Statement of Financial Condition JUNE 30, 2004

Statement of Financial Condition JUNE 30, 2004

Dear Client: The following information outlines the financial condition of Piper Jaffray & Co. As a provider of a full range of investment products and services to individuals, institutions and businesses, we are pleased to report that our business remains in strong financial condition. We have more than $2.7 billion in assets and are capitalized with more than $687 million in equity capital. As described in the notes, we have $244.4 million in net regulatory capital, which is $233.1 million in excess of the minimum required net capital. Now as an independent company, we are executing our strategy as a focused securities firm, building long-term relationships and becoming the primary advisor to our clients. Our Guiding Principles state that serving you is our fundamental purpose. We value the trust you have placed in us, and we look forward to furthering our relationship with you. Andrew S. Duff Chairman & CEO

Piper Jaffray & Co. Statement of Financial Condition (Unaudited) June 30, 2004 (Amounts in thousands, except share data) Assets Cash and cash equivalents $ 20,519 Receivables: Customers, net of allowance of $1,993 464,642 Brokers, dealers and clearing organizations 434,923 Deposits with clearing organizations 57,171 Securities purchased under agreements to resell 228,029 Trading securities owned 705,984 Trading securities owned and pledged as collateral 340,360 Total trading securities owned 1,046,344 Fixed assets, net of accumulated depreciation and amortization of $112,932 55,309 Goodwill 305,635 Other receivables 34,464 Other assets 90,757 Total assets $ 2,737,793 Liabilities and Shareholder's Equity Short-term bank financing $ 160,000 Payables: Customers 206,175 Checks and drafts 40,685 Brokers, dealers and clearing organizations 370,029 Securities sold under agreements to repurchase 179,264 Trading securities sold, but not yet purchased 689,454 Accrued compensation 125,920 Other liabilities and accrued expenses 99,092 Total liabilities 1,870,619 Subordinated debt 180,000 Shareholder's equity: Preferred stock, $1,000 par value; 3,000 shares authorized, none issued and outstanding - Class A common stock, $2,500 par value; 850 shares authorized, 459 issued and outstanding 1,147 Class B common stock, $2,500 par value; 150 shares authorized, 22 issued and outstanding 55 Additional paid-in capital 658,067 Retained earnings 27,905 Total shareholder's equity 687,174 Total liabilities and shareholder's equity $ 2,737,793 See Notes to Statement of Financial Condition Notes to Statement of Financial Condition as of June 30, 2004 (Unaudited) NOTE 1. BACKGROUND Piper Jaffray & Co. (the Company ) is a wholly owned subsidiary of Piper Jaffray Companies (the Parent Company ). The Company is a self-clearing securities broker dealer and investment banking firm. As such, the Company trades and effects transactions in listed and unlisted equity and fixed-income securities, underwrites and conducts secondary trading in corporate and municipal securities, sells mutual fund shares, acts as a broker of option contracts and provides various other financial services. On April 28, 2003, Piper Jaffray Companies was incorporated in Delaware as a subsidiary of U.S. Bancorp ( USB ) to effect the spin off of USB s capital markets business to its shareholders. On December 31, 2003, after receiving regulatory approval, USB distributed to its shareholders all of its interest in Piper Jaffray Companies and its subsidiaries. On that date, 19,334,261 shares of Piper Jaffray Companies common stock were issued to USB shareholders (the Distribution ) based on a distribution ratio of one share of Piper Jaffray Companies common stock for every 100 shares of USB common stock owned. Prior to the Distribution, the Company was a wholly owned subsidiary of an affiliate of USB. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with maturities of 90 days or less at the date of purchase. Collateralized Securities Transactions Securities purchased under agreements to resell and securities sold under agreements to repurchase are carried at the contractual amounts at which the securities will be subsequently resold or repurchased, including accrued interest. It is the Company s policy to take possession or control of securities purchased under agreements to resell at the time these agreements are entered into. Counterparties are principally primary dealers of U.S. Government securities and major financial institutions. Collateral is valued daily and additional collateral is obtained from or refunded to counterparties, when appropriate. Securities borrowed and loaned result from transactions with other brokers and dealers or financial institutions and are recorded at the amount of cash collateral advanced or received. These amounts are included in receivable from and payable to brokers, dealers and clearing organizations on

the Statement of Financial Condition. Securities borrowed transactions require the Company to deposit cash or other collateral with the lender. Securities loaned transactions require the borrower to deposit cash with the Company. The Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as necessary. Interest is accrued on securities borrowed and loaned transactions and is included in other assets and other liabilities and accrued expenses on the Statement of Financial Condition. Customer Transactions Customer securities transactions are recorded on a settlement date basis while the related commission revenues and expenses are recorded on a trade date basis. Customer receivables and payables include amounts related to both cash and margin transactions. Securities owned by customers, including those that collateralize margin or other similar transactions, are not reflected on the Statement of Financial Condition. Allowance for Doubtful Accounts Management estimates an allowance for doubtful accounts to reserve for probable losses from unsecured and partially secured customer accounts. Management is continually evaluating its receivables from customers for collectibility and possible write-off by examining the facts and circumstances surrounding each customer where a loss is deemed possible. Trading Securities Owned and Trading Securities Sold, but Not Yet Purchased Trading securities owned and trading securities sold, but not yet purchased are recorded on a trade date basis and are stated at market or fair value. The Company s valuation policy is to use quoted market or dealer prices from independent sources where they are available and reliable. The fair value of trading securities, for which a quoted market or dealer price is not available, is based on management s estimate, using the best information available, of amounts that could be realized under current market conditions. Among the factors considered by management in determining the fair value of these securities are the cost, terms and liquidity of the investment, the financial condition and operating results of the issuer, quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments. Fixed Assets Fixed assets include office equipment, software and leasehold improvements. Depreciation of office equipment and software is provided using the straight-line method over estimated useful lives of three to ten years. Leasehold improvements are amortized over their estimated useful life or the life of the lease, whichever is shorter. Additionally, certain costs incurred in connection with internal-use software projects are capitalized and amortized over the expected useful life of the asset, generally three to seven years. Goodwill The Company adopted Statement of Financial Accounting Standards No. 142 ( SFAS 142 ), Goodwill and Other Intangible Assets, on January 1, 2002. SFAS 142 addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The most significant changes made by SFAS 142 are that goodwill and indefinite-lived intangible assets are no longer amortized and are to be tested for impairment at least annually. Prior to the adoption of SFAS 142, the Company amortized goodwill using the straightline method over a maximum period of 25 years. The recoverability of goodwill is evaluated annually, at a minimum, or on an interim basis if events or circumstances indicate a possible inability to realize the carrying amount. The evaluation includes assessing the estimated fair value of the goodwill based on market prices for similar assets, where available, and the present value of the estimated future cash flows associated with the goodwill. Because 100 percent of goodwill is treated as a non-allowable asset for regulatory purposes, the impact of any impairment on the Company s net capital would not be significant, but could adversely impact the Company s results of operations. Other Receivables Included in other receivables are loans made to financial advisors and other revenue-producing employees, typically in connection with their recruitment. These loans are forgiven based on continued employment and are amortized to compensation and benefits using the straight-line method over the terms of the loans, which generally range from three to five years. In conjunction with these loans, management estimates an allowance for loan losses. This allowance is established for recipients who leave the Company prior to full forgiveness of their loan balance and the Company is subsequently not able to recover the remaining balances. The Company determines adequacy of the allowance based upon the collectibility of unforgiven balances of departed employees, evaluation of the loan portfolio, recent experience related to attrition of certain revenue-producing employees and other pertinent factors. Other Assets Included in other assets are investments that the Company makes to fund deferred compensation liabilities for certain employees. The Company fully funds its deferred compensation liabilities by investing in venture capital stage companies or by investing in partnerships that invest in venture capital stage companies. Future payments, if any, to deferred compensation plan participants are directly linked to the performance of these investments. Also included in other assets are investments the Company has made in various other venture capital investments. Investments are carried at estimated fair value based on valuations received from statements obtained from the underlying fund manager or based on published market quotes. In the event a security is thinly traded or the market price is not readily available for an investment, management estimates fair value using other valuation methods depending on the type of security and related market. Net deferred tax assets are also included in other assets. Fair Value of Financial Instruments Substantially all of the Company s financial instruments are recorded at fair value or contract amounts on the Company s Statement of Financial Condition. Financial instruments recorded at fair value include trading securities

owned and trading securities sold, but not yet purchased. Financial instruments carried at contract amounts that approximate fair value either have short-term maturities (one year or less), are repriced frequently, or bear market interest rates and, accordingly, are carried at amounts approximating fair value. Financial instruments carried at contract amounts on the Statement of Financial Condition include receivables from and payables to brokers, dealers and clearing organizations, securities purchased under agreements to resell, securities sold under agreements to repurchase, receivables from and payables to customers, short-term bank financing and subordinated debt. The carrying amount of subordinated debt closely approximates fair value based upon market rates of interest available to the Company at June 30, 2004. Income Taxes Income tax expense (benefit) is provided for using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between amounts reported for income tax purposes and financial statement purposes, using current tax rates. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset will not be realized. Consolidation of Special Purpose Entities Special purpose entities ( SPEs ) are trusts, partnerships or corporations established for a particular limited purpose. The Company follows the accounting guidance in Statement of Financial Accounting Standards No. 140 ( SFAS 140 ), Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, to determine whether or not such SPEs are required to be consolidated. The Company engages in transactions with SPEs for the purpose of securitizing fixed rate municipal bonds that meet the SFAS 140 definition of a qualifying special purpose entity ( QSPE ). A QSPE can generally be described as an entity with significantly limited powers, which are intended to limit it to passively holding financial assets and distributing cash flows based upon predetermined criteria. Based upon the guidance in SFAS 140, the Company does not consolidate such QSPEs. The Company accounts for its involvement with such QSPEs under a financial components approach in which the Company recognizes only its retained residual interest in the QSPE. The Company accounts for such retained interests at fair value. Stock-Based Compensation Prior to the Distribution, certain employees of the Company were eligible to participate in USB employee incentive plans pursuant to which they received stock options and restricted stock that are described more fully in Note 12. The Company accounted for these stock option grants under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 ( APB 25 ), Accounting for Stock Issued to Employees, and accordingly, recognized no compensation expense for the stock option grants as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2004, the Company adopted the fair value based method of accounting for grants of stock-based compensation, as prescribed by Statement of Financial Accounting Standards No. 123 ( SFAS 123 ), Accounting and Disclosure of Stock-Based Compensation, as amended by Statement of Financial Accounting Standards No. 148 ( SFAS 148 ), Accounting for Stock-Based Compensation Transition and Disclosure. SFAS 148 provided alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amended the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act ) was signed into law. The Act introduced both a Medicare prescription drug benefit and a federal subsidy to sponsors of retiree health care plans. In January 2004, the FASB staff issued FASB Staff Position No. 106-1 ( FSP 106-1 ), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This statement permitted a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer recognizing the effects of the Act until authoritative guidance on accounting for the federal subsidy was issued or until certain other events occurred. In May 2004, the FASB issued FASB Staff Position No. 106-2 ( FSP 106-2 ), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which superseded FSP 106-1. FSP 106-2 provides guidance on the accounting for the effects of the Act and requires certain disclosures regarding the effect of the federal subsidy provided by the Act. FSP 106-2 will become effective for the Company in the third quarter of 2004. The Company maintains a postretirement benefit plan that provides a prescription drug benefit. The Company expects that application of this guidance will not have a material impact on the Company s Statement of Financial Condition. NOTE 4. DERIVATIVES Derivative contracts are financial instruments such as forwards, futures, swaps or option contracts that derive their value from underlying assets, reference rates, indices or a combination of these factors. A derivative contract generally represents future commitments to purchase or sell financial instruments at specified terms on a specified date or to exchange currency or interest payment streams based on the contract or notional amount. Derivative contracts exclude certain cash instruments, such as mortgage-backed securities, interest-only and principalonly obligations and indexed debt instruments that derive their values or contractually required cash flows from the price of some other security or index. The market or fair values related to derivative contract transactions are reported on the Statement of Financial

Condition. Derivatives are reported on a net-bycounterparty basis when a legal right of offset exists under an enforceable netting agreement. In the normal course of business, the Company enters into derivative transactions as a means to manage risk in certain fixed-income 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. The fair value of derivative contracts is included on the Statement of Financial Condition and was approximately ($4.8) million as of June 30, 2004. NOTE 5. RECEIVABLES FROM AND PAYABLES TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS Amounts receivable from brokers, dealers and clearing organizations included: (Dollars in thousands) Receivable arising from unsettled securities transactions, net $ 136,404 Deposits paid for securities borrowed 82,716 Receivable from clearing organizations 50,894 Securities failed to deliver 152,641 Other 12,268 Total receivables $ 434,923 Amounts payable to brokers, dealers and clearing organizations included: (Dollars in thousands) Deposits received for securities loaned $ 184,839 Payable to clearing organizations 15,667 Securities failed to receive 169,358 Other 165 Total payables $ 370,029 Securities failed to deliver and receive represent the contract value of securities that have not been delivered or received by the Company on settlement date. Deposits paid for securities borrowed and deposits received for securities loaned approximate the market value of the related securities. NOTE 6. RECEIVABLES FROM AND PAYABLES TO CUSTOMERS Amounts receivable from customers included: (Dollars in thousands) Cash accounts $ 73,082 Margin accounts 391,560 Total receivables $ 464,642 Amounts payable to customers included: (Dollars in thousands) Cash accounts $ 139,668 Margin accounts 66,507 Securities owned by customers are held as collateral for margin receivables. Such collateral is not reflected on the financial statements. Margin loan receivables earn interest at floating interest rates based on broker call rates. Payables to customers primarily consist of customer funds pending completion of securities transactions and customer funds on deposit. Except for customer short sales, all amounts payable to customers are subject to withdrawal upon customer request. NOTE 7. 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: (Dollars in thousands) Owned: Corporate securities: Equity securities $ 18,105 Convertible securities 104,260 Fixed-income securities 258,839 Mortgage-backed securities 415,260 U.S. Government securities 72,891 Municipal securities 176,989 $ 1,046,344 Sold, but not yet purchased: Corporate securities: Equity securities $ 61,932 Convertible securities 19,293 Fixed-income securities 159,322 Mortgage-backed securities 280,658 U.S. Government securities 168,230 Municipal securities 19 $ 689,454 At June 30, 2004, trading securities owned in the amount of $340.4 million have been pledged as collateral for the Company s secured borrowings, repurchase agreements and securities loaned activities. Trading securities sold, but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price, thereby creating a liability to purchase the security in the market at prevailing prices. The Company is obligated to acquire the securities sold short at prevailing market prices, which may exceed the amount reflected on the Statement of Financial Condition. The Company hedges changes in market value of its trading securities owned utilizing trading securities sold, but not yet purchased and interest rate swaps. It is the Company s practice to hedge a significant portion of its trading securities owned. NOTE 8. SHORT-TERM FINANCING The Company has uncommitted credit agreements with banks totaling $550 million at June 30, 2004, composed of $450 million in discretionary secured lines and $100 million in Total payables $ 206,175

discretionary unsecured lines. In addition, the Company has established arrangements to obtain financing using as collateral the Company s securities held by its clearing bank and by another broker dealer at the end of each business day. Repurchase agreements and securities loaned to other broker dealers are also used as sources of funding. At June 30, 2004, the Company had $157.0 million in repurchase agreements outstanding for financing purposes. The value of collateral received from securities loaned transactions was $184.8 million at June 30, 2004. The Company has executed a $180 million subordinated debt agreement with an affiliate of USB, which satisfies provisions of Appendix D of SEC Rule 15c3-1 and has been approved by the New York Stock Exchange, Inc. ( NYSE ) and is therefore allowable in the Company s net capital computation. The entire amount of the subordinated debt will mature in 2008. The Company s outstanding borrowings bear interest at rates based on the London Interbank Offered Rate or federal funds rate. At June 30, 2004, the weighted average interest rate on borrowings was 2.24 percent. At June 30, 2004, no formal compensating balance agreements existed, and the Company was in compliance with all debt covenants related to these facilities. NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES Lease Commitments The Company leases office space and equipment under various noncancelable leases. Certain leases have renewal options and clauses for escalation and operating cost adjustments. Additionally, in 2003 the Company entered into a five-year contract with an outside vendor to support the Company s data center and network management technology needs. Venture Capital Commitments As of June 30, 2004, the Company had commitments to invest approximately $2.2 million in limited partnerships that make private equity investments. The commitments will be funded, if called, through the end of the respective investment periods ranging from 2005 to 2010. Litigation The Company has been the subject of customer complaints and has also been named as a defendant in various legal actions arising primarily from securities brokerage and investment banking activities, including certain class actions that primarily allege violations of securities laws and seek unspecified damages, which could be substantial. Also, the Company is involved from time to time in investigations and proceedings by governmental agencies and selfregulatory organizations. The Company has established reserves for potential losses that are probable and reasonably estimable that may result from pending and potential complaints, legal actions, investigations and proceedings. The Company s reserves totaled $42.5 million at June 30, 2004, and are included within other liabilities and accrued expenses on the Statement of Financial Condition. In addition to the established reserves, USB has agreed to indemnify the Company in an amount up to $17.5 million for certain legal and regulatory matters, of which approximately $17.2 million remains as of June 30, 2004. As announced on July 12, 2004, we reached a $2.4 million settlement with the NASD in connection with its investigation of the allocation of initial public offering shares to directors and officers of existing or potential investment banking clients. The full amount of this settlement is covered by the indemnity agreement with USB. Given the uncertainties of the commencement, timing, size, volume and outcome of pending and potential litigation and other factors, the reserve is difficult to determine and of necessity subject to future revisions. Subject to the foregoing, management of the Company believes, based on its current knowledge, after consultation with counsel and after taking into account its established reserves and the USB indemnity agreement, that pending legal actions, investigations and proceedings will be resolved with no material adverse effect on the financial condition of the Company. However, if during any period a potential adverse contingency should become probable or resolved for an amount in excess of the established reserves and indemnification, the results of operations in that period could be materially adversely affected. Guarantees The Company participates in securities lending activities as a funding source for the Company by using customer margin securities. The Company indemnifies customers for the difference between the market value of the securities lent and the market value of the collateral received. Cash collateralizes these transactions. At June 30, 2004, future payments guaranteed by the Company under these arrangements were approximately $176.4 million and represent the market value of the customer securities lent to third parties. At June 30, 2004, the Company held cash of $184.0 million as collateral for these arrangements and included it within payables to brokers, dealers and clearing organizations on the Statement of Financial Condition. At June 30, 2004, the Company had collateral in excess of the market value of the securities lent and, therefore, no liability is recorded related to potential future payments made under these guarantees. The Company has contracted with a major third party financial institution to act as the liquidity provider to trusts securitized in connection with the Company s tender option bond program. The Company has agreed to reimburse this party for any losses associated with providing liquidity to the trusts. This agreement is more fully disclosed in Note 13. Other Commitments In the normal course of business, the Company enters into underwriting and other commitments. The ultimate settlement of such transactions open at June 30, 2004 is not expected to have a material effect on the financial statements of the Company. NOTE 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the Company s customer and trading activities involve the execution, settlement and financing of various securities transactions. These activities

may expose the Company to off-balance sheet risk in the event that the other party to the transaction is unable to fulfill its contractual obligations. The Company from time to time uses financial futures and interest rate swap contracts to manage interest rate risk related to fixed-income trading securities against market interest rate fluctuations and the residual cash flows on the Company s tender option bond program. Such contracts are subject to the same controls as securities owned for the Company s account and are not intended to be entered into for speculative purposes. Contracts are marked to market. As of June 30, 2004, the fair value of these contracts was ($4.8) million. The Company s financing and customer securities activities involve the Company using securities as collateral. In the event that the counterparty does not meet its contractual obligation to return securities used as collateral, or customers do not deposit additional securities or cash for margin when required, the Company may be exposed to the risk of reacquiring the securities or selling the securities at unfavorable market prices in order to satisfy its obligations to its customers or counterparties. The Company seeks to control this risk by monitoring the market value of securities pledged or used as collateral on a daily basis and requiring adjustments in the event of excess market exposure. In the normal course of business, the Company obtains securities under resale, securities borrowed and margin agreements on terms that permit it to repledge or resell the securities to others. The Company obtained securities with a fair value of approximately $858.9 million at June 30, 2004, of which $328.8 million has been either pledged or otherwise transferred to others in connection with the Company s financing activities or to satisfy its commitments under proprietary short sales. The Company provides investment, capital raising and related services to a diverse group of domestic and foreign customers, including governments, corporations, and institutional and individual investors. The Company s exposure to credit risk associated with the non-performance of customers in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile securities markets, credit markets and regulatory changes. This exposure is measured on an individual customer basis, as well as for groups of customers that share similar attributes. To alleviate the potential for risk concentrations, credit limits are established and continually monitored in light of changing customer and market conditions. As of June 30, 2004, the Company did not have significant concentrations of credit risk with any one single customer or counterparty, or group of customers or counterparties. NOTE 11. NET CAPITAL REQUIREMENTS AND OTHER REGULATORY MATTERS As an SEC registered broker dealer and member firm of the NYSE, the Company is subject to the Uniform Net Capital Rule (the Rule ) of the SEC and the net capital rule of the NYSE. The Company has elected to use the alternative method permitted by the Rule, which requires that it maintain minimum net capital of the greater of $1.0 million or 2 percent of aggregate debit balances arising from customer transactions, as such term is defined in the Rule. The NYSE may prohibit a member firm from expanding its business or paying dividends if resulting net capital would be less than 5 percent of aggregate debit balances. In addition, the Company is subject to certain notification requirements related to withdrawals of excess net capital. The Company is also registered with the Commodity Futures Trading Commission ( CFTC ) and therefore is subject to the CFTC regulations. At June 30, 2004, net capital under the Rule was $244.4 million or 43.2 percent of aggregate debit balances, and $233.1 million in excess of the minimum required net capital. Advances to affiliates, repayment of subordinated debt, dividend payments and other equity withdrawals are subject to certain notification and other provisions of the net capital rule of the SEC and regulatory bodies. As a clearing broker dealer, the Company has elected to compute a reserve requirement for Proprietary Accounts of Introducing Broker-Dealers ( PAIB calculation ), as defined. The PAIB calculation is completed in order for each correspondent firm that uses the Company as its clearing broker dealer to classify its assets held by the Company as allowable assets in the correspondents net capital calculation. At June 30, 2004, the Company did not have a reserve requirement for PAIB. NOTE 12. STOCK-BASED COMPENSATION AND CASH AWARD PROGRAM In 2004, the Company has granted shares of restricted stock and options to purchase Piper Jaffray Companies common stock to employees and directors. These awards principally have three-year cliff vesting periods. The following table summarizes the Company s stock options and restricted stock outstanding for the six months ended June 30, 2004: Weighted Restricted Options Average Shares Outstanding Exercise Price Outstanding December 31, 2003 - - - Granted: Stock options 322,005 $47.49 - Restricted stock - - 527,732 Exercised - - - Canceled options 19,500 47.30 - Canceled restricted stock - - 12,311 June 30, 2004 302,505 $47.50 515,421 Effective January 1, 2004, the Company elected to account for stock-based employee compensation under the fair value based method as prescribed by SFAS 123 and as amended by SFAS 148. Therefore, employee stock options granted on and after January 1, 2004, are expensed by the Company over the option vesting period, based on the estimated fair

value of the award on the date of grant using a Black- Scholes option-pricing model. Restricted stock continues to be amortized over its vesting period. Certain of the Company s employees are eligible to participate in a cash award program established in connection with the Distribution from USB on December 31, 2003. The program is intended to aid in retention of employees and to compensate employees for the value of USB stock options and restricted stock lost by employees as a result of the Distribution. No Company employees, officers or directors received Piper Jaffray Companies options or restricted stock as part of the Distribution. The cash award program has an aggregate maximum value of approximately $47.0 million. The Company incurred a $24.0 million charge at the time of the Distribution for the portion of the cash awards that were paid within 120 days of the Distribution. The remaining cash awards will vest and be paid out over the next four years. Participants must be employed on the date of payment to receive the award. NOTE 13. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES The Company, in connection with its tender option bond program, has securitized $200.6 million of highly rated fixed rate municipal bonds. Each municipal bond is sold into a separate trust that is funded by the sale of variable rate certificates to institutional customers seeking variable rate, tax-free investment products. These variable rate certificates reprice weekly. The Company retains a residual interest in each trust, with such interest accounted for as a trading security, recorded at fair value on the Statement of Financial Condition. The fair value of retained interests was $5.9 million at June 30, 2004, with a weighted average life of 10.4 years. Fair value of retained interests is estimated based on the present value of future cash flows using management s best estimates of the key assumptions forward yield curves, credit losses of 0 percent, and a 15 percent discount rate. The Company receives a fee to remarket the variable rate certificates derived from the securitizations. The Company enters into interest rate swaps to minimize any interest rate risk associated with the retained interests. At June 30, 2004, the sensitivity of the current fair value of retained interests to an immediate 10 percent or 20 percent adverse change in the key economic assumptions was not material. The Company has contracted with a major third party financial institution to act as the liquidity provider to the trusts. The Company has agreed to reimburse this party for any losses associated with providing liquidity to the trusts. The maximum exposure to loss at June 30, 2004, was approximately $200 million, which represents the outstanding amount of all trust certificates. This exposure to loss is mitigated by the underlying municipal bonds in the trusts, which are either AAA or AA rated. These bonds had a market value of approximately $200 million at June 30, 2004. The Company believes the likelihood that it will be required to fund the reimbursement agreement obligation under any provision of the arrangement is remote and no liability for such guarantee has been recorded in the accompanying financial statements.

800 Nicollet Mall, Suite 800 Minneapolis, MN 55402-7020 Piper Jaffray & Co. Since 1895. Member SIPC and NYSE. 2004 Piper Jaffray & Co. 9/04 CC-04-1008 #4092 piperjaffray.com