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 September 30, 2007

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

For the transition period from                      to                     

PIPER JAFFRAY COMPANIES

(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		30-0168701 (IRS Employer Identification No.)
800 Nicollet Mall, Suite 800 Minneapolis, Minnesota		55402
(Address of principal executive offices)		(Zip Code)

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

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

     Indicate by check mark whether the registrant is 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 November 2, 2007, the registrant had 17,496,059 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 September 30, 2007 and December 31, 2006
Consolidated Statements of Operations for the three months and nine months ended September 30, 2007 and September 30, 2006
Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and September 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 6. Exhibits
Signatures
Exhibit Index
Certification of CEO
Certification of CFO
Section 1350 Certifications

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Piper Jaffray Companies

		September 30,				December 31,
		2007				2006
(Amounts in thousands, except share data)		(Unaudited)
Assets
Cash and cash equivalents		$	40,758			$	39,903
Cash and cash equivalents segregated for regulatory purposes			20,000				25,000
Receivables:
Customers			113,012				51,441
Brokers, dealers and clearing organizations			120,271				312,874
Deposits with clearing organizations			26,837				30,223
Securities purchased under agreements to resell			134,042				139,927
Trading securities owned			602,857				776,684
Trading securities owned and pledged as collateral			150,302				89,842
Total trading securities owned			753,159				866,526
Fixed assets (net of accumulated depreciation and amortization of $54,283 and $48,603, respectively)			27,442				25,289
Goodwill			264,938				231,567
Intangible assets (net of accumulated amortization of $4,649 and $3,333, respectively)			17,854				1,467
Other receivables			38,857				39,347
Other assets			99,886				88,283
Total assets		$	1,657,056			$	1,851,847
Liabilities and Shareholders’ Equity
Payables:
Customers		$	69,755			$	83,899
Checks and drafts			12,403				13,828
Brokers, dealers and clearing organizations			63,626				210,955
Securities sold under agreements to repurchase			155,184				91,293
Trading securities sold, but not yet purchased			261,478				217,584
Accrued compensation			91,357				164,346
Other liabilities and accrued expenses			114,093				145,503
Total liabilities			767,896				927,408
Shareholders’ equity:
Common stock, $0.01 par value:
Shares authorized: 100,000,000 at September 30, 2007 and December 31, 2006;
Shares issued: 19,487,319 at September 30, 2007 and December 31, 2006;
Shares outstanding: 15,655,255 at September 30, 2007 and 16,984,474 at December 31, 2006			195				195
Additional paid-in capital			729,739				723,928
Retained earnings			352,784				325,684
Less common stock held in treasury at cost: 3,832,930 shares at September 30, 2007 and 2,502,845 shares at December 31, 2006			(194,482	)			(126,026	)
Other comprehensive income			924				658
Total shareholders’ equity			889,160				924,439
Total liabilities and shareholders’ equity		$	1,657,056			$	1,851,847

See Notes to Consolidated Financial Statements

Piper Jaffray Companies

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Amounts in thousands, except per share data)		2007				2006				2007				2006
Revenues:
Investment banking		$	50,276			$	71,261			$	208,881			$	205,346
Institutional brokerage			31,624				36,618				111,451				119,436
Interest			15,003				16,663				46,229				44,869
Asset management			903				2				1,102				17
Other income			735				53				1,523				12,434
Total revenues			98,541				124,597				369,186				382,102
Interest expense			5,647				8,490				16,766				25,786
Net revenues			92,894				116,107				352,420				356,316
Non-interest expenses:
Compensation and benefits			54,343				69,079				206,166				202,656
Occupancy and equipment			7,201				6,878				23,772				21,705
Communications			6,040				5,761				18,296				16,737
Floor brokerage and clearance			3,564				3,759				11,255				9,807
Marketing and business development			6,064				5,820				18,125				17,121
Outside services			8,134				6,344				24,573				19,472
Cash award program			450				512				1,196				2,673
Other operating expenses			1,064				2,905				5,268				10,252
Total non-interest expenses			86,860				101,058				308,651				300,423
Income from continuing operations before income tax expense			6,034				15,049				43,769				55,893
Income tax expense			1,222				5,521				13,858				19,730
Net income from continuing operations			4,812				9,528				29,911				36,163
Discontinued operations:
Income/(loss) from discontinued operations, net of tax			(456	)			177,085				(2,811	)			178,444
Net income		$	4,356			$	186,613			$	27,100			$	214,607
Earnings per basic common share
Income from continuing operations		$	0.30			$	0.53			$	1.79			$	1.97
Income/(loss) from discontinued operations			(0.03	)			9.82				(0.17	)			9.73
Earnings per basic common share		$	0.27			$	10.35			$	1.62			$	11.70
Earnings per diluted common share
Income from continuing operations		$	0.28			$	0.50			$	1.70			$	1.87
Income/(loss) from discontinued operations			(0.03	)			9.29				(0.16	)			9.25
Earnings per diluted common share		$	0.26			$	9.79			$	1.54			$	11.12
Weighted average number of common shares outstanding
Basic			16,096				18,031				16,743				18,348
Diluted			16,904				19,071				17,610				19,294

See Notes to Consolidated Financial Statements

Piper Jaffray Companies

		Nine Months Ended
		September 30,
(Dollars in thousands)		2007				2006
Operating Activities:
Net income		$	27,100			$	214,607
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			6,660				10,512
Gain on sale of PCS branch network			—				(327,749	)
Deferred income taxes			3,822				(11,598	)
Loss on disposal of fixed assets			304				—
Stock-based compensation			19,791				21,433
Amortization of intangible assets			1,316				1,200
Decrease (increase) in operating assets:
Cash and cash equivalents segregated for regulatory purposes			5,000				(35,000	)
Receivables:
Customers			(61,516	)			33,058
Brokers, dealers and clearing organizations			192,541				(141,257	)
Deposits with clearing organizations			3,386				24,701
Securities purchased under agreements to resell			5,885				44,952
Net trading securities owned			157,503				(113,311	)
Other receivables			3,451				(5,099	)
Other assets			(15,337	)			(11,859	)
Increase (decrease) in operating liabilities:
Payables:
Customers			(14,200	)			(18,900	)
Checks and drafts			(1,446	)			(38,524	)
Brokers, dealers and clearing organizations			(147,317	)			275,066
Securities sold under agreements to repurchase			71,539				(13,527	)
Accrued compensation			(74,409	)			(41,662	)
Other liabilities and accrued expenses			(31,849	)			166,832
Net cash provided by operating activities			152,224				33,875
Investing Activities:
Sale of PCS branch network			—				701,861
Business acquisition, net of cash acquired			(52,681	)			—
Purchases of fixed assets, net			(8,280	)			(6,456	)
Net cash provided by (used in) investing activities			(60,961	)			695,405
Financing Activities:
Decrease in securities loaned			—				(234,676	)
Decrease in securities sold under agreements to repurchase			(7,648	)			(228,699	)
Increase in short-term bank financing			—				50,000
Repayment of subordinated debt			—				(180,000	)
Repurchase of common stock			(87,489	)			(100,000	)
Excess tax benefits from stock-based compensation			2,072				—
Proceeds from stock option transactions			2,383				—
Net cash used in financing activities			(90,682	)			(693,375	)
Currency adjustment:
Effect of exchange rate changes on cash			274				982
Net increase in cash and cash equivalents			855				36,887
Cash and cash equivalents at beginning of period			39,903				60,869
Cash and cash equivalents at end of period		$	40,758			$	97,756
Supplemental disclosure of cash flow information - Cash paid during the period for:
Interest		$	17,058			$	35,137
Income taxes		$	4,115			$	36,981
Non-cash financing activities -
Issuance of common stock for retirement plan obligations:
8,619 shares and 190,966 shares for the nine months ended September 30, 2007 and 2006 respectively		$	598			$	9,013

See Notes to Consolidated Financial Statements

Piper Jaffray Companies

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 headquartered in London, England; Piper Jaffray Financial Products Inc., an entity that facilitates customer derivative transactions; Piper Jaffray Financial Products II Inc., an entity dealing primarily in variable rate municipal products; Fiduciary Asset Management, LLC (“FAMCO”), an entity providing asset management services to clients through separately managed accounts and closed end funds; and other immaterial subsidiaries. Piper Jaffray Companies and its subsidiaries (collectively, the “Company”) operate as one reporting segment providing investment banking services, institutional sales, trading and research services, and asset management services. As discussed more fully in Note 4, the Company completed the sale of its Private Client Services branch network and certain related assets to UBS Financial Services, Inc., a subsidiary of UBS AG (“UBS”), on August 11, 2006, thereby exiting the Private Client Services (“PCS”) business.

Basis of Presentation

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

     The consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) with respect to Form 10-Q and reflect all adjustments that in the opinion of management are normal and recurring and that are necessary for a fair statement of the results for the interim periods presented. In accordance with these rules and regulations, certain disclosures that are normally included in annual financial statements have been omitted. The consolidated financial statements included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

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

Note 2 Summary of Significant Accounting Policies

     Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, for a full description of the Company’s significant accounting policies. Changes to the Company’s significant accounting policies are described below.

Revenue Recognition

     Asset management – asset management fees, which are derived from providing contract investment advisory services, are recognized in the period in which services are provided. Fees are defined in client contracts as either fixed or based on a percentage of portfolio assets under management.

Note 3 Recent Accounting Pronouncements

     In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments,” (“SFAS 155”), which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”(“SFAS 133”), and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”). The provisions of SFAS 155 provide a fair value measurement option for certain hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation. SFAS 155 also provides clarification that only the simplest separations of interest payments and principal payments qualify for the exception afforded to interest-only strips and principal-only strips from derivative accounting under paragraph 14 of SFAS 133. The standard also clarifies that concentration of credit risk in the form of subordination is not an embedded derivative. Lastly, the new standard amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 was effective for the Company for all financial instruments acquired or issued beginning January 1, 2007. The adoption of SFAS 155 did not have a material effect on the consolidated financial statements of the Company.

     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. Changes to current practice stem from the revised definition of fair value and the application of this definition within the framework established by SFAS 157. 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 on 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 $0.5 million and $2.8 million for the three months and nine months ended September 30, 2007, respectively, related to the cost of decommissioning a PCS-oriented back office system, litigation-related expenses and restructuring charges. The decommissioning of the PCS-oriented back office system was completed in the third quarter, and the Company does not expect to incur any additional costs related to this system. 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 if the facts that support the Company’s estimates change.

     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 13 for additional information regarding the Company’s restructuring activities.

Note 5 Acquisition of Fiduciary Asset Management, LLC

     On September 14, 2007, the Company acquired FAMCO, a St. Louis-based asset management firm, which significantly expands the Company’s asset management capabilities. At the time of closing, the Company recorded $33.4 million in goodwill, $17.7 million in identifiable intangible assets and $1.7 million in net assets in connection with this acquisition. The Company may make an additional cash payment for FAMCO of up to $15.1 million contingent on net new assets under management secured through December 15, 2007. In addition, the acquisition of FAMCO includes the potential for additional cash consideration to be paid in the form of three annual payments contingent upon revenue exceeding certain revenue run-rate thresholds. The amount of the three annual payments (assuming the revenue run-rate threshold has been met) will be equal to a percentage of earnings before income taxes, depreciation and amortization for the previous year. The percentage in 2008 is 120% and 110% in 2009 and 2010. An allocation of the purchase price, not including any additional cash payments described above, to assets acquired and liabilities assumed has been recorded as of September 30, 2007. For more information regarding the Company’s acquisition of FAMCO, please refer to the Company’s Form 8-K, filed with the SEC on September 14, 2007.

Note 6 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. Interest rate swaps are also used to manage interest rate exposure associated with holding residual interest securities from the Company’s tender option bond program. In addition, the Company enters into total return loan swap agreements to receive the total return on $36.4 million in certain loan assets without transferring actual ownership of the underlying loan to the Company. As of September 30, 2007 and December 31, 2006, the Company was counterparty to notional/contract amounts of $7.2 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 $24.9 million and $19.7 million as of September 30, 2007 and December 31, 2006, respectively.

Note 7 Securitizations

     In connection with its tender option bond program, the Company securitizes highly rated municipal bonds. At September 30, 2007 and December 31, 2006, the Company had $315.6 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 $8.9 million and $8.1 million at September 30, 2007 and December 31, 2006, respectively, with a weighted average life of 8.2 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 September 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:

		Nine Months Ended
		September 30,
(Dollars in thousands)		2007				2006
Proceeds from new securitizations		$	48,471			$	7,578
Remarketing fees received			95				106
Cash flows received on retained interests			4,569				5,525

     Three securitization transactions were designed such that they did not meet the asset sale requirements of SFAS 140, causing the Company to consolidate these trusts. Accordingly, the Company recorded an asset for the underlying bonds of $49.6 million and $51.2 million as of September 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 September 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 $5.8 million and $5.7 million at September 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 September 30, 2007 was $288.7 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 $300.3 million at September 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 8 Receivables from and Payables to Brokers, Dealers and Clearing Organizations

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

		September 30,				December 31,
(Dollars in thousands)		2007				2006
Receivable arising from unsettled securities transactions, net		$	—			$	18,233
Deposits paid for securities borrowed			64,163				271,028
Receivable from clearing organizations			18,311				6,811
Securities failed to deliver			27,304				1,674
Other			10,493				15,128
		$	120,271			$	312,874

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

		September 30,				December 31,
(Dollars in thousands)		2007				2006
Payable arising from unsettled securities transactions, net		$	35,003			$	—
Deposits received for securities loaned			—				189,214
Payable to clearing organizations			23,199				17,140
Securities failed to receive			5,246				4,531
Other			178				70
		$	63,626			$	210,955

     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.

Note 9 Trading Securities Owned and Trading Securities Sold, but Not Yet Purchased

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

		September 30,				December 31,
(Dollars in thousands)		2007				2006
Owned:
Corporate securities:
Equity securities		$	27,532			$	14,163
Convertible securities			98,946				59,118
Fixed income securities			105,098				235,120
Asset-backed securities			151,900				158,108
U.S. government securities			26,328				10,715
Municipal securities			304,295				364,160
Other			39,060				25,142
		$	753,159			$	866,526
Sold, but not yet purchased:
Corporate securities:
Equity securities		$	70,096			$	31,452
Convertible securities			3,314				2,543
Fixed income securities			31,498				16,378
Asset-backed securities			86,485				51,001
U.S. government securities			62,783				109,719
Municipal securities			201				5
Other			7,101				6,486
		$	261,478			$	217,584

     At September 30, 2007 and December 31, 2006, trading securities owned in the amount of $150.3 million and $89.8 million, respectively, had been pledged as collateral for the Company’s repurchase agreements, secured borrowings 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 Goodwill and Intangible Assets

     The following table presents the changes in the carrying value of goodwill and intangible assets for the nine months ended September 30, 2007:

(Dollars in thousands)
Goodwill
Balance at December 31, 2006		$	231,567
Goodwill acquired			33,371
Impairment losses			—
Balance at September 30, 2007		$	264,938

(Dollars in thousands)
Intangible assets
Balance at December 31, 2006		$	1,467
Intangible assets acquired			17,703
Amortization of intangible assets			(1,316	)
Impairment losses			—
Balance at September 30, 2007		$	17,854

     The addition of goodwill and intangible assets during 2007 were based on the purchase price allocation of FAMCO, which the Company acquired on September 14, 2007, as discussed in Note 5. Management identified $17.7 million of intangible assets, consisting principally of asset management contracts, that will be amortized over a weighted average life of 8.8 years.

     The following table illustrates the aggregate future amortization of the Company’s intangible assets:

(Dollars in thousands)
Years Ended December 31,	Amortization
Remainder of 2007			$	961
2008				2,575
2009				2,423
2010				2,282
2011				2,148
Thereafter				7,465
Total			$	17,854

Note 11 Financing

     The Company had uncommitted credit agreements with banks totaling $677 million at September 30, 2007, comprised of $557 million in discretionary secured lines under which no amount was outstanding at September 30, 2007 and December 31, 2006, and $120 million in discretionary unsecured lines under which no amount was outstanding at September 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 September 30, 2007 and December 31, 2006, the weighted average interest rate on borrowings was 5.70 percent and 5.72 percent, respectively. At September 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 12 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 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 September 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 exposure 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 13 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 received a severance package. In addition, the Company 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 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 nine months ended September 30, 2007, the Company incurred $0.4 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 expenses on the statements of financial condition:

		PCS
(Dollars in thousands)		Restructuring
Balance at December 31, 2006		$	28,583
Provisions charged to discontinued operations			382
Cash outlays			(13,117	)
Non-cash write-downs			(398	)
Balance at September 30, 2007		$	15,450

Note 14 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 nine months ended September 30, 2007, the Company repurchased 1,590,477 shares of the Company’s common stock at an average price of $50.28 per share for an aggregate purchase price of $80.0 million. This repurchase activity completed the $180.0 million share repurchase authorization.

Issuance of Shares

     During the nine months ended September 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 255,410 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 15 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. The computation of earnings per share is as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Amounts in thousands, except per share data)		2007				2006				2007				2006
Net income		$	4,356			$	186,613			$	27,100			$	214,607
Shares for basic and diluted calculations:
Average shares used in basic computation			16,096				18,031				16,743				18,348
Restricted stock			722				949				755				869
Stock options			86				91				112				77
Average shares used in diluted computation			16,904				19,071				17,610				19,294
Earnings per share:
Basic		$	0.27			$	10.35			$	1.62			$	11.70
Diluted		$	0.26			$	9.79			$	1.54			$	11.12

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 $7.3 million and $5.4 million for the three months ended September 30, 2007 and 2006, respectively, and $19.7 million and $15.6 million for the nine months ended September 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 $2.8 million and $2.1 million for the three months ended September 30, 2007 and 2006, respectively and $7.5 million and $6.0 million for the nine months ended September 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, which is based on 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 derived from the U.S. treasury bill rate with a maturity equal to the expected life of the option. The dividend yield assumption is derived from the assumed dividend payout over the expected life of the option. The expected volatility assumption for 2007 grants is derived from a combination of Company historical data and industry comparisons. The Company has only been a publicly traded company for approximately 45 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 nine months ended September 30, 2007:

		2007				2006
Weighted average assumptions in option valuation:
Risk-free interest rates			4.68	%			4.55	%
Dividend yield			0.00	%			0.00	%
Stock volatility factor			32.20	%			40.08	%
Expected life of options (in years)			6.00				6.00
Weighted average fair value of options granted		$	28.57			$	22.14

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

										Weighted Average
						Weighted				Remaining				Aggregate
		Options				Average				Contractual				Intrinsic
		Outstanding				Exercise Price				Term (Years)				Value
December 31, 2006			510,181			$	43.25				7.8			$	11,172,964
Granted			35,641				70.13
Exercised			(50,759	)			46.92
Canceled			(20,989	)			40.89
September 30, 2007			474,074			$	44.98				7.3			$	4,086,518
Options exercisable at September 30, 2007			183,497			$	46.33				6.7			$	1,334,023

     As of September 30, 2007, there was $1.5 million of total unrecognized compensation cost related to stock options expected to be recognized over a weighted average period of 1.6 years.

     Cash received from option exercises for the nine months ended September 30, 2007 was $2.4 million. The tax benefit realized for the tax deduction from option exercises totaled $0.9 million for the nine months ended September 30, 2007. There were no option exercis es for the nine months ended September 30, 2006.

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

						Weighted
		Non-Vested				Average
		Restricted				Grant Date
		Stock				Fair Value
December 31, 2006			1,556,801			$	43.81
Granted			654,885				68.51
Vested			(314,905	)			48.70
Canceled			(166,186	)			49.40
September 30, 2007			1,730,595			$	51.73

     As of September 30, 2007, there was $48.8 million of total unrecognized compensation cost related to restricted stock expected to be recognized over a weighted average period of 2.0 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 Geographic Areas

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Dollars in thousands)		2007				2006				2007				2006
Revenues:
Domestic operations		$	89,749			$	106,615			$	312,247			$	330,995
International operations			3,145				9,492				40,173				25,321
Consolidated		$	92,894			$	116,107			$	352,420			$	356,316

		September 30,				December 31,
(Dollars in thousands)		2007				2006
Long-lived assets:
Domestic operations		$	24,724			$	22,503
International operations			2,718				2,786
Consolidated		$	27,442			$	25,289

Note 18 Net Capital Requirements and Other Regulatory Matters

     As a registered broker dealer and member firm of the Financial Industry Regulatory Authority (“FINRA”), Piper Jaffray is subject to the uniform net capital rule of the SEC and the net capital rule of the New York Stock Exchange (“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 September 30, 2007, net capital calculated under the SEC rule was $240.8 million, and exceeded the minimum net capital required under the SEC rule by $238.4 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 September 30, 2007, Piper Jaffray Ltd. was in compliance with the capital requirements of the FSA.

Note 19 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 with 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 nine month period ended September 30, 2007.

Note 20 Acquisition of Goldbond Capital Holdings Limited

     On October 2, 2007, the Company acquired Goldbond Capital Holdings Limited (“Goldbond”), a Hong Kong-based investment bank which provides the Company with capital markets capabilities in Hong Kong. As consideration for the transaction, the Company paid $47.1 million in cash and $4.1 million in the form of restricted stock of the Company. An allocation of the purchase price will be recorded in the fourth quarter of 2007. 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, asset management 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, profits and losses from trading activities related to these securities inventories and asset management fees.

     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 third quarter of 2007, discontinued operations recorded a net loss of $0.5 million, which included costs related to decommissioning a retail-oriented back-office system, costs for PCS litigation-related expenses and additional restructuring charges. The decommissioning of our retail-oriented back-office system was completed in the third quarter and we do not anticipate incurring any additional expenses related to this system in the future. Costs associated with implementing a new back-office system to support our capital markets business are recorded in continuing operations. We may incur additional discontinued operations expenses or income in the future related to changes in litigation reserve estimates for retained PCS litigation matters and for changes in estimates to occupancy and severance restructuring charges if the facts that support our estimates change. See Notes 4 and 13 to our unaudited consolidated financial statements for a further discussion of our discontinued operations and restructuring.

     On September 14, 2007, we completed the acquisition of Fiduciary Asset Management, LLC (“FAMCO”) a St. Louis-based asset management firm that serves clients through separately managed accounts and closed end funds, and offers investment products that include traditional core equity, quantitative and hedged equity, master limited partnerships and fixed income. This acquisition significantly expands our asset management capabilities and helps to diversify our revenue base. FAMCO results of operations are included in our consolidated results of operations from the date of acquisition. At the time of closing, we paid $51.3 million in cash and may make an additional cash payment of up to $15.1 million contingent on new assets under management secured through December 15, 2007. In addition, we may pay future cash consideration contingent on the performance of FAMCO in each of the 2008, 2009 and 2010 calendar years.

     On October 2, 2007, we completed the acquisition of Goldbond Capital Holdings Limited (“Goldbond”), a Hong Kong investment bank, for $47.1 million in cash and $4.1 million in restricted stock. Goldbond focuses primarily on raising capital for and providing financial advisory services to companies listed or to be listed on the Hong Kong Stock Exchange. Our Asia platform now includes corporate finance, sales and trading, equity capital markets and research and will be referred to as Piper Jaffray Asia going forward.

     We plan to continue our focus on revenue growth through expansion of our capital markets and asset management businesses. Within our capital markets business, our efforts will be focused on growing our sector expertise, product depth and geographic reach. We expect that continued growth of both our capital markets and asset management businesses will come from a combination of organic growth and acquisitions. In addition, we have begun to use our own capital to a greater extent by engaging in principal activities that leverage our expertise. These activities include, among other things, proprietary positions in equity and debt securities of public and private companies, arbitrage trading strategies and private equity funds. We intend to increase the amount of capital we have committed to principal activities as opportunities arise. We anticipate leveraging our balance sheet with the addition of long-term debt to facilitate these growth initiatives. All of these 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.

RESULTS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007

     The turmoil in the credit markets created challenging capital markets conditions in the third quarter of 2007, negatively impacting nearly all of our businesses. Net revenues from continuing operations for the three months ended September 30, 2007 were $92.9 million, a decline of 20.0 percent compared with the prior-year period. For the three months ended September 30, 2007, net income from continuing operations totaled $4.8 million, or $0.28 per diluted share, compared to $9.5 million, or $0.50 per diluted share, for the corresponding period in 2006. For the three months ended September 30, 2007, our net income, including continuing and discontinued operations, was $4.4 million, or $0.26 per diluted share, compared to net income of $186.6 million, or $9.79 per diluted share, for the prior-year period. Net income for the third quarter of 2006 included a gain of $179.7 million after tax and net of restructuring and transaction costs from the sale of our PCS branch network to UBS.

     For the nine months ended September 30, 2007, net revenues from continuing operations were $352.4 million, a slight decrease from the year-ago period. For the nine months ended September 30, 2007, net income from continuing operations totaled $29.9 million, or $1.70 per diluted share, compared to $36.2 million, or $1.87 per diluted share, for the corresponding period in 2006. Net income, including continuing and discontinued operations, for the nine months ended September 30, 2007 was $27.1 million, or $1.54 per diluted share, compared to net income of $214.6 million, or $11.12 per diluted share, for the prior-year period.

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, the demand for investment banking services as reflected by the number and size of equity and debt financings and merger and acquisition transactions, and the demand for asset management services as reflected by the amount of assets under management.

     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.

Results of Operations

FINANCIAL SUMMARY FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006

     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 three months ended September 30, 2007 and September 30, 2006.

														Results of Operations
														as a Percentage of Net
		Results of Operations												Revenues
		For the Three Months Ended												For the Three Months Ended
		September 30,												September 30,
										2007
(Dollars in thousands)		2007				2006				v2006				2007				2006
Revenues:
Investment banking		$	50,276			$	71,261				(29.4	)%			54.1	%			61.4	%
Institutional brokerage			31,624				36,618				(13.6	)			34.0				31.5
Interest			15,003				16,663				(10.0	)			16.2				14.4
Asset management			903				2				N/M				1.0				0.0
Other income			735				53				N/M				0.8				0.0
Total revenues			98,541				124,597				(20.9	)			106.1				107.3
Interest expense			5,647				8,490				(33.5	)			6.1				7.3
Net revenues			92,894				116,107				(20.0	)			100.0				100.0
Non-interest expenses:
Compensation and benefits			54,343				69,079				(21.3	)			58.5				59.5
Occupancy and equipment			7,201				6,878				4.7				7.8				5.9
Communications			6,040				5,761				4.8				6.5				5.0
Floor brokerage and clearance			3,564				3,759				(5.2	)			3.8				3.2
Marketing and business development			6,064				5,820				4.2				6.5				5.0
Outside services			8,134				6,344				28.2				8.8				5.5
Cash award program			450				512				(12.1	)			0.5				0.4
Other operating expenses			1,064				2,905				(63.4	)			1.1				2.5
Total non-interest expenses			86,860				101,058				(14.0	)			93.5				87.0
Income from continuing operations before tax expense			6,034				15,049				(59.9	)			6.5				13.0
Income tax expense			1,222				5,521				(77.9	)			1.3				4.8
Net income from continuing operations			4,812				9,528				(49.5	)			5.2				8.2	%
Discontinued operations:
Income/(loss) from discontinued operations, net of tax			(456	)			177,085				N/M				(0.5	)			N/M
Net income		$	4,356			$	186,613				(97.7	)%			4.7	%			N/M

     For the three months ended September 30, 2007, net income, including continuing and discontinued operations, totaled $4.4 million. Net revenues from continuing operations decreased 20.0 percent to $92.9 million for the third quarter of 2007. The difficult capital markets conditions in the third quarter of 2007 negatively impacted nearly all of our businesses. For the three months ended September 30, 2007, investment banking revenues decreased 29.4 percent to $50.3 million, compared with revenues of $71.3 million in the prior-year period. This decline in investment banking revenues was primarily due to lower equity financing activity and lower advisory services revenue. Institutional brokerage revenues decreased 13.6 percent to $31.6 million for the third quarter of 2007, compared with $36.6 million in the corresponding

period in the prior year, due primarily to increased trading losses as a result of the volatility in the markets. In the third quarter of 2007, net interest income increased to $9.4 million, compared with $8.2 million in the third quarter of 2006. In August 2006, we repaid $180 million in subordinated debt with proceeds from the sale of our PCS branch network, reducing interest expense. For the three months ended September 30, 2007, asset management fees were $0.9 million, of which substantially all was generated by FAMCO. In the third quarter of 2007, other income was $0.7 million, compared with $0.1 million in the prior-year period, as a result of other income gains recorded on our investments in private equity funds. Non-interest expenses decreased to $86.9 million for the three months ended September 30, 2007, from $101.1 million in the corresponding period in the prior year. This decrease was primarily due to lower compensation and benefits 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 September 30, 2007, compensation and benefits expenses decreased 21.3 percent to $54.3 million, from $69.1 million in the corresponding period in 2006. This decrease was due to a decline in variable compensation costs resulting from lower revenues. Compensation and benefits expenses as a percentage of net revenues decreased to 58.5 percent for the third quarter of 2007, compared with 59.5 percent for the third quarter of 2006.

     Occupancy and Equipment - In the third quarter of 2007, occupancy and equipment expenses were $7.2 million, compared with $6.9 million for the corresponding period in 2006. This increase was primarily due to base rent increases associated with new leases during 2007.

     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 September 30, 2007, communication expenses were $6.0 million, an increase of 4.8 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 September 30, 2007, floor brokerage and clearance expenses were $3.6 million, compared with $3.8 million for the three months ended September 30, 2006, a decrease of 5.2 percent. This decrease was attributed to a decline in clearing fees associated with lower equity trading activity. Partially offsetting this decrease were higher expenses associated with accessing electronic communication networks as we increased after-market support of deal-related stocks.

     Marketing and Business Development - Marketing and business development expenses include travel and entertainment and promotional and advertising costs. In the third quarter of 2007, marketing and business development expenses increased to $6.1 million, compared with $5.8 million in the third quarter of 2006.

     Outside Services - Outside services expenses include securities processing expenses, outsourced technology functions, outside legal fees and other professional fees. Outside services expenses increased to $8.1 million in the third quarter of 2007, compared with $6.3 million for the prior-year period, an increase of 28.2 percent. This increase primarily was due to expenses related to the implementation of a new back-office system to support our capital markets business, which we completed in the third quarter of 2007.

     Cash Award Program - As part of 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 September 30, 2007, cash awards expense remained flat at $0.5 million, compared with the prior-year period. We anticipate incurring approximately $0.5 million of cash award expense within continuing operations in the fourth quarter 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 $1.1 million in the third quarter of 2007, compared with $2.9 million in third quarter of 2006, primarily due to a decline in litigation-related expenses. We anticipate other operating expenses will increase in future periods as a result of amortization of intangible assets acquired in the FAMCO acquisition.

     Income Taxes - For the three months ended September 30, 2007, our provision for income taxes from continuing operations was $1.2 million, equating to an effective tax rate of 20.3 percent. For the three months ended September 30, 2006, income taxes from continuing operations were $5.5 million, equating to an effective tax rate of 36.7 percent. The unusually low 20.3 percent effective tax rate for the third quarter of 2007 was a result of an increase in the expected ratio of municipal interest income, which is non-taxable, to taxable income and the sharp decline in pre-tax income. This tax rate is not representative of our annual effective tax rate, which was 31.7 percent for the nine months ended September 30, 2007.

NET REVENUES FROM CONTINUING OPERATIONS (DETAIL)

		For the Three Months Ended
		September 30,								2007 vs.
(Dollars in thousands)		2007				2006				2006
Net revenues:
Investment banking
Financing
Equities		$	18,211			$	31,417				(42.0	)%
Debt			18,211				19,395				(6.1	)
Advisory services			16,120				21,948				(26.6	)
Total investment banking			52,542				72,760				(27.8	)
Institutional sales and trading
Equities			25,192				27,946				(9.9	)
Fixed income			13,649				15,814				(13.7	)
Total institutional sales and trading			38,841				43,760				(11.2	)
Asset management			903				2				N/M
Other income			608				(415	)			N/M
Total net revenues		$	92,894			$	116,107				(20.0	)%

     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 September 30, 2007, investment banking revenues decreased 27.8 percent to $52.5 million, compared with $72.8 million in the corresponding period in the prior year. The adverse market conditions in the third quarter significantly impacted investment banking revenues, particularly within the equity finance business. Equity financing revenues declined 42.0 percent to $18.2 million, compared with $31.4 million in the corresponding period in the prior year. The decrease was due to a sharp decline in number of completed public offerings in the healthcare and consumer sectors and a decline in the average revenues per transaction. In the third quarter of 2007, we completed 14 equity financings, raising $2.4 billion in capital, compared with 20 equity financings, raising $2.0 billion in capital, in the prior-year period. In the third quarter of 2007, debt financing revenues decreased 6.1 percent to $18.2 million due to a decline in taxable debt financing revenues. Public finance revenues were consistent with the prior year period as higher revenues per transaction offset a reduction in the number of underwritings. We were the sole underwriter of 91 municipal issues with a par value of $1.3 billion during the third quarter of 2007, compared with 111 municipal issues with a par value of $1.5 billion in the prior-year period. Advisory services revenues decreased 26.6 percent to $16.1 million in the third quarter of 2007. This decrease in revenues was due to lower average revenues per transaction as we completed 12 mergers and acquisitions transactions during the third quarter of 2007, compared with 9 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 September 30, 2007, institutional sales and trading revenues were $38.8 million, a decline of 11.2 percent compared with the prior-year period. Equity institutional sales and trading revenue decreased 9.9 percent, to $25.2 million due to higher trading losses resulting from greater market volatility during the quarter. Fixed income institutional sales and trading revenues decreased 13.7 percent to $13.6 million in the third quarter of 2007. This decline was a result of increased trading losses in high yield and structured products and taxable products.

     Asset management fees include FAMCO asset management advisory services and management fees from our private equity funds. In the third quarter of 2007, asset management fees were $0.9 million due primarily to the acquisition of FAMCO, which was completed in September 2007.

     Other income/loss includes gains and losses from our investments in private equity and venture capital funds as well as other firm investments. In addition, other income/loss included interest expense from our subordinated debt prior to its repayment in August 2006. In the third quarter of 2007, other income totaled $0.6 million, compared with a loss of $0.4 million in the three months ended September 30, 2006. In the third quarter of 2006, we repaid $180 million in subordinated debt, resulting in lower on-going interest expense.

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 third quarter of 2007, discontinued operations recorded a net loss of $0.5 million that included costs related to decommissioning a retail-oriented back-office system, PCS litigation-related expenses and restructuring charges. The decommissioning of our retail-oriented back-office system was completed in the third quarter of 2007 and we do not expect to incur any additional costs related to this system. We may incur discontinued operations expense or income in future periods related to changes in litigation reserve estimates for retained PCS litigation matters and for changes in estimates to occupancy and severance restructuring charges if the facts that support our estimates change. See Note 4 and Note 13 to our unaudited consolidated financial statements for further discussion of our discontinued operations and restructuring activities.

FINANCIAL SUMMARY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

     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 nine months ended September 30, 2007 and September 30, 2006.

														Results of Operations
														as a Percentage of Net
		Results of Operations												Revenues
		For the Nine Months Ended												For the Nine Months Ended
		September 30,												September 30,
										2007
(Dollars in thousands)		2007				2006				v2006				2007				2006
Revenues:
Investment banking		$	208,881			$	205,346				1.7	%			59.3	%			57.6	%
Institutional brokerage			111,451				119,436				(6.7	)			31.6				33.5
Interest			46,229				44,869				3.0				13.1				12.6
Asset management			1,102				17				N/M				0.3				0.0
Other income			1,523				12,434				(87.8	)			0.5				3.5
Total revenues			369,186				382,102				(3.4	)			104.8				107.2
Interest expense			16,766				25,786				(35.0	)			4.8				7.2
Net revenues			352,420				356,316				(1.1	)			100.0				100.0
Non-interest expenses:
Compensation and benefits			206,166				202,656				1.7				58.5				56.9
Occupancy and equipment			23,772				21,705				9.5				6.8				6.1
Communications			18,296				16,737				9.3				5.2				4.7
Floor brokerage and clearance			11,255				9,807				14.8				3.2				2.7
Marketing and business development			18,125				17,121				5.9				5.1				4.8
Outside services			24,573				19,472				26.2				7.0				5.5
Cash award program			1,196				2,673				(55.3	)			0.3				0.7
Other operating expenses			5,268				10,252				(48.6	)			1.5				2.9
Total non-interest expenses			308,651				300,423				2.7				87.6				84.3
Income from continuing operations before tax expense			43,769				55,893				(21.7	)			12.4				15.7
Income tax expense			13,858				19,730				(29.8	)			3.9				5.6
Net income from continuing operations			29,911				36,163				(17.3	)			8.5				10.1	%
Discontinued operations:
Income/(loss) from discontinued operations, net of tax			(2,811	)			178,444				N/M				(0.8	)			N/M
Net income		$	27,100			$	214,607				(87.4	)%			7.7	%			N/M