UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2007

OR

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

For the transition period from                      to                     

Commission File No. 001-31720

(612) 303-6000
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is 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 þ       Accelerated Filer o       Non-Accelerated Filer o

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

     As of July 27, 2007, the registrant had 18,483,270 shares of Common Stock outstanding.

 

 

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

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2007 and December 31, 2006
Consolidated Statements of Operations for the three months and six months ended June 30, 2007 and June 30, 2006
Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and June 30, 2006
Notes to Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits
Signatures
Exhibit Index
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Section 906 Certification

PART I. FINANCIAL INFORMATION

See Notes to Consolidated Financial Statements

See Notes to Consolidated Financial Statements

Piper Jaffray Companies

     In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a two-step process to recognize and measure a tax position taken or expected to be taken in a tax return. The first step is recognition, whereby a determination is made whether it is more-likely-than-not that a tax position will be sustained upon examination based on the technical merits of the position. The second step is to measure a tax position that meets the recognition threshold to determine the amount of benefit to recognize. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 was effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material effect on the consolidated financial statements of the Company.

     In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements, but its application may, for some entities, change current practice. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 157 on the Company’s consolidated results of operations and financial condition.

     In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities ” (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial assets and liabilities and other eligible items at fair value, which are not otherwise currently allowed to be measured at fair value. Under SFAS 159, the decision to measure items at fair value is made at specified election dates on an irrevocable instrument-by-instrument basis. Entities electing the fair value option would be required to recognize changes in fair value in earnings and to expense upfront costs and fees associated with the item for which the fair value option is elected. Entities electing the fair value option are required to distinguish on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. If elected, SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, with earlier adoption permitted provided that the entity also early adopts all of the requirements of SFAS 157. The Company is currently evaluating the impact of SFAS 159 on the Company’s consolidated results of operations and financial condition.

     In April 2007, the FASB issued FSP No. FIN 39-1, “Amendment of FASB Interpretation No. 39” (“FSP FIN 39-1”). FSP FIN 39-1 modifies FIN No. 39, “Offsetting of Amounts Related to Certain Contracts,” and permits companies to offset cash collateral receivables or payables with net derivative positions under certain circumstances. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. FSP FIN 39-1 is not expected to have a material affect to our consolidated financial statements.

Note 4 Discontinued Operations

     On August 11, 2006, the Company and UBS completed the sale of the Company’s PCS branch network under a previously announced asset purchase agreement. The purchase price under the asset purchase agreement was approximately $750 million, which included $500 million for the branch network and approximately $250 million for the net assets of the branch network, consisting principally of customer margin receivables.

     In accordance with the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), the results of PCS operations have been classified as discontinued operations for all periods presented. The Company recorded a loss from discontinued operations, net of tax, of $1.1 million and $2.4 million for the three months and six months ended June 30, 2007, respectively, related to the cost of decommissioning a PCS-oriented back office system, litigation-related expenses and restructuring charges. The Company expects to incur additional discontinued operations costs in the third quarter of 2007 related to decommissioning the PCS-oriented back office system. In addition, the Company may incur discontinued operations expense or income related to changes in litigation reserve estimates for retained PCS litigation matters and for changes in estimates to occupancy and severance restructuring charges.

     In connection with the sale of the Company’s PCS branch network, the Company initiated a plan in 2006 to significantly restructure the Company’s support infrastructure. All restructuring costs related to the sale of the PCS branch network are included within discontinued operations in accordance with SFAS 144. See Note 12 for additional information regarding the Company’s restructuring activities.

Note 5 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 June 30, 2007 and December 31, 2006, the Company was counterparty to notional/contract amounts of $6.6 billion and $5.8 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. The Company does not utilize “hedge accounting” as described within SFAS No. 133. 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, “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 $28.3 million and $19.7 million as of June 30, 2007 and December 31, 2006, respectively.

Note 6 Securitizations

     In connection with its tender option bond program, the Company securitizes highly rated municipal bonds. At June 30, 2007 and December 31, 2006, the Company had $296.7 million and $279.2 million, respectively, of par value of municipal bonds in securitization. Each municipal bond is sold into a separate trust that is funded by the sale of variable rate certificates to institutional customers seeking variable rate tax-free investment products. These variable rate certificates reprice weekly. Securitization transactions meeting certain SFAS 140 criteria are treated as sales, with the resulting gain included in other income 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 $3.9 million and $8.1 million at June 30, 2007 and December 31, 2006, respectively, with a weighted average life of 8.5 years and 8.4 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. At June 30, 2007, 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 Company receives a fee to remarket the variable rate certificates derived from the securitizations.

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

     Three securitization transactions were designed such that they did not meet the asset sale requirements of SFAS 140, and as a result, the Company has consolidated these trusts. Accordingly, the Company recorded an asset for the underlying bonds of $49.5 million and $51.2 million as of June 30, 2007 and December 31, 2006 respectively, in trading securities owned and a liability for the certificates sold by the trust for $48.6 million and $50.1 million as of June 30, 2007 and December 31, 2006 respectively, in other liabilities and accrued expenses on the consolidated statements of financial condition.

     The Company enters into interest rate swap agreements to manage interest rate exposure associated with holding the residual interest securities from its securitizations, which have been recorded at fair value and resulted in a liability of approximately $1.0 million and $5.7 million at June 30, 2007 and December 31, 2006, respectively.

     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 June 30, 2007 was $269.4 million, 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 $275.9 million at June 30, 2007. 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 a guarantee has been recorded in the accompanying consolidated financial statements.

Note 7 Receivables from and Payables to Brokers, Dealers and Clearing Organizations

     Amounts receivable from brokers, dealers and clearing organizations at June 30, 2007 and December 31, 2006 included:

     Amounts payable to brokers, dealers and clearing organizations at June 30, 2007 and December 31, 2006 included:

     Deposits paid for securities borrowed and deposits received for securities loaned declined significantly from December 31, 2006 as the Company discontinued its stock loan conduit business in the first quarter of 2007.

     Deposits paid for securities borrowed and deposits received for securities loaned approximate the market value of the securities. 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.

     At June 30, 2007 and December 31, 2006, trading securities owned in the amount of $87.3 million and $89.8 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 economically 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.

Note 10 Financing

     The Company had uncommitted credit agreements with banks totaling $675 million at June 30, 2007, comprised of $555 million in discretionary secured lines under which $33 million was outstanding at June 30, 2007 and no amount was outstanding at December 31, 2006, and $120 million in discretionary unsecured lines under which no amount was outstanding at June 30, 2007 and December 31, 2006. 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.

     The Company’s short-term financing bears interest at rates based on the federal funds rate. At June 30, 2007 and December 31, 2006, the weighted average interest rate on borrowings was 5.69 percent and 5.72 percent, respectively. At June 30, 2007 and December 31, 2006, no formal compensating balance agreements existed, and the Company was in compliance with all debt covenants related to these facilities.

Note 11 Legal Contingencies

     The Company 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, U.S. Bancorp, from whom the Company spun-off from on December 31, 2003, has agreed to indemnify the Company in an amount up to $17.5 million for certain legal and regulatory matters. Approximately $13.2 million of this amount remained available as of June 30, 2007.

     As part of the asset purchase agreement between UBS and the Company for the sale of the PCS branch network, UBS agreed to assume certain liabilities of the PCS business, including certain liabilities and obligations arising from litigation, arbitration, customer complaints and other claims related to the PCS business. In certain cases we have agreed to indemnify UBS for litigation matters after UBS has incurred costs of $6.0 million related to these matters. In addition, we have retained liabilities arising from regulatory matters and certain litigation relating to the PCS business prior to the sale. The amount of loss in excess of the $6.0 million indemnification threshold and for other PCS litigation matters deemed to be probable and reasonably estimable are included in the Company’s established reserves. Adjustment to litigation reserves for matters pertaining to the PCS business are included within discontinued operations on the consolidated statements of operations.

     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, the U.S. Bancorp indemnity agreement and the assumption by UBS of certain liabilities of the PCS business, that pending legal actions, investigations and proceedings will be resolved with no material adverse effect on the consolidated 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, U.S. Bancorp indemnification and/or the assumption obligation of UBS, the results of operations in that period could be materially adversely affected.

Note 12 Restructuring

     The Company implemented a specific restructuring plan in 2006 to reorganize the Company’s support infrastructure as a result of the PCS branch network sale to UBS.

     The restructuring charges included the cost of severance, benefits, outplacement costs and equity award accelerated vesting costs associated with the termination of employees. The severance amounts were determined based on a one-time severance benefit enhancement to the Company’s existing severance pay program in place at the time of termination notification and will be paid out over a benefit period of up to one year from the time of termination. Approximately 295 employees have received a severance package. In addition, the Company has incurred restructuring charges for contract termination costs related to the reduction of office space and the modification of technology contracts. Contract termination fees are determined based on the provisions of Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which among other things requires the recognition of a liability for contract termination under a cease-use date concept. The Company also incurred restructuring charges for the impairment or disposal of long-lived assets determined in accordance with SFAS 144. All restructuring costs related to the sale of the PCS branch network are included within discontinued operations in accordance with SFAS 144.

     For the six months ended June 30, 2007 the Company incurred $0.7 million of expense to revise contract termination cost estimates.

     The following table presents a summary of activity with respect to the restructuring-related liabilities included in other liabilities and accrued expense on the statements of financial condition:

Note 13 Shareholders’ Equity

Share Repurchase Program

     In the third quarter of 2006, the Company’s board of directors authorized the repurchase of up to $180.0 million in common shares through December 31, 2007. The Company executed an accelerated stock repurchase under this authorization in the amount of $100 million during 2006. During the six months ended June 30, 2007, the Company repurchased 158,687 shares of the Company’s common stock at an average price of $63.02 per share for an aggregate purchase price of $10 million. The Company has $70.0 million remaining under this authorization.

Issuance of Shares

     During the six months ended June 30, 2007, the Company reissued 8,619 common shares out of treasury in fulfillment of $0.6 million in obligations under the Piper Jaffray Companies Retirement Plan and reissued 250,058 common shares out of treasury as a result of vesting and exercise transactions under the Piper Jaffray Companies Amended and Restated 2003 Annual and Long-Term Incentive Plan (the “Long-Term Incentive Plan”).

Note 14 Geographic Areas

     The following table presents revenues and long-lived assets by geographic region:

Note 16 Stock-Based Compensation and Cash Award Program

     The Company maintains one stock-based compensation plan, the Long-Term Incentive Plan. The plan permits the grant of equity awards, including non-qualified stock options and restricted stock, to the Company’s employees and directors for up to 4.5 million shares of common stock. The Company periodically grants shares of restricted stock and options to purchase Piper Jaffray Companies common stock to employees and grants options to purchase Piper Jaffray Companies common stock or shares of Piper Jaffray Companies common stock to its non-employee directors. The Company believes that such awards help align the interests of employees and directors 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 options granted to employees and directors 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), in the event of a participant’s death, and at the discretion of the compensation committee of the Company’s board of directors.

     Prior to January 1, 2006, the Company accounted for stock-based compensation under the fair value method of accounting as prescribed by SFAS 123, as amended by SFAS 148. As such, the Company recorded stock-based compensation expense in the consolidated statements of operations at fair value, net of estimated forfeitures.

     Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R) using the modified prospective transition method. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on fair value, net of estimated forfeitures. Because the Company historically expensed all equity awards based on the fair value method, net of estimated forfeitures, SFAS 123(R) did not have a material effect on the Company’s measurement or recognition methods for stock-based compensation.

     Employee and director stock options granted prior to January 1, 2006, were 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. Employee and director stock options granted after January 1, 2006, are expensed by the Company on a straight-line basis over the required service period, based on the estimated fair value of the award on the date of grant using a Black-Scholes option-pricing model. At the time it adopted SFAS 123(R), the Company changed the expensing period from the vesting period to the required service period, which shortened the period over which options are expensed for employees who are retiree-eligible on the date of grant or become retiree-eligible during the vesting period. The number of employees that fell within this category at January 1, 2006 was not material. In accordance with SEC guidelines, the Company did not alter the expense recorded in connection with prior option grants for the change in the expensing period.

     Employee restricted stock grants prior to January 1, 2006, are amortized on a straight-line basis over the vesting period based on the market price of Piper Jaffray Companies common stock on the date of grant. Restricted stock grants after January 1, 2006, are valued at the market price of the Company’s common stock on the date of grant and amortized on a straight-line basis over the required service period. The majority of the Company’s restricted stock grants provide for continued vesting after termination, so long as the employee does not violate certain post-termination restrictions, as set forth in the award agreements or any agreements entered into upon termination. The Company considers the required service period to be the greater of the vesting period or the post-termination restricted period. The Company believes that the post-termination restrictions meet the SFAS 123(R) definition of a substantive service requirement.

     The Company recorded compensation expense, net of estimated forfeitures, within continuing operations of $7.0 million and $5.6 million for the three months ended June 30, 2007 and 2006, respectively, and $12.4 million and $10.3 million for the six months ended June 30, 2007 and 2006, respectively, related to employee stock option and restricted stock grants. The tax benefit related to the total compensation cost for stock-based compensation arrangements totaled $2.7 million and $2.1 million for the three months ended June 30, 2007 and 2006, respectively and $4.8 million and $3.9 million for the six months ended June 30, 2007 and 2006, respectively.

     The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model using assumptions such as the risk-free interest rate, the dividend yield, the expected volatility and the expected life of the option. The risk-free interest rate assumption is based on the U.S. treasury bill rate with a maturity equal to the expected life of the option. The dividend yield assumption is based on the assumed dividend payout over the expected life of the option. The expected volatility assumption for 2007 grants is based on a combination of Company historical data and industry comparisons. The Company has only been a publicly traded company for approximately 42 months; therefore, it does not have sufficient historical data to determine an appropriate expected volatility solely from the Company’s own historical data. The expected life assumption is based on an average of the following two factors: 1) industry comparisons; and 2) the guidance provided by the SEC in Staff Accounting Bulletin No. 107, (“SAB 107”). SAB 107 allows the use of an “acceptable” methodology under which the Company can take the midpoint of the vesting date and the full contractual term. The following table provides a summary of the valuation assumptions used by the Company to determine the estimated value of stock option grants in Piper Jaffray Companies common stock for the six months ended June 30:

     The following table summarizes the changes in the Company’s outstanding stock options for the six months ended June 30, 2007:

     As of June 30, 2007, there was $2.0 million of total unrecognized compensation cost related to stock options expected to be recognized over a weighted average period of 1.69 years.

     Cash received from option exercises for the six months ended June 30, 2007 was $2.3 million. The tax benefit realized for the tax deduction from option exercises totaled $0.9 million for the six months ended June 30, 2007. There were no option exercises for the six months ended June 30, 2006.

     The following table summarizes the changes in the Company’s non-vested restricted stock for the six months ended June 30, 2007:

     As of June 30, 2007, there was $54.8 million of total unrecognized compensation cost related to restricted stock expected to be recognized over a weighted average period of 2.22 years.

     In connection with the Company’s spin-off from U.S. Bancorp on December 31, 2003, the Company established a cash award program pursuant to which it granted cash awards to a broad-based group of employees to aid in retention of employees and to compensate employees for the value of U.S. Bancorp stock options and restricted stock lost by employees. 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 payment under the award. Expense related to the cash award program is included as a separate line item on the Company’s consolidated statements of operations.

Note 17 Net Capital Requirements and Other Regulatory Matters

     As a registered broker dealer and member firm of the New York Stock Exchange (“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 June 30, 2007, net capital calculated under the SEC rule was $357.9 million, and exceeded the minimum net capital required under the SEC rule by $356.1 million.

     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 June 30, 2007, Piper Jaffray Ltd. was in compliance with the capital requirements of the FSA.

Note 18 Income Taxes

     The Company adopted the provisions of FIN 48 on January 1, 2007. Implementation of FIN 48 resulted in no adjustment to the Company’s liability for unrecognized tax benefits. As of the date of adoption the total amount of unrecognized tax benefits was $1.1 million, all of which relates to tax benefits that if recognized, would impact the annual effective tax rate. Included in the total liability for unrecognized tax benefits is $0.2 million of interest and penalties, both of which the Company recognizes as a component of income tax expense. The Company or one of its subsidiaries file income tax returns in the U.S. federal jurisdiction, all states, and various foreign jurisdictions. The Company is not subject to U.S. federal, state and local or non-U.S. income tax examination by tax authorities for taxable years before 2004.

     There was no change in the unrecognized tax benefit during the six month period ended June 30, 2007.

Note 19 Definitive Agreement to Acquire Fiduciary Asset Management LLC

     On April 13, 2007, the Company announced a definitive agreement to acquire Fiduciary Asset Management LLC (“FAMCO”), a St. Louis-based investment management firm, for approximately $66.0 million in cash upon closing and future cash consideration based on financial performance. The Company currently expects the transaction to close late in the third quarter of 2007, subject to certain regulatory approvals and customary closing conditions, including the receipt of third-party consents. The allocation of the purchase price and determination of intangible assets and goodwill will be made once the transaction closes. For more information regarding the Company’s acquisition of FAMCO, please refer to the Company’s Form 8-K, filed with the SEC on April 13, 2007.

Note 20 Definitive Agreement to Acquire Goldbond Capital Holdings Limited

     On July 3, 2007, the Company announced the signing of a definitive agreement to acquire Goldbond Capital Holdings Limited (“Goldbond”), a Hong Kong-based investment bank, for approximately $51.3 million. The purchase price is subject to adjustment based on an audit of Goldbond’s consolidated net asset value as of March 31, 2007. Consideration for the transaction will be paid in cash upon closing, except for $4.1 million to be paid in the form of restricted stock of the Company as partial consideration for the equity interest held by one of the sellers. The Company currently expects the transaction to close late in the third quarter of 2007, subject to customary closing conditions and certain regulatory approvals, including approval from the shareholders of Goldbond Group Holdings Limited, an indirect equity holder in Goldbond that is listed on the Hong Kong Stock Exchange. For more information regarding the Company’s acquisition of Goldbond, please refer to the Company’s Form 8-K, filed with the SEC on July 3, 2007.

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

     The following information should be read in conjunction with the accompanying 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 include, among other things, statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, and also may include our belief regarding the effect of various legal proceedings, as set forth under “Legal Proceedings” in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2006, as updated in our subsequent reports filed with the SEC. 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 the factors identified under “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, 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

     Our continuing operations are principally engaged in providing investment banking, institutional brokerage and related financial services to middle-market companies, private equity groups, public entities, non-profit entities and institutional investors in the United States, Europe and Asia. Our revenues are generated primarily through the receipt of advisory and financing fees earned on investment banking activities, commissions and sales credits earned on equity and fixed income institutional sales and trading activities, net interest earned on securities inventories and profits and losses from trading activities related to these securities inventories.

     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 and committed to providing the highest quality of service and guidance to our clients.

     Discontinued operations include the operating results of our Private Client Services (“PCS”) retail brokerage business and related restructuring costs. We closed on the sale of our PCS branch network and certain related assets to UBS Financial Services, Inc., a subsidiary of UBS AG (“UBS”), on August 11, 2006. Our PCS retail brokerage business provided financial advice and a wide range of financial products and services to individual investors through a network of approximately 90 branch offices. In the second quarter of 2007, discontinued operations recorded a net loss of $1.1 million, which included costs related to decommissioning a retail-oriented back-office system, costs for PCS litigation-related expenses and restructuring charges. We expect to incur additional costs in the third quarter of 2007 related to decommissioning the retail-oriented back office system. Costs associated with implementing a new back-office system to support our capital markets business will be recorded in continuing operations. See Notes 4 and 12 to our unaudited consolidated financial statements for a further discussion of our discontinued operations and restructuring.

     As part of our growth strategy and our efforts to diversify our revenues following the sale of our PCS branch network, we announced on April 13, 2007, the signing of a definitive agreement to acquire Fiduciary Asset Management, LLC (“FAMCO”) a St. Louis-based investment management firm. This acquisition will allow us to enter the investment management business. We currently expect the transaction to close late in the third quarter of 2007, subject to certain regulatory approvals and customary closing conditions, including the receipt of third party consents. In addition, on July 3, 2007, we entered into a definitive agreement to purchase all equity interests in Goldbond Capital Holdings Limited (“Goldbond”), an investment bank and financial services company based in Hong Kong. With this acquisition, we will gain capital markets capabilities required to accelerate the growth of our Asia platform, including corporate finance, sales and trading, equity capital markets and research. We also expect this transaction to close late in the third quarter of 2007, subject to customary regulatory approvals. Both of these transactions are important components in our plan to redeploy capital from the sale of our PCS branch network.

     In the third quarter of 2006, we entered into a strategic relationship with CIT Group, Inc. (“CIT”), which allowed us to offer expanded debt financing solutions to middle-market companies. During the second quarter, CIT announced the acquisition of a mergers and acquisitions advisory firm, creating a significant overlap with our advisory capabilities that resulted in our mutual agreement to terminate the alliance agreement effective July 30, 2007. Revenues generated from this agreement were not significant. We are evaluating several alternatives for providing debt solutions to effectively address our clients’ debt needs going forward.

     We plan to continue our focus on revenue growth through expansion of our capital markets business and entry into and expansion of the investment management business. Within our capital markets business, our efforts will be focused on growing our sector expertise, product depth and geographic reach, as demonstrated by the pending acquisition of Goldbond. The pending acquisition of FAMCO will allow us to enter the investment management business. We expect that continued growth of these businesses will come from a combination of internal organic growth and acquisitions. In addition, as opportunities arise we intend to use our capital to a greater extent to facilitate customer activity and engage in principal activities that leverage our expertise. Our principal activities will result in greater commitments of capital on our own behalf, and may include, among other things, proprietary positions in equity or debt securities of public and private companies. Our growth initiatives will require investments in personnel and other expenses, which may have a short-term negative impact on our profitability as it may take time to develop meaningful revenues from the growth initiatives.

RESULTS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2007

     Net revenues from continuing operations for the three months ended June 30, 2007 were $122.6 million. For the three months ended June 30, 2007, our net income, including continuing and discontinued operations, was $9.3 million, or $0.52 per diluted share, up from net income of $4.1 million, or $0.21 per diluted share, for the prior-year period. For the three months ended June 30, 2007, net income from continuing operations totaled $10.4 million, or $0.58 per diluted share, up from $7.9 million, or $0.40 per diluted share, for the corresponding period in 2006.

     For the six months ended June 30, 2007, net revenues from continuing operations were $259.5 million, an increase of 8 percent over the year-ago period. Net income for the first half of 2007 was $22.7 million, or $1.27 per diluted share, down from net income of $28.0 million, or $1.44 per diluted share, for the prior-year period. For the six months ended June 30, 2007, net income from continuing operations totaled $25.1 million, or $1.40 per diluted share, down from $26.6 million, or $1.37 per diluted share, for the corresponding period in 2006. The year-ago period included a net gain of $5.6 million, or $0.29 per diluted share, related to our ownership of two seats on the New York Stock Exchange, Inc. (“NYSE”).

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 beyond our control and mostly unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the volume and value of trading in securities, the volatility of the equity and fixed income markets, the level and shape of various yield curves, and the demand for investment banking services as reflected by the number and size of equity and debt financings and merger and acquisition transactions.

     Factors that differentiate our business within the financial services industry also may affect our financial results. For example, our business focuses on specific industry sectors. These 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. 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.

N/M — Not Meaningful

     For the three months ended June 30, 2007, net income, including continuing and discontinued operations, totaled $9.3 million. Net revenues from continuing operations increased 16.5 percent to $122.6 million for the second quarter of 2007. For the three months ended June 30, 2007, investment banking revenues increased 18.9 percent to $75.6 million, compared with revenues of $63.6 million in the prior-year period. This increase in investment banking revenues was attributable to higher equity and public finance underwriting activity, offset in part by lower merger and acquisition revenue. Institutional brokerage revenues decreased 2.6 percent to $37.2 million for the second quarter of 2007, compared with $38.2 million in the corresponding period in the prior year, due primarily to lower equity trading volumes. In the second quarter of 2007, net interest income increased to $9.4 million, compared with $4.4 million in the second quarter of 2006. The increase was primarily driven by significantly reduced borrowing needs following the sale of our PCS branch network in August 2006. In the second quarter of 2007, other income was $0.4 million, compared with a loss of $0.9 million in the prior-year period. The loss in the second quarter of 2006 was a result of a decline in the market value of NYSE Group, Inc. restricted shares that we received in connection with the sale of our two seats on the NYSE. Non-interest expenses increased to $107.4 million for the three months ended June 30, 2007, from $93.1 million in the corresponding period in the prior year. This increase was primarily attributable to higher compensation and benefits, occupancy and outside services expenses.

NON-INTEREST EXPENSES FROM CONTINUING OPERATIONS

      Compensation and Benefits - Compensation and benefits expenses, which are the largest component of our expenses, include salaries, bonuses, commissions, benefits, amortization of stock-based compensation, employment taxes and other employee costs. A substantial portion of compensation expense is comprised of variable incentive arrangements, including 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, than is reflected in our statements of operations.

     For the three months ended June 30, 2007, compensation and benefits expenses increased 18.2 percent to $71.7 million, from $60.7 million in the corresponding period in 2006. This increase was due to higher variable compensation costs resulting from higher investment banking revenues. Compensation and benefits expenses as a percentage of net revenues increased to 58.5 percent for the second quarter of 2007, compared with 57.6 percent for the second quarter of 2006.

      Occupancy and Equipment - In the second quarter of 2007, occupancy and equipment expenses were $8.8 million, compared with $6.7 million for the corresponding period in 2006. In the second quarter of 2007, we incurred costs of $0.9 million to relocate office space in New York City. We also made investments in technology to support our growth initiatives.

      Communications - Communication expenses include costs for telecommunication and data communication, primarily consisting of expenses for obtaining third-party market data information. For the three months ended June 30, 2007, communication expenses were $6.0 million, an increase of 7.2 percent from the prior-year period. This increase was due to higher market data service expenses from obtaining expanded services and price increases.

      Floor Brokerage and Clearance - For the three months ended June 30, 2007, floor brokerage and clearance expenses were $4.2 million, compared with $3.4 million for the three months ended June 30, 2006. This increase was a result of higher expenses associated with accessing electronic communication networks as we increased after market support of deal-related stocks. We anticipate our floor brokerage costs to increase modestly because we have outsourced our NYSE floor trading operations. Expenses from our NYSE floor trading operations have historically been included within compensation and benefits expenses, and will be included within floor brokerage and clearance expenses in future periods.

      Marketing and Business Development - Marketing and business development expenses include travel and entertainment and promotional and advertising costs. In the second quarter of 2007, marketing and business development expenses increased to $6.4 million, compared with $6.1 million in the second quarter of 2006. The increase was due to higher travel expenses and increased supply costs.

      Outside Services - Outside services expenses include securities processing expenses, outsourced technology functions, outside legal fees and other professional fees. Outside services expenses increased to $9.1 million in the second quarter of 2007, compared with $6.8 million for the prior-year period, an increase of 33.4 percent. This increase was due to expenses related to the implementation of a new back-office system to support our capital markets business and higher outside legal fees. We anticipate incurring additional expenses in the third quarter of 2007 related to the implementation of the new back-office system.

      Cash Award Program - In connection with our spin-off from U.S. Bancorp in 2003, we established a cash award program pursuant to which we granted cash awards to a broad-based group of our employees. The award program was designed to aid in retention of employees and to compensate for the value of U.S. Bancorp stock options and restricted stock lost by our employees as a result of the spin-off. The cash awards are being expensed over a four-year period ending December 31, 2007. For the three months ended June 30, 2007, cash awards expense decreased to $0.4 million, compared with $0.9 million in the prior-year period. The sale of our PCS branch network resulted in either the forfeiture or accelerated vesting of approximately half of our cash awards in the prior year period and as a result, our ongoing cash award expense decreased. We anticipate incurring approximately $0.9 million of cash award expense within continuing operations for the remainder of 2007.

      Other Operating Expenses - Other operating expenses include insurance costs, license and registration fees, expenses related to our charitable giving program, amortization of intangible assets and litigation-related expenses, which consist of the amounts we reserve and/or pay out related to legal and regulatory matters. Other operating expenses decreased to $0.8 million in the second quarter of 2007, compared with $2.9 million in second quarter of 2006, primarily due to a decline in litigation-related expenses.

      Income Taxes - For the three months ended June 30, 2007, our provision for income taxes from continuing operations was $4.8 million, equating to an effective tax rate of 31.5 percent. For the three months ended June 30, 2006, income taxes from continuing operations were $4.2 million, equating to an effective tax rate of 34.8 percent. The decreased effective tax rate was attributable to an increase in the ratio of municipal interest income, which is non-taxable, to total taxable income.

     Investment banking revenues comprise all the revenues generated through financing and advisory services activities including derivative activities that relate to debt financing. To assess the profitability of investment banking, we aggregate investment banking fees with the net interest income or expense associated with these activities.

     For the three months ended June 30, 2007, investment banking revenues increased 19.3 percent to $77.8 million, compared with $65.2 million in the corresponding period in the prior year. Equity financing revenues increased 51.3 percent to $40.8 million in the second quarter of 2007, due to the completion of a higher number of public equity offerings with higher average revenue per transaction. In the second quarter of 2007, we completed 34 equity financings, raising $4.5 billion in capital, compared with 25 equity financings, raising $3.2 billion in capital, in the prior-year period. Debt financing revenues in the second quarter of 2007 increased 24.5 percent to $25.2 million driven by increased public finance activity. We were the sole underwriter of 138 municipal issues with a par value of $2.2 billion during the second quarter of 2007, compared with 125 municipal issues with a par value of $1.7 billion in the prior-year period. Advisory services revenues decreased 34.7 percent to $11.7 million in the second quarter of 2007, as we completed fewer merger and acquisition transactions and average revenues per transaction declined. We completed 7 mergers and acquisitions transactions during the second quarter of 2007, compared with 11 mergers and acquisitions transactions in the prior-year period.

     Institutional sales and trading revenues comprise all the revenues generated through trading activities, which consist primarily of facilitating customer trades. To assess the profitability of institutional sales and trading activities, we aggregate institutional brokerage revenues with the net interest income or expense associated with financing, economically hedging and holding long or short inventory positions. Our results may vary from quarter to quarter as a result of changes in trading margins, trading gains and losses, net interest spreads, trading volumes and the timing of transactions based on market opportunities. Increased price transparency in the fixed income market, pressure from institutional clients in the equity market to reduce commissions and the use of alternative trading systems in the equity market have put pressure on trading margins. We expect this pressure to continue.

     For the three months ended June 30, 2007, institutional sales and trading revenues were $44.0 million or essentially flat to the prior-year period. Equity institutional sales and trading revenue decreased 9.0 percent in the second quarter of 2007, to $28.0 million due to lower volumes. Partially offsetting this decrease was incremental sales and trading revenue from our European sales and trading operations. Fixed income institutional sales and trading revenues increased 24.4 percent to $16.0 million in the second quarter of 2007 due primarily to stronger high yield and structured products revenues.

     Other income/loss includes gains and losses from investments in private equity and venture capital funds as well as other firm investments and management fees from our private capital business. In addition, other income/loss included interest expense from our subordinated debt prior to its repayment in August 2006. In the second quarter of 2007, other income totaled $0.8 million, compared with a loss of $3.6 million in the three months ended June 30, 2006. The fluctuation is a result of two factors. First, in the third quarter of 2006, we repaid $180 million in subordinated debt, resulting in lower interest expense in the second quarter of 2007. Second, in the second quarter of 2006, we recognized a loss due to a decline in the market value of NYSE Group, Inc. restricted shares that we received from the sale of our two seats on the NYSE.

DISCONTINUED OPERATIONS

     Discontinued operations include the operating results of our PCS business and restructuring costs. The sale of the PCS branch network to UBS closed on August 11, 2006.

     Our PCS retail brokerage business provided financial advice and a wide range of financial products and services to individual investors through a network of approximately 90 branch offices. Revenues were generated primarily through the receipt of 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.

     In the second quarter of 2007, discontinued operations recorded a net loss of $1.1 million that included costs related to decommissioning a retail-oriented back-office system, PCS litigation-related expenses and restructuring charges. We expect to incur additional costs in the third quarter of 2007 related to decommissioning the retail-oriented back-office system. In addition, we may incur discontinued operations expense or income related to changes in litigation reserve estimates for retained PCS litigation matters and for changes in estimates to occupancy and severance restructuring charges. See Note 4 to our unaudited consolidated financial statements for further discussion of our discontinued operations.