’s capital markets business to its shareholders. On December 31, 2003, after receiving regulatory approval, U.S. Bancorp distributed to its shareholders all of its interest in our new company. On that date, 19,334,261 shares of Piper Jaffray Companies common stock were issued to U.S. Bancorp shareholders based on a distribution ratio of one share of Piper Jaffray Companies common stock for every 100 shares of U.S. Bancorp common stock owned.

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. We incurred a $24.0 million charge at the time of the spin-off from U.S. Bancorp and $4.2 million and $4.7 million of cash awards expense in 2005 and 2004, respectively. The cash awards are being expensed over a four-year period ending December 31, 2007, and will result in charges of approximately $4.0 million and $3.5 million in 2006 and 2007, respectively.

Results of Operations

Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements for periods prior to the spin-off include the adjustments necessary to reflect our operations as if the organizational changes resulting from our spin-off had been consummated prior to the distribution. However, the consolidated financial statements for periods prior to the spin-off may not necessarily be indicative of our results of operations, financial position and cash flows in the future or what our results of operations, financial position and cash flows would have been had we operated as a stand-alone company during those periods.

Generally, our consolidated results for periods prior to the spin-off include revenues generated and expenses incurred based on customer relationships and related business activities. In certain situations, affiliated entities of U.S. Bancorp may have provided services to us. These services primarily related to employee services and benefits, technology and data processing services, and corporate functions including audit, tax and real estate management. Costs included in the consolidated financial statements for these types of shared services were determined based on actual costs to U.S. Bancorp and allocated to us based on our proportionate usage of those services. Proportionate usage was determined based on the number of our employees, actual hours used, square footage of office space or other similar methodologies. Our management believes the assumptions underlying the consolidated financial statements are reasonable.

12       Piper Jaffray Annual Report 2005

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Prior to the spin-off, income taxes were determined on a separate return basis as if we had not been eligible to be included in the consolidated income tax return of U.S. Bancorp and its affiliates. U.S. Bancorp was managing its tax position for the benefit of its entire portfolio of businesses, and its tax strategies are not necessarily reflective of the tax strategies that we would have followed had we been a stand-alone entity.

FINANCIAL SUMMARY

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.

																		AS A PERCENTAGE OF
																		NET REVENUES
																		FOR THE YEAR ENDED
FOR THE YEAR ENDED DECEMBER 31,												2005			2004			DECEMBER 31,
(Dollars in Thousands)			2005			2004			2003			v 2004			v 2003			2005			2004			2003
Revenues:
	Commissions and fees		$	283,481		$	263,730		$	256,747			7.5	%		2.7	%		36.6	%		33.1	%		32.6	%
	Principal transactions			143,391			188,526			215,191			(23.9	)		(12.4	)		18.5			23.6			27.4
	Investment banking			270,758			257,932			229,945			5.0			12.2			34.9			32.3			29.2
	Interest			71,471			54,784			50,536			30.5			8.4			9.2			6.9			6.4
	Other income			45,688			57,967			59,082			(21.2	)		(1.9	)		5.9			7.3			7.5
		Total revenues		814,789			822,939			811,501			(1.0	)		1.4			105.1			103.2			103.1
	Interest expense			(39,736	)		(25,441	)		(24,771	)		56.2			2.7			(5.1	)		(3.2	)		(3.1	)
		Net revenues		775,053			797,498			786,730			(2.8	)		1.4			100.0			100.0			100.0
Non-interest expenses:
	Compensation and benefits			471,674			488,394			482,397			(3.4	)		1.2			60.9			61.2			61.3
	Occupancy and equipment			57,627			57,066			58,025			1.0			(1.7	)		7.4			7.2			7.4
	Communications			39,791			42,198			37,599			(5.7	)		12.2			5.1			5.3			4.8
	Floor brokerage and clearance			17,568			17,309			22,755			1.5			(23.9	)		2.3			2.2			2.9
	Marketing and business development			39,863			42,468			39,030			(6.1	)		8.8			5.1			5.3			5.0
	Outside services			46,978			41,477			38,511			13.3			7.7			6.1			5.2			4.9
	Cash award program			4,206			4,717			24,000			(10.8	)		(80.3	)		0.5			0.6			3.1
	Restructuring-related expense			8,595			–			–			N/M			N/M			1.1			–			–
	Royalty fee			–			–			3,911			N/M			N/M			–			–			0.5
	Other operating expenses			27,645			24,248			39,619			14.0			(38.8	)		3.6			3.0			4.9
		Total non-interest expenses		713,947			717,877			745,847			(0.5	)		(3.8	)		92.1			90.0			94.8
Income before taxes				61,106			79,621			40,883			(23.3	)		94.8			7.9			10.0			5.2
	Income tax expense			21,023			29,273			14,884			(28.2	)		96.7			2.7			3.7			1.9
Net income			$	40,083		$	50,348		$	25,999			(20.4	)%		93.7	%		5.2	%		6.3	%		3.3	%

NM – Not Meaningful

Net income was $40.1 million for the year ended December 31, 2005, down from $50.3 million for the year ended December 31, 2004. Net revenues were $775.1 million in 2005, a decline of 2.8 percent from the prior year. Commissions and fees increased 7.5 percent over the prior year to $283.5 million in 2005, driven by increases in equity commissions and fee-based account revenues. Principal transactions revenues decreased 23.9 percent from 2004 due primarily to significant declines in fixed income volumes, lower spreads on fixed income products due to the NASD’s Trade Reporting and Compliance Engine (“TRACE”) requirements and reduced equity sales and trading revenues. Investment banking revenues increased 5.0 percent to $270.8 million compared with $257.9 million in 2004, driven by record advisory services activity. Other income for the year ended December 31, 2005 decreased by 21.2 percent to $45.7 million, compared with $58.0 million for the prior year. This decrease was due to higher gains recorded on private equity investments in 2004. Also, 2004 included revenues associated with our venture capital business, the management of which was transitioned to an independent company effective December 31, 2004. Net interest income in 2005 increased to $31.7 million, up 8.2 percent compared to 2004. The increase was due to the impact of rising short-term interest rates on net interest income earned on

Piper Jaffray Annual Report 2005        13

Management’s Discussion and Analysis of Financial Condition and Results of Operations

our customer margin balances, net inventories and other net earning assets, and the growth in sales of interest rate products. Non-interest expenses were $713.9 million in 2005, down slightly compared to 2004. Compensation and benefits expense declined due to lower revenues and profitability. Non-compensation expenses increased due to an $8.6 million restructuring charge taken in the second quarter of 2005 in connection with certain expense reduction measures, and higher litigation-related expenses.

Net income increased to $50.3 million for the year ended December 31, 2004, up from $26.0 million for the year ended December 31, 2003. Net revenues increased 1.4 percent to $797.5 million in 2004, from $786.7 million in 2003, as increased revenues in investment banking and commissions and fees were nearly offset by a decline in principal transactions. Investment banking revenues increased 12.2 percent to $257.9 million in 2004, compared with $229.9 million in 2003, as a result of increased advisory services and equity underwriting activity. Commissions and fees revenues totaled $263.7 million in 2004, an increase of 2.7 percent from 2003. The increase in commissions and fees was driven by increased fee-based account revenues. Principal transactions decreased 12.4 percent from 2003, largely due to a decline in our fixed income institutional sales and trading business. Our fixed income institutional sales and trading revenues hit record levels in the second and third quarters of 2003, but rising interest rates created a more challenging fixed income environment in 2004. Non-interest expenses decreased 3.8 percent to $717.9 million for 2004, from $745.8 million for 2003. This decrease was primarily attributable to the cash award charge of $24.0 million taken in the fourth quarter of 2003. Additionally, in 2004 we recorded lower loan losses on employee loans and lower litigation-related charges, which were partially offset by new costs related to our status as a public company.

CONSOLIDATED NON-INTEREST EXPENSES

Compensation and Benefits – Compensation and benefits expenses to secure the services of our employees are the largest component of our expenses. Compensation and benefits expenses include salaries, commissions, bonuses, benefits, employment taxes and other employee costs. A substantial portion of compensation expense is comprised of variable incentive arrangements, including commissions and discretionary bonuses, the amount of which fluctuates in proportion to the level of business activity, increasing with higher revenues and operating profits. Other compensation costs, primarily base salaries and benefits, are more fixed in nature. The timing of bonus payments, which generally occur in February, have a greater impact on our cash position and liquidity as they are paid, than is reflected in our statement of operations.

Compensation and benefits expenses decreased 3.4 percent to $471.7 million in 2005, from $488.4 million in the prior year. The decrease was attributable to lower net revenues and profitability and the savings from the restructuring actions taken in the second quarter of 2005. Compensation and benefits expenses as a percentage of net revenues decreased slightly to 60.9 percent for the year ended December 31, 2005, compared to 61.2 percent for the year ended December 31, 2004.

Compensation and benefits expenses increased 1.2 percent to $488.4 million in 2004, from $482.4 million in 2003. Compensation and benefits expenses as a percentage of net revenues were essentially flat at 61.2 percent for 2004, versus 61.3 percent for 2003.

Occupancy and Equipment – Occupancy and equipment expenses were $57.6 million in 2005, compared with $57.1 million in the prior year. Increased costs associated with additional office space and software costs related to our algorithmic and program trading (“APT”) capabilities, which we acquired in the fourth quarter of 2004, were partially offset by prior investments in technology becoming fully depreciated.

Occupancy and equipment expenses were $57.1 million in 2004, compared with $58.0 million in 2003. Occupancy and equipment expenses in 2004 included $1.5 million of accelerated depreciation expense relating to an information system conversion and higher software amortization costs reflecting the fact that we recorded a full year of amortization associated with the implementation of a new fixed income trading system in late 2003. Expenses for 2003 included a $4.1 million write-off of internally developed software associated with the new fixed income trading system implementation.

Communications – Communication expenses include costs for telecommunication and data communication, primarily consisting of expense for obtaining third-party market data information. Communication expenses were $39.8 million in 2005, down 5.7 percent from 2004. The decrease was primarily attributable to lower market data service expenses as a result of cost savings initiatives.

Communications expenses were $42.2 million in 2004, compared with $37.6 million in 2003. This

14       Piper Jaffray Annual Report 2005

Management’s Discussion and Analysis of Financial Condition and Results of Operations

increase was due primarily to higher communication infrastructure costs resulting from our separation from U.S. Bancorp and increased costs to support our fixed income sales and trading capabilities.

Floor Brokerage and Clearance – Floor brokerage and clearance expenses in 2005 were essentially flat as compared with 2004. Increased costs associated with APT were offset by our continued efforts to reduce expenses associated with accessing electronic communication networks.

Floor brokerage and clearance expenses were $17.3 million in 2004, compared with $22.8 million in 2003, a decrease of 23.9 percent. This decrease was a result of our efforts to reduce expenses associated with accessing electronic communication networks and our efforts to execute a greater number of trades through our own trading desks.

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 decreased 6.1 percent to $39.9 million in 2005, compared with $42.5 million in the prior year. This decrease was largely driven by the impact of cost savings initiatives to reduce travel and supplies costs.

Marketing and business development expenses were $42.5 million in 2004, compared with $39.0 million in 2003, an increase of 8.8 percent. This increase was attributable to increased travel and entertainment costs related to equity underwritings, which increased by 54.1 percent over 2003, and higher travel costs related to our fixed income corporate sales and trading efforts.

Outside Services – Outside services expenses include securities processing expenses, outsourced technology and operations functions, outside legal fees and other professional fees. Outside services expenses increased to $47.0 million in 2005, compared with $41.5 million in the prior year. This increase reflects the costs for outsourcing additional technology and operations functions, which were previously performed in-house, and higher legal fees.

Outside services expenses increased to $41.5 million in 2004, compared with $38.5 million for the prior year. This 7.7 percent increase primarily reflects the costs for outsourcing the operation of our network and mainframe to a third-party vendor, a change we made in 2004, and additional costs resulting from our new status as a public company.

Cash Award Program – As discussed above under the caption, “Information Regarding Our Spin-off from U.S. Bancorp,” we granted cash awards to a broad-based group of our employees in connection with our spin-off from U.S. Bancorp. At the time of the spin-off, we incurred a $24.0 million charge related to these awards. This charge was included in our 2003 results of operations. In 2005 and 2004, we incurred additional expense related to the cash awards of $4.2 million and $4.7 million, respectively. We expect to incur charges of approximately $4.0 million and $3.5 million related to these awards in 2006 and 2007, respectively.

Restructuring-Related Expense – In the second quarter of 2005, we implemented certain expense reduction measures as a means to better align our cost infrastructure with our revenues. This resulted in a restructuring charge of $8.6 million, consisting of $4.9 million in severance benefits and $3.7 million related to the reduction of leased office space. We anticipate realizing approximately $10.0 million in annual cost savings as a result of these expense reduction measures. Based on the timing of these actions, approximately $5.0 million in savings was recognized during the second half of 2005.

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 our spin-off from U.S. Bancorp.

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, amortization on intangible assets 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 increased to $27.6 million in 2005, compared with $24.2 million in 2004, an increase of 14.0 percent. This increase was driven primarily by increased litigation-related expenses and intangible asset amortization expense that we began to record in late 2004 in conjunction with the acquisition of our APT capabilities. Additionally, other operating expenses were lower in 2004 due to the fact that we reduced our financial advisor loan loss reserve by $2.1 million as we determined that the attrition of our financial advisors related to the implementation of a new compensation plan in 2003 was largely complete. Partially offsetting the higher costs in 2005 was a decline in insurance premiums and lower minority interest expense related to our private equity investments.

Piper Jaffray Annual Report 2005        15

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Other operating expenses decreased to $24.2 million in 2004, compared with $39.6 million in 2003, a decrease of 38.8 percent. In the second quarter of 2003, we increased our allowance for financial advisor loan losses by $8.8 million in conjunction with implementing a new compensation plan that we expected would result in attrition of certain financial advisors. During the first and second quarters of 2003, we communicated to financial advisors certain changes to our production-based compensation plans that were effective in the third quarter of 2003. These compensation changes reflected a shift from a product-based payout to a production-based payout. This change more closely aligned our new compensation plan with the compensation plans of our competitors. Subsequent to these communications, we experienced attrition of certain financial advisors, primarily those with low levels of production. We expected this trend to continue and, based on historical collection efforts, to result in employee loan losses. Accordingly, we increased our allowance for our exposure to employee loan losses in 2003. In 2004, we reduced the loan loss reserve by $2.1 million, reflecting our belief that we would not experience further attrition of financial advisors related to the new compensation plan, as well as the fact that attrition related to the plan was lower than originally expected.

Further contributing to the decrease in other operating expenses in 2004 were reduced litigation-related costs, which totaled $4.4 million in 2004 in comparison with $16.1 million in 2003, a decrease of 72.7 percent. The decrease in other operating expenses was offset in part by a $3.1 million increase in costs for corporate insurance as a result of being a stand-alone public company and new expenses associated with our charitable giving program.

Income Taxes – Our provision for income taxes in 2005 was $21.0 million, an effective tax rate of 34.4 percent, compared with $29.3 million, an effective tax rate of 36.8 percent, for 2004, and compared with $14.9 million, an effective tax rate of 36.4 percent, for 2003. The decreased effective tax rate in 2005 compared to 2004 is attributable to an increase in the ratio of municipal interest income, which is non-taxable, to total taxable income and a reduction in our state taxes.

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 to the business unit that maintains the relationship and generates the revenues. Expenses directly managed by the business unit are accounted for within each segment’s pre-tax operating income or loss. In addition, operations, technology and other business activities managed on a corporate basis are allocated to the segments based on each segment’s use of these functions to support its business. Expenses related to being a 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 and restructuring charges 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 expenses 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 costs are included in the results of the revenue-producing segments. Approximately $27.4 million and $28.0 million in expenses were allocated in 2004 and 2003, respectively, from Corporate Support and Other to Capital Markets and Private Client Services. Internally, we manage and allocate resources to our business segments based on these results. All periods presented have been restated and are presented on a comparable basis. This restatement did not affect our aggregate financial results.

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. Compensa-

16       Piper Jaffray Annual Report 2005

Management’s Discussion and Analysis of Financial Condition and Results of Operations

tion 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 revenues. In addition, Private Client Services has a higher proportion of fixed non-compensation expenses than Capital Markets.

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

											PERCENT INC/(DEC)
FOR THE YEAR ENDED DECEMBER 31,											2005			2004
(Dollars in Thousands)		2005			2004			2003			v 2004			v 2003
Net revenues
	Capital Markets	$	435,808		$	431,302		$	430,846			1.0	%		0.1	%
	Private Client Services		346,951			359,668			355,563			(3.5	)		1.2
	Corporate Support and Other		(7,706	)		6,528			321			N/M			N/M
Total		$	775,053		$	797,498		$	786,730			(2.8	)%		1.4	%
Pre-tax operating income (loss) before unallocated charges a
	Capital Markets	$	70,586		$	68,053		$	69,065			3.7	%		(1.5	)%
	Private Client Services		18,281			26,959			7,906			(32.2	)		241.0
	Corporate Support and Other		(14,960	)		(10,674	)		(8,177	)		40.2			30.5
Total		$	73,907		$	84,338		$	68,794			(12.4	)%		22.6	%
Pre-tax operating margin before unallocated charges
	Capital Markets		16.2	%		15.8	%		16.0	%
	Private Client Services		5.3	%		7.5	%		2.2	%
Total			9.5	%		10.6	%		8.7	%
(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	$	73,907		$	84,338		$	68,794
	Cash award program		4,206			4,717			24,000
	Restructuring-related		8,595			–			–
	Royalty fee		–			–			3,911
Consolidated income before income tax expense		$	61,106		$	79,621		$	40,883

Piper Jaffray Annual Report 2005        17

Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAPITAL MARKETS

													PERCENT INC/(DEC)
FOR THE YEAR ENDED DECEMBER 31,													2005			2004
(Dollars in Thousands)				2005			2004			2003			v 2004			v 2003
Net revenues:
	Institutional sales and trading
		Fixed income		$	75,201		$	84,685		$	106,138			(11.2	)%		(20.2	)%
		Equities			114,789			117,272			122,492			(2.1	)		(4.3	)
	Total institutional sales and trading				189,990			201,957			228,630			(5.9	)		(11.7	)
	Investment banking
		Underwriting
			Fixed income		67,649			62,096			64,762			8.9			(4.1	)
			Equities		75,026			87,505			70,202			(14.3	)		24.6
		Advisory services			100,672			78,066			63,258			29.0			23.4
	Total investment banking				243,347			227,667			198,222			6.9			14.9
	Other income				2,471			1,678			3,994			47.3			(58.0	)
	Total net revenues			$	435,808		$	431,302		$	430,846			1.0	%		0.1	%
Pre-tax operating income before unallocated charges				$	70,586		$	68,053		$	69,065			3.7	%		(1.5	)%
Pre-tax operating margin					16.2	%		15.8	%		16.0	%

Capital Markets net revenues were $435.8 million, up 1.0 percent compared with the prior year. These results reflected record advisory services revenues, offset primarily by lower institutional sales and trading revenues. Institutional sales and trading revenues decreased as a result of structural changes in the trading markets. The structural changes include increased price transparency in the corporate bond market, decreased revenue per equity share traded and increased use of electronic and direct market access trading, which have created downward pressure on sales and trading margins. We expect to experience continued downward pressure on trading margins over time.

Institutional sales and trading revenues comprise all the revenues generated through trading activities. 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. In 2005, institutional sales and trading revenues decreased 5.9 percent to $190.0 million, compared with $202.0 million in the prior year.

Fixed income institutional sales and trading revenues declined 11.2 percent to $75.2 million in 2005, compared with $84.7 million in 2004. Rising interest rates and a flattened yield curve resulted in reduced sales and trading volumes in fixed income products. Additionally, trading margins declined in 2005, due largely to increased price transparency in the corporate bond markets and growth in electronic trading. In February 2005, certain high-yield bonds for which we issue proprietary research became subject to TRACE disclosure requirements. These high-yield bonds represent a substantial portion of our overall corporate bond sales and trading.

Equity institutional sales and trading revenue decreased 2.1 percent in 2005, to $114.8 million. In 2005, we experienced downward pressure on net commissions in the cash equities business as a result of increased pressure from institutional clients to reduce transaction costs. The decline in net commissions in our cash equities business was offset by increased electronic trading revenue from our APT capabilities acquired in the fourth quarter of 2004.

Investment banking revenues increased 6.9 percent to $243.3 million in 2005, compared with $227.7 million in 2004. This increase was primarily attributable to strong advisory services revenues, as we achieved record full-year advisory services revenues of $100.7 million, an increase of 29.0 percent compared with 2004. We completed 48 mergers and acquisitions deals valued at $8.1 billion in 2005, compared with 49 deals valued at $6.8 billion in 2004. Additionally, fixed income underwriting revenues increased 8.9 percent to $67.6 million in 2005 compared with

18       Piper Jaffray Annual Report 2005

Management’s Discussion and Analysis of Financial Condition and Results of Operations

$62.1 million in 2004. We underwrote 473 municipal issues with a par value of $6.1 billion during 2005, compared with 504 municipal issues with a par value of $5.9 billion during 2004. Equity underwriting revenues decreased 14.3 percent to $75.0 million in 2005. Driving this decline in equity underwriting revenues were less favorable capital market conditions, particularly during the first half of 2005, that led to a decline in offering activity compared with the prior year. During 2005, we completed 64 equity offerings, raising $8.7 billion in capital for our clients, compared with 94 equity offerings, raising $12.9 billion in capital, during 2004.

Segment pre-tax operating margin for 2005 increased to 16.2 percent from 15.8 percent for the prior year as a result of the increase in net revenues and the impact of cost savings initiatives.

In 2004, institutional sales and trading revenues decreased 11.7 percent to $202.0 million, compared with $228.6 million in 2003. This decline was primarily due to reduced fixed income institutional sales and trading revenues, which decreased 20.2 percent to $84.7 million in 2004, compared with $106.1 million in 2003. The significant decline in fixed income revenues from the prior year was attributable to substantially reduced institutional client order flow and reduced trading profits. The decrease in 2004 also reflected the fact that our fixed income business achieved record revenues in the second and third quarters of 2003, driven by high-yield corporate bonds where we have proprietary research capabilities, while the rising interest rate environment in 2004 created a more challenging fixed income trading environment. In addition, equity institutional sales and trading decreased 4.3 percent in 2004, to $117.3 million, compared with $122.5 million in the prior year. This decline was primarily attributable to a reduction in revenue related to convertible sales and trading activity as a result of challenging market conditions for convertible securities.

Investment banking revenue increased to $227.7 million in 2004, compared with $198.2 million in the prior year, up 14.9 percent. This increase reflects higher equity underwriting activity during the first half of 2004 compared with the corresponding period of 2003. During 2004, we completed 94 equity offerings, raising $12.9 billion in capital for our clients, compared with 61 equity offerings, raising $8.2 billion in capital, during 2003. Additionally, advisory services activity rose. We completed 49 merger and acquisition deals valued at $6.8 billion in 2004, compared with 38 deals valued at $5.1 billion in 2003. This increase was offset in part by fixed income investment banking revenues, which decreased 4.1 percent from the prior year to $62.1 million in 2004.

Segment pre-tax operating margin for 2004 decreased to 15.8 percent from 16.0 percent for 2003 as fixed compensation costs increased while net revenues remained flat.

PRIVATE CLIENT SERVICES

										PERCENT INC/(DEC)
FOR THE YEAR ENDED DECEMBER 31,										2005			2004
(Dollars in Thousands)	2005			2004			2003			v 2004			v 2003
Net revenues	$	346,951		$	359,668		$	355,563			(3.5	)%		1.2	%
Pre-tax operating income before unallocated charges	$	18,281		$	26,959		$	7,906			(32.2	)%		241.0	%
Pre-tax operating margin		5.3	%		7.5	%		2.2	%
Number of financial advisors(period end)		842			860			874

Private Client Services financial performance in 2005 reflected decreased transaction revenues driven by fewer financial advisors and reduced spreads on fixed income products, offset partially by increased fee-based revenues. We are in the process of transitioning our business to an advisory, rather than a transactional, model. We are working to improve the profitability of the business by increasing financial advisor productivity, increasing the number of financial advisors by selectively recruiting experienced financial advisors and training developing financial advisors, and diligently managing costs. We continue to anticipate that returning this business to competitive performance will be a multi-year process.

Private Client Services net revenues decreased 3.5 percent to $347.0 million in 2005, compared with net revenues of $359.7 million in the prior year. Fewer financial advisors and reduced fixed income product revenue led to the decline. Offsetting these declines, in part, were increased fee-based account revenues, which are charged as a percentage of an account’s asset balance rather than on a transaction basis. Total client assets under management increased approximately 2.0 percent from $51 billion at December 31,

Piper Jaffray Annual Report 2005        19

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2004 to $52 billion at December 31, 2005. Fee-based account revenues increased 16.4 percent from 2004, while client assets in fee-based accounts increased 13.0 percent from the prior year. As of December 31, 2005, 16.9 percent of client assets were held in fee-based accounts.

Segment pre-tax operating margin for Private Client Services decreased to 5.3 percent for 2005, compared with 7.5 percent in 2004. The decline in pre-tax operating margin was due to lower net revenues and higher litigation-related expenses in 2005. Additionally, the results for 2004 included the reduction of our financial advisor loan loss reserve by $2.1 million as we determined that the attrition of financial advisors related to the implementation a new compensation plan in 2003 was largely complete.

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 by training professionals to become financial advisors and by selectively recruiting experienced financial advisors. Our financial advisors continue to make the transition from a transactional model to an advisory model, and we have seen increases in assets under management per financial advisor. The number of financial advisors continued to decline in 2005 as departures of lower level producers was not offset with new financial advisor hiring.

Private Client Services net revenues increased slightly to $359.7 million in 2004 compared with 2003. Fee-based account revenues increased as a result of higher client asset balances in fee-based accounts in 2004, reflecting improved conditions in the equity markets. This increase was partially offset by decreased transactional business due to a decline in individual investor sentiment that began during the second half of 2004. Total client assets under management increased from $50 billion at December 31, 2003, to $51 billion at December 31, 2004, largely due to 2004 equity market gains.

Another factor that limited 2004 net revenues was the decline in the number of our financial advisors when compared to 2003. The decreased number of financial advisors reflected the attrition of certain financial advisors following the change in our compensation program described above under the caption “Consolidated Non-Interest Expenses – Other Operating Expenses” and the difficulty we experienced in recruiting experienced financial advisors following the announcement in early 2003 of our impending spin-off from U.S. Bancorp as a result of the uncertainty surrounding the future of our business.

Despite net revenues being up only 1.2 percent year over year, segment pre-tax operating margin for Private Client Services increased to 7.5 percent for 2004 compared to 2.2 percent in 2003, due to lower financial advisor loan loss reserves, a reduction in litigation-related expenses and diligent cost control efforts.

CORPORATE SUPPORT AND OTHER

Corporate Support and Other includes revenues primarily attributable to our private equity business and our investments in private equity and venture capital 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, however, we maintained our existing investments in these funds. In 2005, Corporate Support and Other recorded negative net revenues of $7.7 million, compared with $6.5 million in revenues during the prior year. This $14.2 million fluctuation in revenues was primarily due to management fees recorded in 2004 pertaining to our venture capital business, capital gains recorded in 2004 pertaining to our private equity investments and an increase in long-term financing costs in 2005. Our subordinated debt is variable-rate debt based on the London Interbank Offered Rate, which increased by approximately 200 basis points from December 31, 2004 to December 31, 2005.

We anticipate realizing a significant gain in Corporate Support and Other in 2006 related to our ownership of two seats on the New York Stock Exchange, Inc. (“NYSE”). The NYSE and Archipelago Holdings, Inc. (“Archipelago”) have entered into a merger agreement providing for the combination of the NYSE and Archipelago under a new holding company named NYSE Group, Inc. In the proposed merger, NYSE seat members will be entitled to receive $300,000 in cash and 80,177 restricted shares of NYSE Group, Inc. common stock. We currently value our two NYSE seats at a cost basis of $0.6 million.

In 2004, net revenues for the Corporate Support and Other segment increased to $6.5 million from $0.3 million in 2003. This change was due primarily to capital gains recorded in 2004 pertaining to our private equity investments as discussed above. In addition, interest expense on our subordinated debt de-

20       Piper Jaffray Annual Report 2005

Management’s Discussion and Analysis of Financial Condition and Results of Operations

creased, as we reduced our subordinated debt balance by $35.0 million in the fourth quarter of 2003.

Recent Accounting Pronouncements

Recent accounting pronouncements are set forth in Note 3 to our consolidated financial statements included in our Annual Report to Shareholders, and are incorporated herein by reference.

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 our consolidated financial statements included in our Annual Report to Shareholders. We believe that of our significant accounting policies, the following are our critical accounting policies:

VALUATION OF FINANCIAL INSTRUMENTS

Trading securities owned, trading securities owned and pledged as collateral, and trading securities sold, but not yet purchased on our consolidated statements of financial condition consist of financial instruments recorded at fair value. Unrealized gains and losses related to these financial instruments are reflected on our consolidated statements of operations.

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. When available, we use observable market prices, observable market parameters, or broker or dealer prices (bid and ask prices) to derive the fair value of the instrument. In the case of financial instruments transacted on recognized exchanges, the observable market prices represent quotations for completed transactions from the exchange on which the financial instrument is principally traded. Bid prices represent the highest price a buyer is willing to pay for a financial instrument at a particular time. Ask prices represent the lowest price a seller is willing to accept for a financial instrument at a particular time.

A substantial percentage of the fair value of our trading securities owned, trading securities owned and pledged as collateral, and trading securities sold, but not yet purchased are based on observable market prices, observable market parameters, or derived from broker or dealer prices. The availability of observable market prices and pricing parameters can vary from product to product. Where available, observable market prices and pricing or market parameters in a product may be used to derive a price without requiring significant judgment. In certain markets, observable market prices or market parameters are not available for all products, and fair value is determined using techniques appropriate for each particular product. These techniques involve some degree of judgment.

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 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.

Piper Jaffray Annual Report 2005        21

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 products. 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.

The following table presents the carrying value of our trading securities owned, trading securities owned and pledged as collateral and trading securities sold, but not yet purchased for which fair value is measured based on quoted prices or other independent sources versus those for which fair value is determined by management.

			Trading
			Securities Sold,
DECEMBER 31, 2005	Trading Securities		But Not Yet
(Dollars in Thousands)	Owned or Pledged		Purchased
Fair value of securities excluding derivatives, based on quoted prices and independent sources	$	706,671	$	327,587
Fair value of securities excluding derivatives, as determined by management		25,617		–
Fair value of derivatives based on quoted prices and independent sources		–		–
Fair value of derivatives as determined by management		21,610		4,617
	$	753,898	$	332,204

Financial instruments carried at contract amounts that approximate fair value 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.

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.” Determining the fair value of assets and liabilities acquired requires certain management estimates. At December 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.

Under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, we are required to perform impairment tests of our goodwill and intangible assets annually and more frequently in certain circumstances. We have elected to test for goodwill impairment in the fourth quarter of each calendar year. The goodwill impairment test is a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of each operating segment based on a discounted cash flow model using revenue and profit forecasts and comparing those estimated fair values with carrying values, which includes the allocated goodwill. If the estimated fair value is less than the carrying values, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of a reporting unit’s “implied fair value” of goodwill requires us to allocate the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to its corresponding carrying value. We completed our last goodwill impairment test as of October 31, 2005, and no impairment was identified.

As noted above, 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. 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. Additionally, estimated cash flows may extend beyond ten years and, by their nature, are difficult to determine over an extended time period.

22       Piper Jaffray Annual Report 2005

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 and directors, we use stock-based compensation, including stock options and restricted stock. 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.

Compensation paid to employees in the form of stock options or restricted stock is generally amortized on a straight-line basis over the requisite service period of the award, which is usually three years, and is included in our results of operations as compensation expense, net of estimated forfeitures. A substantial percentage of our restricted stock issued to employees has a substantive non-compete agreement. Restricted stock that contains a non-compete agreement is expensed over the non-compete period. 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 as outside services expense.

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 a lack of historical data. For instance, because our stock has been publicly traded for just over two years, we have limited information on which to base our volatility estimates; therefore, to develop a reasonable estimate, we have used industry comparisons to determine an appropriate volatility level. Similarly, as none of our employee options are vested, we do not have historical data regarding employee option exercises or post-termination behaviors; therefore, industry comparisons were 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 19 to our consolidated financial statements.

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 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

Piper Jaffray Annual Report 2005        23

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 are 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 is responsible for all liabilities relating to the businesses U.S. Bancorp retained. However, in addition to our established reserves, U.S. Bancorp agreed to indemnify us in an amount up to $17.5 million for losses that result from certain matters, primarily third-party claims relating to research analyst independence. U.S. Bancorp has the right to terminate this indemnification obligation in the event of a change in control of our company. As of December 31, 2005, approximately $13.4 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

Liquidity is of critical importance to us given the nature of our business. Insufficient liquidity resulting from adverse circumstances contributes to, and may be the cause of, financial institution failure. Accordingly, we regularly monitor our liquidity position, including our cash and net capital positions, and we have implemented a liquidity strategy designed to enable our business to continue to operate even under adverse circumstances, although there can be no assurance that our strategy will be successful under all circumstances.

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 repurchasing 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, in January 2005 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 was completed on October 4, 2005. We repurchased the 1,300,000 shares of common stock authorized by the board at an average price of $32.78 per share.

Over the long-term, one of our objectives in repurchasing common stock on the open market is to offset dilution from stock-based compensation.

CASH FLOWS

Cash and cash equivalents decreased $6.5 million in 2005 to $60.9 million at December 31, 2005. Operating activities provided cash of $99.7 million, as cash received from earnings and operating assets and liabilities exceeded cash utilized to increase net trading securities owned. Cash of $19.7 million was used for investing activities toward the purchase of fixed assets. Cash of $86.3 million was used in financing activities, including a $55.5 million reduction of our secured financing activities and $42.6 million utilized to repurchase common stock in conjunction with the share repurchase program discussed above. The cash used in financing activities was offset by an increase in securities loaned activities of $11.8 million.

Cash and cash equivalents decreased $17.0 million in 2004 to $67.4 million at December 31, 2004. Operating activities used cash of $2.1 million, as cash received from earnings and operating assets and liabilities was exceeded by cash utilized toward fails to deliver, stock borrowed and for processing ac-

24       Piper Jaffray Annual Report 2005

Management’s Discussion and Analysis of Financial Condition and Results of Operations

counts. Cash of $31.3 million was used for investing activities toward the purchase of fixed assets and the acquisition of Vie Securities, LLC. Cash of $16.4 million was generated by financing activities, including $133.6 million received from secured financing activities and $41.7 million from securities loaned. The cash generated through repurchase agreements and securities loaned financing was offset by a net reduction of short-term borrowings of $159.0 million.

Cash and cash equivalents increased $51.8 million in 2003 to $84.4 million at December 31, 2003. Operating activities used cash of $1.3 million as cash received from earnings and operating assets and liabilities was exceeded by cash utilized toward the purchase of repurchase agreements and reverse repurchase agreements. Cash of $15.1 million was used for investing activities toward the purchase of fixed assets. Cash of $68.3 million was generated by financing activities, including $153.9 million received from secured financing activities and $33.9 million in capital contributions from U.S. Bancorp. The cash generated through financing was offset by a net reduction of short-term borrowings of $91.0 million and a $35.0 million reduction in our subordinated debt.

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 primarily 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.

To finance customer receivables we utilized an average of $38 million in short-term bank loans and an average of $244 million in securities lending arrangements in 2005. This compares to an average of $34 million in short-term bank loans and $211 million in average securities lending arrangements in 2004. Average repurchase agreements (excluding hedging) of $176 million and $165 million in 2005 and 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 or securities lending. Bank financing supplements these sources as necessary. On December 31, 2005, we had no outstanding short-term bank financing.

As of December 31, 2005, we had uncommitted credit agreements with banks totaling $675 million, comprising $555 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 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.

In addition to the $675 million of credit agreements described above, our broker dealer subsidiary is party to a $180 million subordination agreement with an affiliate of U.S. Bancorp, which has been approved by the NYSE for regulatory net capital purposes as allowable in our broker dealer subsidiary’s net capital computation. The interest on the $180 million subordination agreement is based on the three-month London Interbank Offer Rate. The entire amount outstanding matures October 31, 2008.

CASH REQUIREMENTS

The following table provides a summary of our contractual obligations as of December 31, 2005:

			2007		2009		2011
			Through		Through		and
(Dollars in Millions)	2006		2008		2010		Thereafter		Total
Long-term borrowings	$	–	$	180.0	$	–	$	–	$	180.0
Operating leases		27.2		51.2		47.6		69.1		195.1
Cash award program		4.0		3.5		–		–		7.5
Venture fund commitments a		–		–		–		–		13.5

(a)  The venture fund commitments have no specified call dates. The timing of capital calls is based on market conditions and investment opportunities.

As of December 31, 2005, our long-term borrowings were $180.0 million, all due in 2008. Our minimum lease commitments for non-cancelable office space leases were $195.1 million. Certain leases have renewal options and clauses for escalation and operation cost adjustments. We have commitments to invest an additional $13.5 million in venture capital funds.

Piper Jaffray Annual Report 2005        25

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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. In addition, we are subject to certain notification requirements related to withdrawals of excess net capital from our broker dealer subsidiary. Our broker dealer subsidiary is also 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 December 31, 2005, net capital under the SEC’s Uniform Net Capital Rule was $314.0 million or 57.0 percent of aggregate debit balances, and $303.0 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 non-derivative guarantees and enter into other off-balance sheet arrangements.

We enter into arrangements with special-purpose entities (“SPEs”), also known as variable interest entities. SPEs are corporations, trusts or partnerships that are established for a limited purpose. SPEs, by their nature, generally are not controlled by their equity owners, as the establishing documents govern all material decisions. Our primary involvement with SPEs 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. See Note 5, “Securitizations,” in the notes to the consolidated financial statements for a complete discussion of our securitization activities.

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 lower of cost or market method of accounting is applied to investments where we do not have the ability to exercise significant influence over the operations of an entity. See Note 6, “Variable Interest Entities,” in the notes to consolidated financial statements for a complete discussion of our activities related to these types of partnerships.

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. For a complete discussion of our activities related to derivative products, see Note 4, “Derivatives,” in the notes to the consolidated financial statements.

Our other types of off-balance-sheet arrangements include contractual commitments and guarantees. For a discussion of our activities related to these off-balance sheet arrangements, see Note 14, “Contingencies, Commitments and Guarantees,” in the notes to the consolidated financial statements.

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.

26       Piper Jaffray Annual Report 2005

Management’s Discussion and Analysis of Financial Condition and Results of Operations

With respect to market risk and credit risk, the cornerstone of our risk management process is daily communication among traders, trading department management and senior management concerning our inventory positions and overall risk profile. Our enterprise risk management functions supplement this communication process by providing their independent perspectives on our market and credit risk profile on a daily basis through a series of reports. The broader goals of our enterprise risk management functions are to understand the risk profile of each trading area, to consolidate risk monitoring company-wide, to articulate large trading or position risks to senior management, to provide traders with perspectives on their positions and to ensure accurate mark-to-market pricing.

In addition to supporting daily risk management processes on the trading desks, our enterprise risk management functions support our market risk, institutional credit risk and asset/liability committees. These committees oversee risk management practices, including defining acceptable risk tolerances and approving risk management policies.

MARKET RISK

Market risk represents the risk of financial loss that may result from the change in value of a financial instrument due to fluctuations in its market price. Our exposure to market risk is directly related to our role as a financial intermediary for our clients and to our market-making activities. Market risk is inherent in both cash and derivative financial instruments. The scope of our market risk management policies and procedures includes all market-sensitive financial instruments.

Our different types of market risk include:

• Interest Rate Risk — Interest rate risk represents the potential loss from adverse changes in market interest rates. We are exposed to interest rate risk arising from changes in the level and volatility of interest rates, changes in the shape of the yield curve, changes in credit spreads, and the rate of mortgage prepayments. Interest rate risk is managed through the use of short positions in U.S. government securities, agency securities, mortgage-backed securities, corporate debt securities, interest rate swaps, options, futures and forward contracts. We utilize interest rate swap contracts to hedge a portion of our fixed income inventory, to hedge residual cash flows from our tender option bond program, and to hedge rate lock agreements and forward bond purchase agreements we may enter into with our public finance customers. These interest rate swap contracts are recorded at fair value with the changes in fair value recognized in earnings.

• Equity Price Risk — Equity price risk represents the potential loss in value due to adverse changes in the level or volatility of equity prices. We are exposed to equity price risk through our trading activities in both listed and over-the-counter equity markets. We attempt to reduce the risk of loss inherent in our market-making and in our inventory of equity securities by establishing limits on the level of our position in any individual security and by managing net position levels with those limits.

VALUE-AT-RISK

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 trading net 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 that are 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

Piper Jaffray Annual Report 2005        27

Management’s Discussion and Analysis of Financial Condition and Results of Operations

such losses will not occur more than once in a 20-day trading 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:

AT DECEMBER 31,
(Dollars in Thousands)	2005			2004			2003
Interest Rate Risk	$	309		$	381		$	828
Equity Price Risk		288			232			299
Aggregate Undiversified Risk		597			613			1,127
Diversification Benefit		(239	)		(242	)		(613	)
Aggregate Diversified Value-at-Risk	$	358		$	371		$	514
The table below illustrates the daily high, low and average value-at-risk calculated for each component of market risk during the years ended 2005, 2004 and 2003, respectively.
FOR THE YEAR ENDED DECEMBER 31, 2005
(Dollars in Thousands)	High			Low			Average
Interest Rate Risk	$	825		$	259		$	463
Equity Price Risk		766			201			466
Aggregate Undiversified Risk		1,406			551			929
Aggregate Diversified Value-at-Risk		760			253			589
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
FOR THE YEAR ENDED DECEMBER 31, 2003
(Dollars in Thousands)	High			Low			Average
Interest Rate Risk	$	1,193		$	544		$	870
Equity Price Risk		1,051			256			536
Aggregate Undiversified Risk		1,971			1,028			1,406
Aggregate Diversified Value-at-Risk		944			481			664

28       Piper Jaffray Annual Report 2005

Management’s Discussion and Analysis of Financial Condition and Results of Operations

LIQUIDITY RISK

Market risk can be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Depending on the specific security, the structure of the financial product, and/or overall market conditions, we may be forced to hold onto a security for days or weeks longer than we had planned.

We carefully watch our aged inventory to minimize the amount of illiquid securities we own at any one time. Also, given that we attempt to hedge away most of our market risk, it is likely that changes in value of our long positions in an illiquid market would be largely offset by changes in value of our short positions.

We are also exposed to liquidity risk in our day-to-day funding activities. In addition to the benefit of having a strong capital structure, we manage this risk by diversifying our funding sources across products and among individual counterparties within those products. For example, our treasury department, working under the guidance of our asset/liability committee, can switch between securities lending, repurchase agreements, box loans and bank borrowings on any given day depending on the pricing and availability of funding from any one of these sources.

In addition to managing our capital and funding, the asset/liability committee oversees the management of net interest income risk, portfolio collateral, and the overall use of our capital, funding, and balance sheet.

CREDIT RISK

Credit risk in our Capital Markets business arises from potential non-performance by counterparties, customers, borrowers or issuers of securities we hold in our trading inventory. We are exposed to credit risk in our role as a trading counterparty to dealers and customers, as a holder of securities and as a member of exchanges and clearing organizations. Our client activities involve the execution, settlement and financing of various transactions. Client activities are transacted on a cash, delivery versus payment or margin basis. Our credit exposure to institutional client business is mitigated by the use of industry-standard delivery versus payment through depositories and clearing banks.

Credit exposure associated with our Private Client Services business consists primarily of customer margin accounts, which are monitored daily and are collateralized. Our treasury and credit services departments, in conjunction with our retail credit committee, establishes and reviews appropriate credit limits for our Private Client Services customers.

Our institutional credit committee reviews risk associated with institutional counterparties with whom we hold repurchase and resale agreement facilities, stock borrow or loan facilities, derivatives, TBAs and other documented institutional counterparty agreements that may give rise to credit exposure. Counterparty levels are established relative to the level of counterparty ratings and potential levels of activity.

We are subject to credit concentration risk if we hold large individual securities positions, execute large transactions with individual counterparties or groups of related counterparties, extend large loans to individual borrowers or make substantial underwriting commitments. Concentration risk can occur by industry, geographic area or type of client. Potential credit concentration risk is carefully monitored and is managed through the use of policies and limits.

We are also exposed to the risk of loss related to changes in the credit spreads of debt instruments. Credit spread risk arises from potential changes in an issuer’s credit rating or the market’s perception of the issuer’s credit worthiness. Credit spread risk is managed through offsetting long or short positions in similar securities.

OPERATIONAL RISK

Operational risk refers to the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. We rely on the ability of our employees, our internal systems and processes and systems at computer centers operated by third parties to process a large number of transactions. In the event of a breakdown or improper operation of our systems or processes or improper action by our employees or third-party vendors, we could suffer financial loss, regulatory sanctions and damage to our reputation. We have business continuity plans in place that we believe will cover critical processes on a company-wide basis, and redundancies are built into our systems as we have deemed appropriate.

In order to mitigate and control operational risk, we have developed and continue to enhance a quarterly risk profile review that is designed to identify and assess operational risk throughout the organization. These control mechanisms attempt to ensure that operations policies and procedures are being followed

Piper Jaffray Annual Report 2005        29

Management’s Discussion and Analysis of Financial Condition and Results of Operations

and that our various businesses are operating within established corporate policies and limits.

LEGAL, REGULATORY AND COMPLIANCE RISK

Legal, regulatory and compliance risk includes the risk of non-compliance with applicable legal and regulatory requirements and the risk that a counterparty’s performance obligations will be unenforceable. We are generally subject to extensive regulation in the various jurisdictions in which we conduct our business. We have established procedures that are designed to ensure compliance with applicable statutory and regulatory requirements, including, but not limited to, those related to regulatory net capital requirements, sales and trading practices, use and safekeeping of customer funds and securities, credit extension, money-laundering, privacy and recordkeeping.

We have established internal policies relating to ethics and business conduct, and compliance with applicable legal and regulatory requirements, as well as training and other procedures designed to ensure that these policies are followed.

Effects of Inflation

Because our assets are liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects our expenses, such as employee compensation, office space leasing costs and communications charges, which may not be readily recoverable in the price of services offered by us. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets, it may adversely affect our financial position and results of operations.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements. 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 the following: (1) developments in market and economic conditions have in the past adversely affected, and may in the future adversely affect, our business and profitability, (2) developments in specific sectors of the economy have in the past adversely affected, and may in the future adversely affect, our business and profitability, (3) we may not be able to compete successfully with other companies in the financial services industry who are often larger and better capitalized than we are, (4) we have experienced significant pricing pressure in areas of our business, which may impair our revenues and profitability, (5) our ability to attract, develop and retain highly skilled and productive employees is critical to the success of our business, (6) our underwriting and market-making activities may place our capital at risk, (7) an inability to readily divest or transfer trading positions may result in financial losses to our business, (8) 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, (9) 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, (10) 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, (11) our technology systems, including outsourced systems, are critical components of our operations, and failure of those systems or other aspects of our operations infrastructure may disrupt our business, cause financial loss and constrain our growth, (12) 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, (13) regulatory capital requirements may limit our ability to expand or maintain present levels of our business or impair our ability to meet our financial obligations, (14) our exposure to legal liability is significant, and could lead to substantial damages, (15) the business operations that we conduct outside of the United States subject us to unique risks, (16) we may suffer losses if our reputation is harmed, (17) our stock price may fluctuate as a result of several factors, including but not limited to changes in our revenues and operating results, (18) 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, and (19) other factors identified under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005, and updated in our subsequent reports filed with the SEC. These reports are available at our Web site at www.piperjaffray.com and at the SEC 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.

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Piper Jaffray Companies

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

		Page
Management’s Report on Internal Control Over Financial Reporting			32
Report of Independent Registered Public Accounting Firm			33
Report of Independent Registered Public Accounting Firm			34
Consolidated Financial Statements:
	Consolidated Statements of Financial Condition		35
	Consolidated Statements of Operations		36
	Consolidated Statements of Changes in Shareholders’ Equity		37
	Consolidated Statements of Cash Flows		38
	Notes to Consolidated Financial Statements
	Note 1 Background		39
	Note 2 Summary of Significant Accounting Policies		40
	Note 3 Recent Accounting Pronouncements		44
	Note 4 Derivatives		44
	Note 5 Securitizations		44
	Note 6 Variable Interest Entities		45
	Note 7 Receivables from and Payables to Brokers, Dealers and Clearing Organizations		46
	Note 8 Receivables from and Payables to Customers		46
	Note 9 Collateralized Securities Transactions		47
	Note 10 Goodwill and Intangible Assets		47
	Note 11 Trading Securities Owned and Trading Securities Sold, but Not Yet Purchased		48
	Note 12 Fixed Assets		48
	Note 13 Financing		48
	Note 14 Contingencies, Commitments and Guarantees		49
	Note 15 Restructuring		51
	Note 16 Shareholders’ Equity		51
	Note 17 Earnings Per Share		52
	Note 18 Employee Benefit Plans		53
	Note 19 Stock-Based Compensation and Cash Award Program		56
	Note 20 Transactions with U.S. Bancorp Prior to the Distribution		59
	Note 21 Net Capital Requirements and Other Regulatory Matters		59
	Note 22 Income Taxes		60
	Note 23 Business Segments		61

Piper Jaffray Annual Report 2005        31

Piper Jaffray Companies

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Our internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its assessment and those criteria, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2005.

Our independent registered public accounting firm has issued an attestation report on management’s assessment of our internal control over financial reporting.

32       Piper Jaffray Annual Report 2005

Piper Jaffray Companies

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
of Piper Jaffray Companies

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Piper Jaffray Companies maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Piper Jaffray Companies’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Piper Jaffray Companies maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Piper Jaffray Companies maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2005 consolidated financial statements of Piper Jaffray Companies and our report dated February 24, 2006 expressed an unqualified opinion thereon.

Minneapolis, Minnesota

February 24, 2006

Piper Jaffray Annual Report 2005        33

Piper Jaffray Companies

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
of Piper Jaffray Companies

We have audited the accompanying consolidated statements of financial condition of Piper Jaffray Companies as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Piper Jaffray Companies and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Piper Jaffray Companies’ internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2006 expressed an unqualified opinion thereon.

Minneapolis, Minnesota

February 24, 2006

34       Piper Jaffray Annual Report 2005

Piper Jaffray Companies

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

DECEMBER 31,
(Dollars in Thousands, Except Share Data)				2005			2004
Assets
	Cash and cash equivalents			$	60,869		$	67,387
	Receivables:
		Customers (net of allowance of $1,793)			472,987			433,173
		Brokers, dealers and clearing organizations			299,056			536,705
	Deposits with clearing organizations				64,379			70,886
	Securities purchased under agreements to resell				222,844			251,923
	Trading securities owned				517,310			694,222
	Trading securities owned and pledged as collateral				236,588			290,499
			Total trading securities owned		753,898			984,721
	Fixed assets (net of accumulated depreciation and amortization of $98,952 and $110,928, respectively)				55,124			53,968
	Goodwill and intangible assets (net of accumulated amortization of $54,264 and $52,664, respectively)				320,234			321,834
	Other receivables				34,610			31,832
	Other assets				70,190			75,828
			Total assets	$	2,354,191		$	2,828,257
Liabilities and Shareholders’ Equity
	Payables:
		Customers		$	216,652		$	189,153
		Checks and drafts			53,304			63,270
		Brokers, dealers and clearing organizations			259,597			287,217
	Securities sold under agreements to repurchase				245,786			312,273
	Trading securities sold, but not yet purchased				332,204			746,604
	Accrued compensation				171,551			184,608
	Other liabilities and accrued expenses				140,270			139,704
			Total liabilities		1,419,364			1,922,829
	Subordinated debt				180,000			180,000
	Shareholders’ equity:
		Common stock, $0.01 par value; Shares authorized: 100,000,000 at December 31, 2005 and December 31, 2004; Shares issued: 19,487,319 at December 31, 2005 and 19,333,261 at December 31, 2004; Shares outstanding: 18,365,177 at December 31, 2005 and 19,333,261 at December 31, 2004			195			193
		Additional paid-in capital			704,005			678,755
		Retained earnings			90,431			50,348
		Less common stock held in treasury, at cost: 1,122,142 shares at December 31, 2005			(35,422	)		–
		Other comprehensive loss			(4,382	)		(3,868	)
			Total shareholders’ equity		754,827			725,428
			Total liabilities and shareholders’ equity	$	2,354,191		$	2,828,257

See Notes to Consolidated Financial Statements

Piper Jaffray Annual Report 2005        35

Piper Jaffray Companies

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31,
(Amounts in Thousands, Except Per Share Data)			2005		2004		2003
Revenues:
	Commissions and fees		$	283,481	$	263,730	$	256,747
	Principal transactions			143,391		188,526		215,191
	Investment banking			270,758		257,932		229,945
	Interest			71,471		54,784		50,536
	Other income			45,688		57,967		59,082
		Total revenues		814,789		822,939		811,501
	Interest expense			39,736		25,441		24,771
		Net revenues		775,053		797,498		786,730
Non-interest expenses:
	Compensation and benefits			471,674		488,394		482,397
	Occupancy and equipment			57,627		57,066		58,025
	Communications			39,791		42,198		37,599
	Floor brokerage and clearance			17,568		17,309		22,755
	Marketing and business development			39,863		42,468		39,030
	Outside services			46,978		41,477		38,511
	Cash award program			4,206		4,717		24,000
	Restructuring-related expense			8,595		–		–
	Royalty fee			–		–		3,911
	Other operating expenses			27,645		24,248		39,619
		Total non-interest expenses		713,947		717,877		745,847
Income before income tax expense				61,106		79,621		40,883
	Income tax expense			21,023		29,273		14,884
Net income			$	40,083	$	50,348	$	25,999
Earnings per common share
	Basic		$	2.13	$	2.60	$	1.35
	Diluted		$	2.10	$	2.60	$	1.35
Weighted average number of common shares
	Basic			18,813		19,333		19,237
	Diluted			19,081		19,399		19,237

See Notes to Consolidated Financial Statements

36       Piper Jaffray Annual Report 2005

Piper Jaffray Companies

CONSOLIDATED STATEMENTS OF CHANGES IN

SHAREHOLDERS’ EQUITY

Common

Additional

Other

Total

Shares

Common

Paid-In

Retained

Invested

Treasury

Comprehensive

Shareholders’

(Dollars in Thousands, Except Share Amounts)

Outstanding

Stock

Capital

Earnings

Capital

Stock

Loss

Equity

Balance at December 31, 2002

–

$

–

$

–

$

–

$

609,857

$

–

$

–

$

–

Net income

–

–

–

–

25,999

–

–

–

Capital contribution from U.S. Bancorp

–

–

–

–

37,500

–

–

–

Distribution to U.S. Bancorp

–

–

–

–

(3,561

)

–

–

–

Recapitalization upon spin-off from U.S. Bancorp

19,334,261

193

669,602

–

(669,795

)

–

–

669,795

Balance at December 31, 2003

19,334,261

$

193

$

669,602

$

–

$

–

$

–

$

–

$

669,795

Net income

–

–

–

50,348

–

–

–

50,348

Amortization of restricted stock

–

–

7,119

–

–

–

–

7,119

Amortization of stock options

–

–

2,034

–

–

–

–

2,034

Minimum pension liability adjustment

–

–

–

–

–

–

(3,868

)

(3,868

)

Retirement of common stock

(1,000

)

–

–

–

–

–

–

–

Balance at December 31, 2004

19,333,261

$

193

$

678,755

$

50,348

$

–

$

–

$

(3,868

)

$

725,428

Net income

–

–

–

40,083

–

–

–

40,083

Amortization of restricted stock

–

–

15,914

–

–

–

–

15,914

Amortization of stock options

–

–

3,341

–

–

–

–

3,341

Minimum pension liability adjustment

–

–

–

–

–

–

(73

)

(73

)

Foreign currency translation adjustment

–

–

–

–

–

–

(441

)

(441

)

Issuance of common stock

154,058

2

6,010

–

–

–

–

6,012

Repurchase of common stock

(1,300,000

)

–

–

–

–

(42,612

)

–

(42,612

)

Reissuance of treasury shares

177,858

–

(15

)

–

–

7,190

–

7,175

Balance at December 31, 2005

18,365,177

$

195

$

704,005

$

90,431

$

–

$

(35,422

)

$

(4,382

)

$

754,827

See Notes to Consolidated Financial Statements

Piper Jaffray Annual Report 2005        37

Piper Jaffray Companies

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
(Dollars in Thousands)					2005			2004			2003
Operating Activities:
	Net income				$	40,083		$	50,348		$	25,999
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization				18,135			21,391			19,031
		Deferred income taxes				(475	)		6,553			(6,491	)
		Loss on disposal of fixed assets				320			233			4,380
		Stock-based compensation				19,255			9,153			3,859
		Amortization of intangible assets				1,600			133			–
		Forgivable loan reserve				–			(2,100	)		8,800
		Decrease (increase) in operating assets:
			Cash and cash equivalents segregated for regulatory purposes			–			66,000			(66,000	)
			Receivables:
				Customers		(39,493	)		30,384			10,445
				Brokers, dealers and clearing organizations		237,624			(297,405	)		(20,936	)
			Deposits with clearing organizations			6,507			(4,316	)		(29,988	)
			Securities purchased under agreements to resell			29,079			55,064			(66,973	)
			Net trading securities owned			(183,634	)		27,039			32,231
			Other receivables			(2,778	)		7,782			27,067
			Other assets			6,046			11,302			19,469
		Increase (decrease) in operating liabilities:
			Payables:
				Customers		27,503			(37,010	)		82,583
				Checks and drafts		(9,966	)		(1,333	)		6,519
				Brokers, dealers and clearing organizations		(39,699	)		21,273			10,559
			Securities sold under agreements to repurchase			(11,031	)		(64	)		(90,988	)
			Accrued compensation			110			(9,975	)		53,611
			Other liabilities and accrued expenses			497			43,478			(24,526	)
		Net cash provided by (used in) operating activities				99,683			(2,070	)		(1,349	)
Investing Activities:
	Purchases of fixed assets, net					(19,743	)		(14,712	)		(15,109	)
	Acquisition, net of cash acquired					–			(16,624	)		–
		Net cash used in investing activities				(19,743	)		(31,336	)		(15,109	)
Financing Activities:
	Increase in securities loaned					11,774			41,736			6,467
	Increase (decrease) in securities sold under agreements to repurchase					(55,456	)		133,621			153,913
	Decrease in short-term bank financing, net					–			(159,000	)		(91,040	)
	Decrease in subordinated debt, net					–			–			(35,000	)
	Repurchase of common stock					(42,612	)		–			–
	Capital contribution from U.S. Bancorp					–			–			37,500
	Capital distribution to U.S. Bancorp					–			–			(3,561	)
		Net cash provided by (used in) financing activities				(86,294	)		16,357			68,279
Currency adjustment:
	Effect of exchange rate changes on cash					(164	)		–			–
Net increase (decrease) in cash and cash equivalents						(6,518	)		(17,049	)		51,821
Cash and cash equivalents at beginning of year						67,387			84,436			32,615
Cash and cash equivalents at end of year					$	60,869		$	67,387		$	84,436
Supplemental disclosures of cash flow information
	Cash paid (received) during the year for:
		Interest			$	40,174		$	16,647		$	19,427
		Income taxes			$	20,131		$	18,949		$	(1,937	)
		Non-cash financing activities
			Issuance of 331,434 shares of common stock for retirement plan obligations		$	13,187		$	–		$	–

See Notes to Consolidated Financial Statements

38       Piper Jaffray Annual Report 2005

Notes to Consolidated Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  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; Piper Jaffray Financial Products Inc. and Piper Jaffray Financial Products II Inc., two entities that facilitate Piper Jaffray Companies customer derivative transactions; and Piper Jaffray Ventures Inc. (“Piper Jaffray Ventures”), which served until December 31, 2004, as a venture capital firm managing funds that invested in emerging growth companies. Effective December 31, 2004, the management of these funds transitioned to an independent company. 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, trading and research 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 long-term financing costs. The Company’s business segments are described more fully in Note 23.

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”).

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. Because prior to the Distribution no direct ownership relationship existed among all the various units comprising the Company, USB and its subsidiaries’ interest in the Company is shown in the consolidated financial statements as invested capital. 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 the Company’s 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.

Prior to the Distribution, the consolidated results included revenues generated and expenses incurred based on customer relationships and related business activities. In certain situations, affiliated entities of USB may have provided services to, and thus charged expense to, the Company. These expenses primarily relate to providing employee-related services and benefits, technology and data processing services, and corporate functions including audit, tax and real estate management services. Costs included on the consolidated financial statements for shared services were determined based on actual costs to USB and allocated based on the Company’s proportionate usage of those services. Proportionate usage was determined based on the number of employees, actual hours used, square footage of office space or other similar methodologies. Management believes the assumptions underlying the consolidated financial statements are reasonable.

Prior to the Distribution, income taxes were determined on a separate return basis as if the Company had not been eligible to be included in the consolidated income tax return of USB and its affiliates. However, USB was managing its tax position for the benefit of its entire portfolio of businesses, and its tax strategies are not necessarily reflective of the tax strategies that the Company would have followed as a stand-alone entity.

Piper Jaffray Annual Report 2005        39

Notes to Consolidated Financial Statements

Note 2  Summary of Significant Accounting Policies

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Piper Jaffray Companies, its subsidiaries, and all other entities in which the Company has a controlling financial interest. All material intercompany accounts and transactions have been eliminated. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity, a variable interest entity (“VIE”), a special-purpose entity (“SPE”), or a qualifying special-purpose entity (“QSPE”) under U.S. generally accepted accounting principles.

Voting interest entities are entities in which the total equity investment at risk is sufficient to enable each entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. Voting interest entities are consolidated in accordance with Accounting Research Bulletin No. 51 (“ARB 51”), “Consolidated Financial Statements,” as amended. ARB 51 states that the usual condition for a controlling financial interest in an entity is ownership of a majority voting interest. Accordingly, the Company consolidates voting interest entities in which it has all, or a majority of, the voting interest.

As defined in Financial Accounting Standards Board Interpretation No. 46(R) (“FIN 46(R)”), “Consolidation of Variable Interest Entities,” VIEs are entities that lack one or more of the characteristics of a voting interest entity described above. FIN 46(R) states that a controlling financial interest in an entity is present when an enterprise has a variable interest, or combination of variable interests, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. Accordingly, the Company consolidates VIEs in which the Company is deemed to be the primary beneficiary.

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 establishes SPEs to securitize fixed rate municipal bonds. The majority of these securitizations meet the SFAS 140 definition of a QSPE. A QSPE can generally be described as an entity with significantly limited powers that 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 such QSPEs. The Company accounts for its involvement with such QSPEs under a financial components approach in which the Company recognizes only its retained residual interest in the QSPE. The Company accounts for such retained interests at fair value.

Certain SPEs do not meet the QSPE criteria due to their permitted activities not being sufficiently limited or to control remaining with one of the owners. These SPEs are typically considered VIEs and are reviewed under FIN 46(R) to determine the primary beneficiary.

When the Company does not have a controlling financial interest in an entity but exerts significant influence over the entity’s operating and financial policies (generally defined as owning a voting or economic interest of between 20 percent to 50 percent), the Company accounts for its investment in accordance with the equity method of accounting prescribed by Accounting Principles Board Opinion No. 18 (“APB 18”), “The Equity Method of Accounting for Investments in Common Stock.” If the Company does not have a controlling financial interest in, or exert significant influence over, an entity, the Company accounts for its investment at fair value.

USE OF ESTIMATES

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and highly liquid investments with maturities of 90 days or less at the date of purchase.

In accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, Piper Jaffray, as a registered broker dealer carrying customer accounts, is subject to requirements related to maintaining cash or qualified

40       Piper Jaffray Annual Report 2005

Notes to Consolidated Financial Statements

securities in a segregated reserve account for the exclusive benefit of its customers.

COLLATERALIZED SECURITIES TRANSACTIONS

Securities purchased under agreements to resell and securities sold under agreements to repurchase are carried at the contractual amounts at which the securities will be subsequently resold or repurchased, including accrued interest. It is the Company’s policy to take possession or control of securities purchased under agreements to resell at the time these agreements are entered into. The counterparties to these agreements typically are primary dealers of U.S. government securities and major financial institutions. Collateral is valued daily, and additional collateral is obtained from or refunded to counterparties when appropriate.

Securities borrowed and loaned result from transactions with other broker dealers or financial institutions and are recorded at the amount of cash collateral advanced or received. These amounts are included in receivables from and payable to brokers, dealers and clearing organizations on the consolidated statements of financial condition. Securities borrowed transactions require the Company to deposit cash or other collateral with the lender. Securities loaned transactions require the borrower to deposit cash with the Company. The Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as necessary. Interest is accrued on securities borrowed and loaned transactions and is included in other assets and other liabilities and accrued expenses on the consolidated statements of financial condition and the respective interest income and expense balances on the consolidated statements of operations.

CUSTOMER TRANSACTIONS

Customer securities transactions are recorded on a settlement date basis, while the related revenues and expenses are recorded on a trade date basis. Customer receivables and payables include amounts related to both cash and margin transactions. Securities owned by customers, including those that collateralize margin or other similar transactions, are not reflected on the consolidated statements of financial condition.

REVENUE RECOGNITION

Commissions and Fees. The Company generates commissions from executing and clearing client transactions. These commissions are recorded on a trade date basis. The Company charges fees to certain private client accounts based on the value of client assets under management. These revenues are recognized over the periods for which services are rendered.

Principal Transactions. Gains and losses related to trading securities and other inventory positions owned, trading securities and other inventory positions pledged, and trading securities and other inventory positions sold, but not yet purchased are reflected on a trade date basis in principal transactions on the consolidated statements of operations.

Investment Banking. Investment banking revenues, which include underwriting fees, management fees and advisory fees, are recorded when services for the transactions are completed under the terms of each engagement. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded. Investment banking revenues are presented net of related expenses.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Management estimates an allowance for doubtful accounts to reserve for probable losses from unsecured and partially secured customer accounts. Management is continually evaluating its receivables from customers for collectibility and possible write-off by examining the facts and circumstances surrounding each customer where a loss is deemed possible.

FIXED ASSETS

Fixed assets include furniture and equipment, software and leasehold improvements. Depreciation of furniture and equipment and software is provided using the straight-line method over estimated useful lives of three to ten years. Leasehold improvements are amortized over their estimated useful life or the life of the lease, whichever is shorter. Additionally, certain costs incurred in connection with internal-use software projects are capitalized and amortized over the expected useful life of the asset, generally three to seven years.

LEASES

The Company leases its corporate headquarters and retail branches under various non-cancelable leases. The leases require payment of real estate taxes, insurance and common area maintenance, in addition to rent. The terms of the Company’s lease agreements generally range up to 10 years. Some of the leases contain renewal options, escalation clauses, rent free holidays and operating cost adjustments.

For leases that contain escalations and rent-free holidays, the Company recognizes the related rent expense on a straight-line basis from the date the

Piper Jaffray Annual Report 2005        41

Notes to Consolidated Financial Statements

Company takes possession of the property to the end of the initial lease term. The Company records any difference between the straight-line rent amounts and amounts payable under the leases as part of other liabilities and accrued expenses.

Cash or lease incentives received upon entering into certain leases are recognized on a straight-line basis as a reduction of rent expense from the date the Company takes possession of the property or receives the cash to the end of the initial lease term. The Company records the unamortized portion of lease incentives as part of other liabilities and accrued expenses.

GOODWILL AND INTANGIBLE ASSETS

Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” addresses the accounting for goodwill and intangible assets subsequent to their acquisition. Goodwill represents the excess of purchase price over the fair value of net assets acquired using the purchase method of accounting. The recoverability of goodwill is evaluated annually, at a minimum, or on an interim basis if events or circumstances indicate a possible inability to realize the carrying amount. The evaluation includes assessing the estimated fair value of the goodwill based on market prices for similar assets, where available, and the present value of the estimated future cash flows associated with the goodwill.

Intangible assets with determinable lives consist of unpatented technologies that are amortized on a straight-line basis over three years.

OTHER RECEIVABLES

Included in other receivables are loans made to financial advisors and other revenue-producing employees, typically in connection with their recruitment. These loans are forgiven based on continued employment and are amortized to compensation and benefits using the straight-line method over the respective terms of the loans, which generally range from three to five years.

In conjunction with these loans, management estimates an allowance for loan losses. This allowance is established for situations where loan recipients leave the Company prior to full forgiveness of their loan balance and the Company is subsequently not able to recover the remaining balances. The Company determines adequacy of the allowance based upon an evaluation of the loan portfolio, including the collectibility of unforgiven balances of departed employees, recent experience related to attrition of certain revenue-producing employees and other pertinent factors.

OTHER ASSETS

Other assets include exchange memberships valued at cost; including two seats on the New York Stock Exchange, Inc. (“NYSE”), investments in partnerships valued at fair value, investments to fund deferred compensation liabilities valued at fair value, prepaid expenses, and net deferred tax assets. Refer to Note 6 for additional information regarding investments in partnerships. Refer to Note 22 for additional information regarding income taxes.

As noted above, included in other assets are investments that the Company has made to fund certain deferred compensation liabilities for employees. The Company has fully funded these deferred compensation liabilities by investing in venture capital stage companies or by investing in partnerships that invest in venture capital stage companies. Future payments, if any, to participants in these deferred compensation plans are directly linked to the performance of these investments. No further deferrals of compensation are expected under these deferred compensation plans. Also included in other assets are the Company’s other venture capital investments. Investments are carried at estimated fair value based on valuations set forth in statements obtained from the underlying fund manager or based on published market quotes, with the resulting gains and losses recognized in other income on the consolidated statements of operations. In the event a security is thinly traded or the market price of an investment is not readily available, management estimates fair value using other valuation methods depending on the type of security and related market.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Substantially all of the Company’s financial instruments are recorded on the Company’s consolidated statements of financial condition at fair value or the contract amount. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

Trading securities owned and trading securities sold, but not yet purchased are recorded on a trade date basis and are stated at market or fair value. The Company’s valuation policy is to use quoted market or dealer prices from independent sources where they are available and reliable. A substantial percentage of the fair values recorded for the Company’s trading securities owned and trading securities sold, but not yet purchased are based on observable market prices. The fair values of trading securities for which a quoted market or dealer price is not available are based on management’s estimate, using the best information

42       Piper Jaffray Annual Report 2005

Notes to Consolidated Financial Statements

available, of amounts that could be realized under current market conditions. Among the factors considered by management in determining the fair value of these securities are the cost, terms and liquidity of the investment, the financial condition and operating results of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments.

The fair value of over-the-counter derivative contracts are valued using valuation models. The model primarily used by the Company is the present value of cash flow model, as most of the Company’s derivative products are interest rate swaps. This model requires inputs including contractual terms, market prices, yield curves, credit curves and measures of volatility.

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 amounts on the 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.

The carrying amount of subordinated debt closely approximates fair value based upon market rates of interest available to the Company at December 31, 2005.

INCOME TAXES

Income tax expense is recorded using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between amounts reported for income tax purposes and financial statement purposes, using current tax rates. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset will not be realized.

STOCK-BASED COMPENSATION

Effective January 1, 2004, the Company adopted the fair value 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.”

Prior to the Distribution, certain employees of the Company were eligible to participate in USB employee incentive plans pursuant to which they received stock option and restricted stock awards that are described more fully in Note 19. 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.

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 year. 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 the Distribution, the weighted average number of common shares outstanding for each year presented prior to the Distribution was calculated by applying the distribution ratio utilized in the spin-off to the historical USB weighted average number of common shares outstanding for the same periods presented.

FOREIGN CURRENCY TRANSLATION

The Company consolidates a foreign subsidiary, which has designated its local currency as its functional currency. Assets and liabilities of this foreign subsidiary are translated at year-end rates of exchange, and statement of operations accounts are translated at an average rate for the period. In accordance with Statement of Financial Accounting Standards No. 52 (“SFAS 52”), “Foreign Currency Translation,” gains or losses resulting from translating foreign currency financial statements are reflected in other comprehensive loss, a separate component of shareholders’ equity. Gains or losses resulting from foreign currency transactions are included in net income.

RECLASSIFICATIONS

Certain prior period amounts have been reclassified to conform to the current year presentation.

Piper Jaffray Annual Report 2005        43

Notes to Consolidated Financial Statements

Note 3  Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R (“SFAS 123(R)”), “Share-Based Payment.” SFAS 123(R), which is effective for public companies for annual periods beginning after June 15, 2005, supersedes APB 25 and amends Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows.” SFAS 123(R) clarifies and expands the guidance in SFAS 123 in several areas. The approach under SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options and restricted stock, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123(R) also generally requires the immediate expensing of share-based payments granted to retirement-eligible employees. However, awards granted subject to a substantive non-compete agreement are generally expensed over the non-compete period. SFAS 123(R) also requires expected forfeitures to be included in determining the expense related to share-based payments. The Company has evaluated the impact of the adoption of SFAS 123(R) and does not believe the impact will be significant to the Company’s overall results of operations or financial position as the Company elected to account for stock-based compensation under the fair value method as prescribed by SFAS 123, effective January 1, 2004. The Company adopted the provisions of SFAS 123(R) on January 1, 2006, using the modified prospective application.

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.

The Company uses interest rate swaps, interest rate locks, and forward contracts 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 December 31, 2005 and 2004, the Company was counterparty to notional/contract amounts of $4.6 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 a legally enforceable master netting agreement in accordance with FASB Interpretation No. 39 (“FIN 39”), “Offsetting of Amounts Related to Certain Contracts.”

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 approximately $17.0 million and $2.5 million as of December 31, 2005 and 2004, respectively.

Note 5  Securitizations

In connection with its tender option bond program, the Company securitizes highly rated municipal bonds. At December 31, 2005 and 2004, the Company had $298.5 million and $246.9 million, respectively, of municipal bonds in securitization. Each municipal bond is sold into a separate trust that is

44       Piper Jaffray Annual Report 2005

Notes to Consolidated Financial Statements

funded by the sale of variable rate certificates to institutional 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 $7.3 million and $10.1 million at December 31, 2005 and 2004, respectively, with a weighted average life of 9.3 years and 9.7 years, respectively. The 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 December 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 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 and 2004 includes:

(Dollars in Thousands)	2005		2004
Proceeds from new sales	$	22,655	$	98,822
Remarketing fees received		132		98
Cash flows received on retained interests		8,465		6,725

During 2004, two securitization transactions were designed such that they did not meet the asset sale requirements of SFAS 140; therefore, the Company consolidated these trusts. As a result, the Company recorded an asset for the underlying bonds of $45.1 million and $46.5 million as of December 31, 2005 and 2004, respectively, in trading securities owned and a liability for the certificates sold by the trust for $44.9 million and $46.3 million, respectively, in other liabilities and accrued expenses on the consolidated statement of financial condition. 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 each of December 31, 2005 and 2004.

Note 6  Variable Interest Entities

In the normal course of business, the Company regularly creates or transacts with entities that may be VIEs. These entities are either securitization vehicles or investment vehicles.

The Company acts as transferor, seller, investor, or structurer in securitizations. These transactions typically involve entities that are qualifying special purpose entities as defined in SFAS 140. For further discussion on these types of transactions, see Note 5.

The Company has investments in and/or acts as the managing partner or member to approximately 25 partnerships and limited liability companies (“LLCs”). These entities were established for the purpose of investing in emerging growth companies. At December 31, 2005, the Company’s aggregate net investment in these partnerships and LLCs totaled $4.6 million. The Company’s remaining commitment to these partnerships and LLCs was $13.5 million at December 31, 2005.

The Company has identified one LLC described above as a VIE. Furthermore, it was determined that the Company is not the primary beneficiary of this VIE. However, the Company owns a significant variable interest in the VIE. The VIE had assets approximating $5.5 million at December 31, 2005. The Company’s exposure to loss from this entity is $1.1 million, which is the value of its capital contribution at December 31, 2005.

Piper Jaffray Annual Report 2005        45

Notes to Consolidated Financial Statements

The Company also consolidates those partnerships and LLCs in which it has the ability to exercise control over major operating and financial policies. Any partnership or LLC that is not consolidated is accounted for on the equity or cost method of accounting, depending upon the ownership percentage and/or the ability to exercise significant influence over the business activities.

Note 7  Receivables from and Payables to Brokers,

Dealers and Clearing Organizations

Amounts receivable from brokers, dealers and clearing organizations at December 31 included:

(Dollars in Thousands)		2005		2004
Receivable arising from unsettled securities transactions, net		$	108,454	$	264,471
Deposits paid for securities borrowed			92,495		116,041
Receivable from clearing organizations			50,236		52,822
Securities failed to deliver			34,946		88,286
Other			12,925		15,085
	Total receivables	$	299,056	$	536,705

Amounts payable to brokers, dealers and clearing organizations at December 31 included:

(Dollars in Thousands)		2005		2004
Deposits received for securities loaned		$	234,676	$	222,902
Payable to clearing organizations			8,117		44,226
Securities failed to receive			16,609		19,986
Other			195		103
	Total payables	$	259,597	$	287,217

Securities failed to deliver and receive represent the contract value of securities that have not been delivered or received by the Company on settlement date. Deposits paid for securities borrowed and deposits received for securities loaned approximate the market value of the related securities.

Note 8  Receivables from and Payables to Customers

Amounts receivable from customers at December 31 included:

(Dollars in Thousands)		2005		2004
Cash accounts		$	48,850	$	27,211
Margin accounts			424,137		405,962
	Total receivables	$	472,987	$	433,173

Securities owned by customers are held as collateral for margin loan receivables. This collateral is not reflected on the consolidated financial statements. Margin loan receivables earn interest at floating interest rates based on prime rates.

Amounts payable to customers at December 31 included:

(Dollars in Thousands)		2005		2004
Cash accounts		$	191,541	$	120,572
Margin accounts			25,111		68,581
	Total payables	$	216,652	$	189,153

Payables to customers primarily comprise certain cash balances in customer accounts consisting of customer funds pending settlement of securities transactions and customer funds on deposit. Except for amounts arising from customer short sales, all amounts payable to customers are subject to withdrawal by customers upon their request.

46       Piper Jaffray Annual Report 2005

Notes to Consolidated Financial Statements

Note 9  Collateralized Securities Transactions

The Company’s financing and customer securities activities involve the Company using securities as collateral. In the event that the counterparty does not meet its contractual obligation to return securities used as collateral, or customers do not deposit additional securities or cash for margin when required, the Company may be exposed to the risk of reacquiring the securities or selling the securities at unfavorable market prices in order to satisfy its obligations to its customers or counterparties. The Company seeks to control this risk by monitoring the market value of securities pledged or used as collateral on a daily basis and requiring adjustments in the event of excess market exposure.

In the normal course of business, the Company obtains securities purchased under agreements to resell, securities borrowed and margin agreements on terms that permit it to repledge or resell the securities to others. The Company obtained securities with a fair value of approximately $904.3 million and $931.6 million at December 31, 2005 and 2004, respectively, of which $454.0 million and $489.8 million, respectively, has been either pledged or otherwise transferred to others in connection with the Company’s financing activities or to satisfy its commitments under trading securities sold, but not yet purchased.

At December 31, 2005, the Company’s securities sold under agreements to repurchase (“Repurchase Liabilities”) exceeded 10 percent of total assets. The majority of Repurchase Liabilities at December 31, 2005, consisted of U.S. Government agency obligations.

The following is a summary of Repurchase Liabilities as of December 31, 2005:

	Carrying
	Amount of		Repurchase
(Dollars in Thousands)	Assets Sold		Liabilities		Interest Rates
Overnight maturity	$	234,255	$	232,078		3.90%-4.40%
1-30 days maturity		5,428		5,310		2.25%-3.65%
On demand maturity		8,528		8,398		3.75%-3.90%
	$	248,211	$	245,786

Note 10  Goodwill and Intangible Assets

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

				Private		Corporate
	Capital			Client		Support and		Consolidated
(Dollars in Thousands)	Markets			Services		Other		Company
Goodwill
Balance at December 31, 2004	$	231,567		$	85,600	$	–	$	317,167
Goodwill acquired		–			–		–		–
Impairment losses		–			–		–		–
Balance at December 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		(1,600	)		–		–		(1,600	)
Impairment losses		–			–		–		–
Balance at December 31, 2005	$	3,067		$	–	$	–	$	3,067
Total goodwill and intangible assets	$	234,634		$	85,600	$	–	$	320,234

Piper Jaffray Annual Report 2005        47

Notes to Consolidated Financial Statements

Note 11  Trading Securities Owned and Trading Securities Sold,

but Not Yet Purchased

At December 31, trading securities owned and trading securities sold, but not yet purchased were as follows:

(Dollars in Thousands)			2005		2004
Owned:
	Corporate securities:
		Equity securities	$	13,260	$	9,490
		Convertible securities		9,221		93,480
		Fixed income securities		76,733		208,494
	Mortgage-backed securities			329,057		459,322
	U.S. government securities			26,652		37,244
	Municipal securities			278,156		165,435
	Other			20,819		11,256
			$	753,898	$	984,721
Sold, but not yet purchased:
	Corporate securities:
		Equity securities	$	8,367	$	59,106
		Convertible securities		2,572		12,600
		Fixed income securities		31,588		155,534
	Mortgage-backed securities			157,132		406,621
	U.S. government securities			127,833		103,148
	Municipal securities			93		–
	Other			4,619		9,595
			$	332,204	$	746,604

At December 31, 2005 and 2004, trading securities owned in the amount of $236.6 million and $290.5 million, respectively, had 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 12  Fixed Assets

The following is a summary of fixed assets as of December 31, 2005 and 2004:

(Dollars in Thousands)		2005		2004
Furniture and equipment		$	69,885	$	82,589
Leasehold improvements			35,007		30,538
Software			47,879		45,431
Projects in process			1,305		6,338
	Total		154,076		164,896
Less accumulated depreciation and amortization			98,952		110,928
		$	55,124	$	53,968

For the years ended December 31, 2005, 2004 and 2003, depreciation and amortization of furniture and equipment, software and leasehold improvements totaled $18.1 million, $21.4 million and $19.0 million, respectively, and are included in occupancy and equipment on the consolidated statements of operations.

Note 13  Financing

The Company had uncommitted credit agreements with banks totaling $675 million at December 31, 2005, composed of $555 million in discretionary secured lines under which no amount was outstanding at December 31, 2005 and 2004, and $120 million in discretionary unsecured lines under which no amount

48       Piper Jaffray Annual Report 2005

Notes to Consolidated Financial Statements

was outstanding at December 31, 2005 and 2004. 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 Securities and Exchange Commission (“SEC”) Rule 15c3-1 and has been approved by the NYSE and is therefore allowable in the net capital computation for Piper Jaffray. The entire amount of the subordinated debt will mature in 2008.

The Company’s subordinated debt and short-term bank financing bear interest at rates based on the London Interbank Offered Rate or federal funds rate. At December 31, 2005 and 2004, the weighted average interest rate on borrowings was 5.55 percent and 3.51 percent, respectively. At December 31, 2005 and 2004, no formal compensating balance agreements existed, and the Company was in compliance with all debt covenants related to these facilities. The Company recognized and paid to USB and affiliates $9.0 million of interest expense related to borrowings for the year ended December 31, 2003.

Note 14  Contingencies, Commitments and Guarantees

In the normal course of business, the Company maintains contingency reserves and enters into various commitments and guarantees, the most significant of which are as follows:

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 $13.4 million of this amount remained available as of December 31, 2005.

Given uncertainties regarding the timing, scope, volume and outcome of pending and potential litigation, arbitration and regulatory proceedings and other factors, the amounts of reserves are 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 outside legal 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.

Litigation-related expenses charged to operations included within other operating expenses were $9.6 million, $4.4 million, and $16.1 million for the years ended December 31, 2005, 2004 and 2003, respectively.

CONTRACTUAL COMMITMENTS

The Company leases office space throughout the United States and one location in London, England. The Company’s only material lease is for its corporate headquarters located in Minneapolis, Minnesota. Aggregate minimum lease commitments under operating leases as of December 31, 2005 are as follows:

(Dollars in Thousands)
2006	$	27,158
2007		25,540
2008		25,679
2009		24,776
2010		22,784
Thereafter		69,117
	$	195,054

Piper Jaffray Annual Report 2005        49

Notes to Consolidated Financial Statements

Total minimum rentals to be received in the future under noncancelable subleases were $2.4 million at December 31, 2005.

Rental expense, including operating costs and real estate taxes, charged to operations was $29.2 million, $28.1 million and $27.5 million for the years ended December 31, 2005, 2004 and 2003, respectively.

VENTURE CAPITAL COMMITMENTS

As of December 31, 2005, the Company had commitments to invest approximately $13.5 million in limited partnerships that make private equity investments. The commitments will be funded, if called, through the end of the respective investment periods ranging from 2006 to 2011.

OTHER COMMITMENTS

The Company is a member of numerous exchanges and clearinghouses. Under the membership agreements with these entities, members generally are required to guarantee the performance of other members, and if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral. The Company’s maximum potential liability under these arrangements cannot be quantified. However, the likelihood that the Company would be required to make payments under these arrangements is remote. Accordingly, no liability is recorded in the consolidated financial statements for these arrangements.

SECURITIES LENDING GUARANTEE

As a funding source for the Company, the Company participates in securities lending activities by using customer excess margin securities. The Company indemnifies customers for the difference between the market value of the securities loaned and the market value of the collateral received. These transactions are collateralized with cash. At December 31, 2005, future payments guaranteed by the Company under these arrangements were approximately $221.9 million and represent the market value of the customer securities loaned to third parties. At December 31, 2005, the Company received cash of $232.3 million as collateral for these arrangements. The value of this collateral is included on the consolidated statements of financial condition within payables to brokers, dealers and clearing organizations. At December 31, 2005, the Company had collateral in excess of the market value of the securities loaned and, therefore, no liability is recorded related to potential future payments made under these guarantees.

REIMBURSEMENT GUARANTEE

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 December 31, 2005 and 2004 was $298.5 million and $246.9 million, respectively, representing the outstanding amount of all trust certificates at those dates. This exposure to loss is mitigated by the underlying bonds in the trusts, which are either AAA or AA rated. These bonds had a market value of approximately $282.0 million and $260.0 million at December 31, 2005 and 2004, respectively. 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.

CONCENTRATION OF CREDIT RISK

The Company provides investment, capital-raising and related services to a diverse group of domestic and foreign customers, including governments, corporations, and institutional and individual investors. The Company’s exposure to credit risk associated with the non-performance of customers in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile securities markets, credit markets and regulatory changes. This exposure is measured on an individual customer basis and on a group basis for customers that share similar attributes. To alleviate the potential for risk concentrations, credit limits are established and continually monitored in light of changing customer and market conditions. As of December 31, 2005 and 2004, the Company did not have significant concentrations of credit risk with any one customer or counterparty, or any group of customers or counterparties.

50       Piper Jaffray Annual Report 2005

Notes to Consolidated Financial Statements

Note 15  Restructuring

The Company recorded a pre-tax restructuring-related expense of $8.6 million in the second quarter of 2005. The expense was incurred to restructure the Company’s operations as a means to better align its cost infrastructure with its revenues. The Company determined restructuring charges and related accruals based on a specific formulated plan.

The components of these charges are shown below:

(Dollars in Thousands)
Severance and employee-related		$	4,886
Lease terminations and asset write-downs			3,709
	Total	$	8,595

Severance and employee-related charges included the cost of severance, other benefits and outplacement costs associated with the termination of employees. The severance amounts were determined based on the Company’s severance pay program in place at the time of termination and will be paid out over a benefit period of up to one year from the time of termination. Approximately 100 employees received severance.

Lease terminations and asset write-downs represented costs associated with redundant office space and equipment disposed of as part of the restructuring plan. Payments related to terminated lease contracts continue through the original terms of the leases, which run for various periods, with the longest lease term running through 2014.

The following table presents a summary of activity with respect to the restructuring-related liability:

(Dollars in Thousands)
Balance at December 31, 2004		$	–
	Provision charged to operating expense		8,595
	Cash outlays		(4,432	)
	Noncash write-downs		(1,138	)
Balance at December 31, 2005		$	3,025

The adequacy of the restructuring-related liability is reviewed regularly, taking into consideration actual payments and projected liabilities. Adjustments are made to increase or decrease the accrual as needed. Reversals of expenses, if any, can reflect a lower-than-expected use of benefits by affected employees and changes in initial assumptions as a result of subsequent events.

Note 16  Shareholders’ Equity

The certificate of incorporation of Piper Jaffray Companies provides for the issuance of up to 100,000,000 shares of common stock with a par value of $0.01 per share and up to 5,000,000 shares of undesignated preferred stock with a par value of $0.01 per share.

COMMON STOCK

The holders of Piper Jaffray Companies common stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Subject to preferences that may be applicable to any outstanding preferred stock of Piper Jaffray Companies, the holders of its common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Piper Jaffray Companies board of directors out of funds legally available for that purpose. In the event that Piper Jaffray Companies is liquidated, dissolved or wound up, the holders of its common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to any prior distribution rights of Piper Jaffray Companies preferred stock, if any, then outstanding. The holders of the common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to Piper Jaffray Companies common stock.

Piper Jaffray Companies does not intend to pay cash dividends on its common stock for the foreseeable future. Instead, Piper Jaffray Companies intends to retain all available funds and any future earnings for use in the operation and expansion of its business and to repurchase outstanding common stock to the extent authorized by its board of directors. Additionally, as set forth in Note 21, there are dividend restrictions on Piper Jaffray.

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

In 2005, the board of directors of Piper Jaffray Companies authorized the Company to repurchase up to 1.3 million shares of the outstanding common stock

Piper Jaffray Annual Report 2005        51

Notes to Consolidated Financial Statements

of Piper Jaffray Companies for a maximum aggregate purchase price of $65.0 million. The Company completed the purchase of 1.3 million shares on October 4, 2005. Purchases were made on the open market pursuant to a 10b5-1 plan established with an independent agent.

PREFERRED STOCK

The Piper Jaffray Companies board of directors has the authority, without action by its shareholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights associated with the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of common stock until the Piper Jaffray Companies board of directors determines the specific rights of the holders of preferred stock. However, the effects might include, among other things, the following: restricting dividends on its common stock, diluting the voting power of its common stock, impairing the liquidation rights of its common stock and delaying or preventing a change in control of Piper Jaffray Companies without further action by its shareholders.

RIGHTS AGREEMENT

Piper Jaffray Companies adopted a rights agreement prior to the Distribution date. The issuance of a share of Piper Jaffray Companies common stock also constitutes the issuance of a preferred stock purchase right associated with such share. These rights are intended to have anti-takeover effects in that the existence of the rights may deter a potential acquirer from making a takeover proposal or a tender offer for Piper Jaffray Companies stock.

Note 17  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 the Distribution, the weighted average number of common shares outstanding for 2003 was calculated by applying the distribution ratio utilized in the spin-off to USB’s historical weighted average number of common shares outstanding for the applicable period. The computation of earnings per share is as follows:

YEAR ENDED DECEMBER 31,
(Amounts in Thousands, Except Per Share Data)	2005		2004		2003
Net income	$	40,083	$	50,348	$	25,999
Shares for basic and diluted calculations:
Average shares used in basic computation		18,813		19,333		19,237
Stock options		4		–		–
Restricted stock		264		66		–
Average shares used in diluted computation		19,081		19,399		19,237
Earnings per share:
Basic	$	2.13	$	2.60	$	1.35
Diluted	$	2.10	$	2.60	$	1.35

The Company has excluded 0.6 million and 0.3 million options to purchase shares of common stock from its calculation of diluted earnings per share for the periods ended December 31, 2005 and 2004, respectively, as they represented anti-dilutive stock options. There were no anti-dilutive effects for the period ended December 31, 2003.

52       Piper Jaffray Annual Report 2005

Notes to Consolidated Financial Statements

Note 18  Employee Benefit Plans

The Company has various employee benefit plans, and substantially all employees are covered by at least one plan. The plans include a tax-qualified retirement plan with 401(k) and profit-sharing components, a non-qualified retirement plan, a post-retirement benefit plan, and health and welfare plans. During the years ended December 31, 2005, 2004 and 2003, the Company incurred employee benefit expenses of $26.0 million, $28.2 million and $31.3 million, respectively.

RETIREMENT PLAN

Effective with the Distribution, the Company established the Piper Jaffray Companies Retirement Plan (“Retirement Plan”), which has two components: a defined contribution retirement savings plan and a tax-qualified, non-contributory profit-sharing plan. The defined contribution retirement savings plan allows qualified employees, at their option, to make contributions through salary deductions under Section 401(k) of the Internal Revenue Code. Employee contributions are 100 percent matched by the Company to a maximum of 4 percent of recognized compensation up to the social security taxable wage base. Although the Company’s matching contribution vests immediately, a participant must be employed on December 31 to receive that year’s matching contribution. The matching contribution can be made in cash or Piper Jaffray Companies common stock, in the Company’s discretion.

Prior to the Distribution, Company employees participated in a similar USB defined contribution retirement savings plan. Effective upon the Distribution, employees of the Company became inactive participants in the USB plan, similar to terminated employees.

The tax-qualified, non-contributory profit-sharing component of the Retirement Plan covers substantially all employees. Company profit-sharing contributions are discretionary, subject to some limitations to ensure they qualify as deductions for income tax purposes. Employees are fully vested after five years of service. Prior to the establishment of the Retirement Plan at the time of the Distribution, the profit-sharing component of the plan was operated as a stand-alone plan. The Company expensed $2.9 million, $7.3 million and $9.5 million related to profit-sharing contributions in 2005, 2004 and 2003, respectively.

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. This plan is substantially similar to a non-qualified cash balance pension plan maintained by USB, which Company employees participated in prior to the Distribution. Effective upon the Distribution, the existing non-qualified pension liability relating to Company employees was transferred from the USB cash balance pension plan to the Company’s new plan. As most of the Company’s employees participating in the USB plan were fully vested with respect to their benefits, the Company froze the new plan immediately upon establishment, thereby eliminating future benefits related to pay increases and excluding new participants from the plan. In 2004, the Company recorded a $1.1 million pre-tax curtailment gain as a result of freezing the plan.

In 2005, the Company paid out amounts under the plan that exceeded its service cost and interest cost. These payouts triggered settlement accounting under Statement of Financial Accounting Standard No. 88 (“SFAS 88”), “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.” Therefore, the Company recognized a pre-tax settlement loss of $1.2 million in 2005.

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. Prior to the Distribution, Company employees were eligible for retiree health care benefits as part of a substantially similar USB post-retirement benefit plan.

Piper Jaffray Annual Report 2005        53

Notes to Consolidated Financial Statements

The Company uses a September 30 measurement date for the pension and post-retirement benefit plans. Financial information on changes in benefit obligation and plan assets funded and balance sheet status as of December 31, 2005 and 2004, is as follows:

								Post-retirement
		Pension Benefits						Medical Benefits
(Dollars in Thousands)		2005			2004			2005			2004
Change in benefit obligation:
	Benefit obligation at beginning of year	$	29,389		$	27,254		$	1,687		$	1,448
	Service cost		–			–			306			185
	Interest cost		1,643			1,363			99			66
	Plan participants’ contributions		–			–			–			–
	Actuarial loss (gain)		1,577			2,753			(80	)		(12	)
	Curtailments		–			(819	)		–			–
	Settlements		(5,033	)		–			–			–
	Benefits paid		(26	)		(1,162	)		–			–
Benefit obligation at measurement date		$	27,550		$	29,389		$	2,012		$	1,687
Change in plan assets:
	Fair value of plan assets at beginning of year	$	–		$	–		$	–		$	–
	Actual return on plan assets		–			–			–			–
	Employer contribution		5,059			1,162			–			–
	Plan participants’ contributions		–			–			–			–
	Settlements		(5,033	)		–			–			–
	Benefits paid		(26	)		(1,162	)		–			–
Fair value of plan assets at measurement date		$	–		$	–		$	–		$	–
Funded status		$	(27,550	)	$	(29,389	)	$	(2,012	)	$	(1,687	)
Adjustment for fourth quarter contributions			1,217			1,260			–			–
Unrecognized net actuarial loss			6,395			6,381			235			328
Unrecognized prior service cost			–			–			(360	)		(424	)
Net amount recognized		$	(19,938	)	$	(21,748	)	$	(2,137	)	$	(1,783	)
Amounts recognized in the Consolidated Statements of Financial Condition:
	Accrued benefit liability	$	(26,333	)	$	(28,129	)	$	(2,137	)	$	(1,783	)
	Accumulated other comprehensive loss		6,395			6,381			–			–
Net amount recognized		$	(19,938	)	$	(21,748	)	$	(2,137	)	$	(1,783	)
Accumulated benefit obligation		$	27,550		$	29,389

The minimum pension liability adjustment included in “other comprehensive loss” at December 31, 2005, was $3.9 million, which is net of a $2.5 million deferred tax benefit.

54       Piper Jaffray Annual Report 2005

Notes to Consolidated Financial Statements

The components of the net periodic benefits costs for the years ended December 31, 2005, 2004 and 2003, are as follows:

									Post-retirement
	Pension Benefits								Medical Benefits
(Dollars in Thousands)	2005		2004			2003			2005			2004			2003
Service cost	$	–	$	–		$	–		$	306		$	185		$	246
Interest cost		1,643		1,363			1,817			99			66			88
Expected return on plan assets		–		–			–			–			–			–
Amortization of prior service cost		–		(158	)		(210	)		(64	)		(48	)		(64	)
Amortization of net loss		395		145			185			13			22			25
Curtailment gain		–		(1,124	)		–			–			–			–
Net periodic benefit cost	$	2,038	$	226		$	1,792		$	354		$	225		$	295

The assumptions used in the measurement of our benefit obligations as of December 31, 2005 and 2004, are as follows:

							Post-retirement
	Pension Benefits						Benefits
	2005			2004			2005			2004
Discount rate used to determine year-end obligation		5.85	%		6.00	%		5.85	%		6.00	%
Discount rate used to determine fiscal year expense		6.00	%		6.20	%		6.00	%		6.20	%
Expected long-term rate of return on participant balances		6.50	%		6.50	%		N/A			N/A
Rate of compensation increase		N/A			N/A			N/A			N/A

	2005		2004
Health care cost trend rate assumed for next year (pre-medicare/post-medicare)		9%/11%		10%/12%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) (pre-medicare/post-medicare)		5.0%/5.0%		5.0%/5.0%
Year that the rate reaches the ultimate trend rate (pre-medicare/post-medicare)		2012/2013		2012/2013

The health care cost trend rate assumption does not have a significant impact on the Company’s post-retirement medical benefit obligations because the Company’s obligations are largely fixed dollar amounts in future years. To illustrate, a one-percentage-point change in assumed health care cost trends would have the following effects:

	1-Percentage-Point		1-Percentage-Point
(Dollars in Thousands)	Increase		Decrease
Effect on total of service and interest cost	$	1	$	(1	)
Effect on post-retirement benefit obligation		3		(4	)

The pension plan and post-retirement medical plan do not have assets and are not funded. The Company expects to contribute cash of $4.5 million to the pension plan and $0.2 million to the post-retirement benefit plan to fund anticipated withdrawals in 2006.

Piper Jaffray Annual Report 2005        55

Notes to Consolidated Financial Statements

Pension and post-retirement benefit payments, which reflect expected future service, are expected to be paid as follows:

			Post-
	Pension		Retirement
(Dollars in Thousands)	Benefits		Benefits
2006	$	4,494	$	159
2007		2,739		201
2008		2,248		218
2009		2,109		255
2010		2,272		263
Thereafter		9,554		1,832
	$	23,416	$	2,928

HEALTH AND WELFARE PLANS

Company employees who meet certain work schedule and service requirements are eligible to participate in the Company’s health and welfare plans. The Company subsidizes the cost of coverage for employees. The medical plan contains cost-sharing features such as deductibles and coinsurance.

Note 19  Stock-Based Compensation and Cash Award Program

The Company maintains one stock-based compensation plan, the Piper Jaffray Companies Amended and Restated 2003 Annual and Long-Term Incentive Plan. The plan permits the grant of equity awards, including stock options and restricted stock, to the Company’s 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 granted options to purchase Piper Jaffray Companies common stock to its non-employee directors. The Company believes that such awards better align the interests of employees with those of shareholders and serve as an employee retention tool. The awards granted to employees have three-year cliff vesting periods. The director awards are fully vested upon grant. The maximum term of the stock option awards granted is ten years. The plan provides for accelerated vesting of option and restricted stock awards if there is a change in control of the Company (as defined in the plan) and in the event of a participant’s death.

56       Piper Jaffray Annual Report 2005

Notes to Consolidated Financial Statements

The following table summarizes the Company’s stock options and restricted stock outstanding for the years ended December 31, 2003, 2004 and 2005:

				Weighted		Shares of
		Options		Average		Restricted
		Outstanding		Exercise Price		Stock Outstanding
December 31, 2003			–		–		–
Granted:
	Stock options		322,005	$	47.49		–
	Restricted stock		–		–		550,659
Exercised options			–		–		–
Vested restricted stock			–		–		–
Canceled options			25,975		47.30		–
Canceled restricted stock			–		–		18,774
December 31, 2004			296,030	$	47.50		531,885
Granted:
	Stock options		426,352	$	38.78		–
	Restricted stock		–		–		993,919
Exercised options			–		–		–
Vested restricted stock			–		–		482
Canceled options			79,350		42.91		–
Canceled restricted stock			–		–		107,878
December 31, 2005			643,032	$	42.29		1,417,444
Options exercisable at December 31, 2004			21,249
Options exercisable at December 31, 2005			54,041

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

			Options Outstanding
			Weighted				Exercisable Options
			Average		Weighted				Weighted
			Remaining		Average				Average
			Contractual		Exercise				Exercise
Range of Exercise Prices	Shares		Life (Years)		Price		Shares		Price
$28.01		28,565		9.3	$	28.01		28,565	$	28.01
$33.40		4,001		9.6	$	33.40		4,001	$	33.40
$39.62		348,378		9.1	$	39.62		99	$	39.62
$47.30 – $51.05		262,088		8.1	$	47.53		21,376	$	50.12

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 years ended December 31, 2005 and 2004, the Company recorded compensation expense, net of estimated forfeitures, of $19.0 million and $8.9 million, respectively, related to employee stock option and restricted stock grants and $0.3 million in each year in outside services expense related to director stock option grants.

Piper Jaffray Annual Report 2005        57

Notes to Consolidated Financial Statements

The following table provides a summary of the valuation assumptions used by the Company to determine the estimated value of awards of stock options to purchase Piper Jaffray Companies common stock:

Weighted average assumptions in option
valuation	2005			2004
Risk-free interest rates		3.77	%		3.20	%
Dividend yield		0.00	%		0.00	%
Stock volatility factor		38.03	%		40.00	%
Expected life of options (in years)		5.83			5.79
Weighted average fair value of options granted	$	16.58		$	21.24

In connection with the Company’s spin-off from USB, the Company established a cash award program pursuant to which it 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.

Prior to the Distribution, certain of the Company’s employees were eligible to participate in the stock incentive plans maintained by USB, which included non-qualified and incentive stock options, restricted stock and other stock-based awards. While part of USB, the Company applied APB 25 to account for USB employee stock incentive plans. Because the exercise price of the 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 at the grant date. Options granted under the USB plans were generally exercisable up to ten years from the date of grant and vested over three to five years. Restricted shares 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 was amortized on a straight-line basis over the vesting period. Expense related to restricted stock grants was $3.9 million in 2003. Based on the USB plans, these options and restricted stock either terminated within 90 days following the Distribution or remained with USB.

The following table summarizes USB stock options and restricted stock outstanding and exercised under various equity plans of USB while the Company’s employees were employed by USB:

			Weighted		Shares of
	Options		Average		Restricted Stock
	Outstanding		Exercise Price		Outstanding
December 31, 2002		20,552,381	$	23.47		399,667
Exercised		4,992,438		25.87		–
Canceled options and canceled/vested restricted stock		3,821,652		24.49		327,754
Options/restricted stock remaining with USB		11,738,291		24.19		71,913
December 31, 2003		–				–

Pro forma information regarding net income is required to be disclosed by SFAS 123 and has been determined as if the Company had accounted for employee stock option and stock purchase plans (collectively, the “options”) under the fair value method of SFAS 123. The fair value of the options was estimated at the grant date using a Black-Scholes option-pricing model.

The pro forma disclosures include USB options granted to the Company’s employees while employed by USB and therefore should not be viewed as representative of future years. Furthermore, the value of certain of USB options that terminated as a result of the Distribution were replaced by cash awards to our employees.

58       Piper Jaffray Annual Report 2005

Notes to Consolidated Financial Statements

The following table shows pro forma compensation expense, net income and earnings per share adjusted for the impact of applying the fair value method of accounting for stock-based compensation for the year ended December 31, 2003.

(Dollars in Thousands, Except Per Share Data)
Reported compensation expense		$	482,397
Stock-based compensation			21,457
	Pro forma compensation expense	$	503,854
Reported net income		$	25,999
Stock-based compensation, net of tax			(12,874	)
	Pro forma net income	$	13,125
	Pro forma earnings per share	$	0.68

Note 20  Transactions with U.S. Bancorp Prior to the Distribution

Prior to the Distribution, the Company regularly entered into transactions with USB and its affiliates. These transactions resulted in either charges to or reimbursements from the Company, including fees for referrals and for underwriting and selling USB affiliated mutual funds, and costs for occupancy, technology support and general and administrative services. Royalty fees for the use of the USB brand names and other USB trademarks were charged to the Company by a USB affiliate in the amount of $3.9 million for the year ended December 31, 2003.

During 2003, Piper Jaffray repaid its outstanding subordinated debt of $215.0 million and entered into a new subordinated debt agreement of $180.0 million with an affiliate of USB. The Company received capital contributions of $37.5 million in 2003 from USB. Additionally, the Company made distributions of $3.6 million to USB in 2003.

Note 21  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 of the SEC and the net capital rule of the NYSE. Piper Jaffray has elected to use the alternative method permitted by the SEC 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 SEC rule. Under the NYSE 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 SEC and NYSE rules. In addition, Piper Jaffray is subject to certain notification requirements related to withdrawals of excess net capital.

At December 31, 2005, net capital calculated under the SEC rule was $314.0 million, or 57.0 percent of aggregate debit balances; this amount exceeded the minimum net capital required under the SEC rule by $303.0 million.

Piper Jaffray also is 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 December 31, 2005, Piper Jaffray Ltd. was in compliance with the capital requirements of the FSA.

Piper Jaffray Annual Report 2005        59

Notes to Consolidated Financial Statements

Note 22  Income Taxes

Income tax expense is provided using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between amounts reported for income tax purposes and financial statement purposes, using current tax rates. Prior to the Distribution, income taxes were determined on a separate return basis as if the Company had not been eligible to be included in the consolidated income tax return of USB and its affiliates.

The components of income tax expense are as follows:

YEAR ENDED DECEMBER 31,
(Dollars in Thousands)	2005			2004		2003
Current:
Federal	$	19,693		$	15,008	$	17,528
State		1,695			3,839		3,429
Foreign		116			489		418
		21,504			19,336		21,375
Deferred:
Federal		(2,076	)		8,222		(5,529	)
State		1,595			1,715		(962	)
		(481	)		9,937		(6,491	)
Total income tax expense	$	21,023		$	29,273	$	14,884

A reconciliation of the statutory federal income tax rates to the Company’s effective tax rates for the fiscal years ended December 31, is as follows:

(Dollars in Thousands)		2005			2004			2003
Federal income tax at statutory rates		$	21,387		$	27,867		$	14,642
Increase (reduction) in taxes resulting from:
	State income taxes, net of federal tax benefit		2,139			3,610			1,319
	Net tax-exempt interest income		(3,426	)		(3,677	)		(2,933	)
	Other, net		923			1,473			1,856
Total income tax expense		$	21,023		$	29,273		$	14,884

Deferred income tax assets and liabilities reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for the same items for income tax reporting purposes.

60       Piper Jaffray Annual Report 2005

Notes to Consolidated Financial Statements

The net deferred tax asset included in other assets on the consolidated statements of financial condition consisted of the following items at December 31:

(Dollars in Thousands)		2005		2004
Deferred tax assets:
	Liabilities/accruals not currently deductible	$	19,205	$	20,975
	Pension and retirement costs		10,962		11,811
	Deferred compensation		15,108		9,640
	Partnership investments		–		233
	Other		4,406		4,855
			49,681		47,514
Deferred tax liabilities:
	Partnership investments		440		–
	Fixed assets		2,379		1,101
	Other		270		296
			3,089		1,397
Net deferred tax asset		$	46,592	$	46,117

The Company has reviewed the components of the deferred tax assets and has determined that no valuation allowance is deemed necessary based on management’s expectation of future taxable income.

As part of the Distribution, the Company entered into a tax-sharing agreement with USB that governs each parties’ responsibilities going forward related to income taxes. Pursuant to this agreement, USB generally is responsible for any future liabilities resulting from Internal Revenue Service audits for those years when the Company was part of the USB consolidated income tax return.

Note 23  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 served, 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 business segment. 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 made 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 are included in the results of the revenue-producing segments. The Company manages and allocates resources to its business segments based on these 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, 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 public company and long-term financing are included within Corporate Support and Other. Cash award plan charges related to the Distribution, restructuring-related charges and income taxes are not

Piper Jaffray Annual Report 2005        61

Notes to Consolidated Financial Statements

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 $14.4 million, $11.3 million and $9.2 million for the years ended December 31, 2005, 2004 and 2003, respectively, and are included in the Capital Markets business segment. Non-U.S. long-lived assets were $1.0 million and $0.6 million at December 31, 2005 and 2004, respectively.

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 periods are reclassified and presented on a comparable basis.

CAPITAL MARKETS (“CM”)

This segment consists of equity and fixed income institutional sales, trading and research and investment banking services. Revenues are generated 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 CM maintains securities inventories primarily to facilitate customer transactions, CM also realizes profits and losses from trading activities related to these securities inventories.

PRIVATE CLIENT SERVICES (“PCS”)

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 branch offices. Revenues are generated primarily through commissions earned on equity and fixed income transactions and for distribution of mutual funds and annuities, fees earned on fee-based client accounts and net interest from customers’ margin loan balances. As of December 31, 2005, PCS had 842 financial advisors operating in 90 branch offices in 17 Midwest, Mountain and West Coast states.

CORPORATE SUPPORT AND OTHER

Corporate Support and Other includes costs of being a public company, long-term financing costs and the results of the Company’s private equity business, which generates revenues through the management of private equity funds. This segment also includes results related to the Company’s investments in these funds and in venture capital funds. Prior to January 1, 2005, Corporate Support and Other also included the results of the Company’s venture capital business. Effective December 31, 2004, the Company exited this business and the management of the Company’s venture capital funds was transitioned to an independent company. Therefore, the Company no longer earns management fees for those funds.

62       Piper Jaffray Annual Report 2005

Notes to Consolidated Financial Statements

Reportable segment financial results for the respective year ended December 31, were as follows:

(Dollars in Thousands)				2005			2004			2003
Capital Markets
	Institutional sales
		Fixed income		$	75,201		$	84,685		$	106,138
		Equities			114,789			117,272			122,492
			Total Institutional sales		189,990			201,957			228,630
	Investment banking
		Underwriting
			Fixed income		67,649			62,096			64,762
			Equities		75,026			87,505			70,202
		Advisory services			100,672			78,066			63,258
			Total investment banking		243,347			227,667			198,222
	Other income				2,471			1,678			3,994
	Net revenues				435,808			431,302			430,846
	Operating expenses				365,222			363,249			361,781
	Segment pre-tax operating income			$	70,586		$	68,053		$	69,065
	Segment pre-tax operating margin				16.2	%		15.8	%		16.0	%
Private Client Services
	Net revenues			$	346,951		$	359,668		$	355,563
	Operating expenses				328,670			332,709			347,657
	Segment pre-tax operating income			$	18,281		$	26,959		$	7,906
	Segment pre-tax operating margin				5.3	%		7.5	%		2.2	%
Corporate Support and Other
	Net revenues			$	(7,706	)	$	6,528		$	321
	Operating expenses				7,254			17,202			8,498
	Segment pre-tax operating loss			$	(14,960	)	$	(10,674	)	$	(8,177	)
	Segment pre-tax operating margin				N/M			N/M			N/M
Reconciliation to total income before taxes:
	Total segment pre-tax operating income			$	73,907		$	84,338		$	68,794
	Royalty fee				–			–			3,911
	Cash award program				4,206			4,717			24,000
	Restructuring-related expense				8,595			–			–
	Total income before tax expense			$	61,106		$	79,621		$	40,883
	Pre-tax operating margin				7.9	%		10.0	%		5.2	%

N/M – Not Meaningful

Piper Jaffray Annual Report 2005        63

Piper Jaffray Companies

SUPPLEMENTAL INFORMATION

Quarterly Information (Unaudited)

2005 FISCAL QUARTER
(Amounts in Thousands, Except Per Share Data)		First		Second			Third		Fourth
Total revenues		$	187,675	$	189,380		$	219,340	$	218,394
Interest expense			8,607		9,715			9,979		11,435
Net revenues			179,068		179,665			209,361		206,959
Non-interest expenses			167,589		178,073	(1)		186,296		181,989
Income before income taxes			11,479		1,592			23,065		24,970
Net income		$	7,335	$	1,237		$	15,148	$	16,363
Earnings per common share
	Basic	$	0.38	$	0.07		$	0.80	$	0.89
	Diluted	$	0.38	$	0.06	(1)	$	0.79	$	0.87
Weighted average number of common shares
	Basic		19,378		19,028			18,841		18,365
	Diluted		19,523		19,195			19,107		18,850

2004 FISCAL QUARTER		First		Second		Third		Fourth
Total revenues		$	214,177	$	214,474	$	192,737	$	201,551
Interest expense			4,777		7,171		6,512		6,981
Net revenues			209,400		207,303		186,225		194,570
Non-interest expenses			187,228		186,613		167,650		176,386
Income before income taxes			22,172		20,690		18,575		18,184
Net income		$	13,790	$	12,980	$	11,769	$	11,809
Earnings per common share
	Basic	$	0.71	$	0.67	$	0.61	$	0.61
	Diluted	$	0.71	$	0.67	$	0.61	$	0.61
Weighted average number of common shares
	Basic		19,333		19,333		19,333		19,333
	Diluted		19,366		19,395		19,387		19,445

(1)  The second quarter included a pre-tax restructuring charge of $8,595 or $0.29 per diluted share after tax.

Market for Piper Jaffray Common Stock and Related Shareholder Matters

STOCK PRICE INFORMATION

Our common stock is listed on the New York Stock Exchange under the symbol “PJC.” The following table contains historical quarterly price information for the years ended December 31, 2005 and 2004. On February 17, 2006, the last reported sale price of our common stock was $47.90.

2005 FISCAL YEAR	High		Low
First Quarter	$	47.18	$	36.59
Second Quarter		37.67		26.40
Third Quarter		35.00		29.00
Fourth Quarter		41.12		28.56

2004 FISCAL YEAR	High		Low
First Quarter	$	57.63	$	41.35
Second Quarter		55.55		45.23
Third Quarter		44.70		39.20
Fourth Quarter		49.37		37.65

SHAREHOLDERS

We had 21,300 shareholders of record and an estimated 112,000 beneficial owners of our common stock as of February 17, 2006.

DIVIDENDS

We do not intend to pay cash dividends on our common stock for the foreseeable future. Instead, we currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business. Our board of directors is free to change our dividend policy at any time.

Restrictions on our broker dealer subsidiary’s ability to pay dividends are described in Note 21 to the consolidated financial statements.

64       Piper Jaffray Annual Report 2005

EX-21.1

Exhibit 21.1

SUBSIDIARIES OF PIPER JAFFRAY COMPANIES

Name*	State or Jurisdiction of Entity
Piper Jaffray & Co.	Delaware
PJH Idaho, Inc.	Idaho
PJH Montana, Inc.	Montana
PJH South Dakota, Inc.	South Dakota
PJH Utah, Inc.	Utah
PJH Wyoming, Inc.	Wyoming
PJI Arizona, Inc.	Arizona
Piper Jaffray Ltd.	United Kingdom
PJC Nominees Ltd.	United Kingdom
Piper Jaffray Financial Products Inc.	Delaware
Piper Jaffray Financial Products II Inc.	Delaware
Piper Jaffray Funding LLC	Delaware
Piper Jaffray Lending LLC	Delaware
Piper Jaffray Private Capital Inc.	Delaware
Piper Jaffray Ventures Inc.	Delaware
Piper Ventures Capital Inc.	Delaware

* Indentation indicates the principal parent of each subsidiary.

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in this Annual Report (Form 10-K) of Piper Jaffray Companies (the Company) of our reports dated February 24, 2006, with respect to the consolidated financial statements of the Company, the Company’s management assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of the Company, included in the 2005 Annual Report to Shareholders of the Company.

We consent to the incorporation by reference in the following Registration Statements:

1.	Registration Statement (Form S-8 No. 333-111665) of the Company dated December 31, 2003,
2.	Registration Statement (Form S-8 No. 333-112384) of the Company dated January 30, 2004, and
3.	Registration Statement (Form S-8 No. 333-122494) of the Company dated February 2, 2005,

of our reports dated February 24, 2006, with respect to the consolidated financial statements of the Company, the Company’s management assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of the Company, incorporated herein by reference, and our report dated February 24, 2006, with respect to the financial statement schedule of the Company included in item 15(a) of this Form 10-K.

/s/ Ernst & Young LLP                    

Minneapolis, Minnesota
February 24, 2006

EX-24.1

Exhibit 24.1

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Andrew S. Duff, Sandra G. Sponem and James L. Chosy, and each of them, his or her true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Piper Jaffray Companies (the “Company”) for the Company’s fiscal year ended December 31, 2005, and any or all amendments to said Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and to file the same with such other authorities as necessary, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.

Dated and effective as of the 1st of March, 2006.

/s/ Andrew S. Duff	/s/ Samuel L. Kaplan
Andrew S. Duff, Chairman and Chief	Samuel L. Kaplan, Director
Executive Officer and Director
/s/ Sandra G. Sponem	/s/ Frank L. Sims
Sandra G. Sponem	Frank L. Sims, Director
Chief Financial Officer
/s/ Addison L. Piper	/s/ Jean M. Taylor
Addison L. Piper, Vice Chairman	Jean M. Taylor, Director
and Director
/s/ Michael R. Francis	/s/ Richard A. Zona
Michael R. Francis, Director	Richard A. Zona, Director
/s/ B. Kristine Johnson
B. Kristine Johnson, Director

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Andrew S. Duff, certify that:

1.	I have reviewed this annual report on Form 10-K 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: March 1, 2006

/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 annual report on Form 10-K 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: March 1, 2006

/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: March 1, 2006

/s/ Andrew S. Duff Andrew S. Duff

Chairman and Chief Executive Officer

/s/ Sandra G. Sponem Sandra G. Sponem

Chief Financial Officer