The following information should be read in conjunction with the accompanying audited 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, 2012 and 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 I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012, 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.

Explanation of Non-GAAP Financial Measures

We have included financial measures that are not prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). These non-GAAP financial measures exclude the effects of a goodwill impairment charge recognized in 2011 and affect the following financial measure disclosures: net income/loss from continuing operations applicable to Piper Jaffray Companies, earnings per diluted common share, non-compensation expenses, non-interest expenses, Capital Markets pre-tax operating income/loss and Capital Markets pre-tax operating margin. These non-GAAP measures should not be considered a substitute for measures of financial performance prepared in accordance with GAAP. These non-GAAP financial measures have been used because management believes they are useful to investors by providing greater transparency and more relevant measures of our operating performance and aid comparison to other periods.

Executive Overview

Our continuing operations are principally engaged in providing investment banking, institutional brokerage, asset management and related financial services to corporations, private equity groups, public entities, non-profit entities and institutional investors in the United States and Europe. We operate through two reportable business segments:

Capital Markets - The Capital Markets segment provides institutional sales, trading and research services and investment banking services. Institutional sales, trading and research services focus on the trading of equity and fixed income products with institutions, government and non-profit entities. Revenues are generated through commissions and sales credits earned on equity and fixed income institutional sales activities, net interest revenues on trading securities held in inventory, and profits and losses from trading these securities. Investment banking services include management of and participation in underwritings, merger and acquisition services and public finance activities. Revenues are generated through the receipt of advisory and financing fees. Also, we generate revenue through strategic trading activities, which focus on proprietary investments in municipal bond and non-agency mortgage-backed securities, and merchant banking activities, which involve equity or debt investments in late stage private companies. As certain of these efforts have matured and an investment process has been developed, we have created alternative asset management funds in merchant banking and municipal securities in order to invest firm capital as well as seek capital from outside investors. We receive management and performance fees for managing these funds.

Asset Management - The Asset Management segment provides traditional asset management services with product offerings in equity and master limited partnership ("MLP") securities to institutions and individuals through proprietary distribution channels. Revenues are generated in the form of management and performance fees. The majority of our performance fees, if earned, are generally recognized in the fourth quarter. Revenues are also generated through investments in the partnerships and funds that we manage.

Our discontinued operations for all periods presented include the operating results of our Hong Kong capital markets business and Fiduciary Asset Management, LLC ("FAMCO"), a division of our asset management segment.

As of September 30, 2012, we ceased operations related to our Hong Kong capital markets business. As a result of discontinuing this business, we will realize net cash proceeds of approximately $19.1 million, due principally to a U.S. tax benefit for the realized loss on the investment in our Hong Kong subsidiaries. The results of the Hong Kong capital markets business were previously reported in our Capital Markets segment.

We are actively pursuing a sale of FAMCO. Strategically, given its client base, limited scale and investment strategies, it is not a compelling fit with the rest of our asset management business. In light of this, FAMCO is classified as held for sale and reported in discontinued operations for all periods presented. The results of FAMCO were previously reported in our Asset Management segment. As discussed in Part I, Item 1 of this Form 10-K, in the first quarter of 2012 we reorganized our FAMCO and ARI reporting units, resulting in FAMCO's MLP business becoming part of ARI.

See Note 4 to our consolidated financial statements for further discussion of our discontinued operations.

Our 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.

Results for the year ended December 31, 2012

For the year ended December 31, 2012, net income applicable to Piper Jaffray Companies, including continuing and discontinued operations, was $41.3 million, or $2.26 per diluted common share. Net income applicable to Piper Jaffray Companies from continuing operations in 2012 was $47.1 million, or $2.58 per diluted common share, compared with a net loss applicable to Piper Jaffray Companies from continuing operations of $90.8 million, or $5.79 per diluted common share, for the prior-year period. The net loss in 2011 included a $118.4 million after-tax non-cash charge for impairment of goodwill related to our Capital Markets reporting unit. Excluding this charge, in 2011 we recorded net income applicable to Piper Jaffray Companies, from continuing operations of $27.7 million(1), or $1.44(1) per diluted common share. Net revenues from continuing operations for the year ended December 31, 2012 were $489.0 million, up 13.2 percent from the $432.1 million reported in the year-ago period due primarily to higher fixed income institutional brokerage revenues, particularly related to our strategic trading activities. In 2012, we recorded increased debt financing and advisory services revenues, offset in part by lower equity institutional brokerage revenues. For the year ended December 31, 2012, non-compensation expenses from continuing operations were $123.1 million, down slightly from $127.0 million in 2011 (excluding the $120.3 million goodwill impairment charge).

(1) Net income/(loss) from continuing operations applicable to Piper Jaffray

Companies and earnings per share
                                                                     For the Year Ended
(Amounts in thousands, except per share data)                        December 31, 2011
Loss from continuing operations                                     $         (90,772 )
Adjustment to exclude the goodwill impairment charge, net of
income tax                                                                    118,448

Net income from continuing operations, excluding the
goodwill impairment charge                                          $          27,676

Net income from continuing operations applicable to Piper
Jaffray Companies common shareholders, excluding the
goodwill impairment charge                                          $          22,593

Diluted earnings per common share, excluding the goodwill
impairment charge                                                   $            1.44

Weighted average number of common shares outstanding -
diluted                                                                        15,685

Market Data

The following table provides a summary of relevant market data over the past
three years.
                                                                            2012          2011
Year Ended December 31,           2012          2011          2010         v 2011        v 2010
Dow Jones Industrials
Average (a)                       13,104        12,218        11,578          7.3  %        5.5  %
NASDAQ (a)                         3,020         2,605         2,653         15.9  %       (1.8 )%
NYSE Average Daily Number of
Shares Traded (millions of
shares)                            1,146         1,552         1,764        (26.2 )%      (12.0 )%
NASDAQ Average Daily Number
of Shares Traded (millions
of shares)                         1,741         2,042         2,192        (14.7 )%       (6.8 )%
Mergers and Acquisitions
(number of transactions in
U.S.) (b)                          8,400         8,539         8,214         (1.6 )%        4.0  %
Public Equity Offerings
(number of transactions in
U.S.) (c) (e)                        748           663           783         12.8  %      (15.3 )%
Initial Public Offerings
(number of transactions in
U.S.) (c)                            139           138           155          0.7  %      (11.0 )%
Managed Municipal
Underwritings (number of
transactions in U.S.) (d)         12,994        10,574        13,828         22.9  %      (23.5 )%
Managed Municipal
Underwritings (value of
transactions in billions in
U.S.) (d)                      $   374.2     $   287.7     $   433.3         30.1  %      (33.6 )%
10-Year Treasuries Average
Rate                                1.80 %        2.79 %        3.21 %      (35.3 )%      (13.3 )%
3-Month Treasuries Average
Rate                                0.09 %        0.05 %        0.14 %       63.5  %      (61.6 )%

(a) Data provided is at period end.

(b) Source: Securities Data Corporation.

(c) Source: Dealogic (offerings with reported market value greater than $20 million).

(d) Source: Thomson Financial.

(e) Number of transactions includes convertible offerings.

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 demand for investment banking services as reflected by the number and size of equity and debt financings and merger and acquisition transactions, the volatility of the equity and fixed income markets, changes in interest rates (especially rapid and extreme changes), the level and shape of various yield curves, the volume and value of trading in securities, 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 may also affect our financial results. For example, our business focuses on a middle-market clientele in specific industry sectors. If the business environment for our focus sectors is impacted disproportionately as compared to the economy as a whole, or does not recover on pace with other sectors of the economy, our business and results of operations will be negatively impacted. In addition, 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 for any individual period should not be considered indicative of future results.

As a participant in the financial services industry, we are subject to complex and extensive regulation of our business. In recent years and following the credit crisis of 2008, legislators and regulators increased their focus on the regulation of the financial services industry, resulting in fundamental changes to the manner in which the industry is regulated and increased regulation in a number of areas. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010 bringing sweeping change to financial services regulation in the U.S. Changes in the regulatory environment in which we operate could affect our business and the competitive environment, potentially adversely.

Outlook for 2013

We believe a gradual economic recovery will continue into 2013 with the potential to benefit several of our businesses. We are mindful, however, that certain factors could cause a more challenging economic environment to emerge in 2013. The impact of recent tax increases and pending spending cuts could have a negative impact on economic growth. In addition, the ongoing political debate related to the U.S. debt ceiling limit, the federal budget, and the level of federal deficit spending will intensify in early 2013. As we have seen in recent years, global issues like the European debt crisis also can impact the U.S. economy and our businesses. In 2012, equity market volatility remained near a five-year low and the equity markets posted positive results, which resulted in increased U.S. capital markets activity as compared to 2011. We believe that the level of U.S. capital markets activity will continue to improve in 2013 if the key economic metrics remain strong. However, this level of activity can change rapidly as economic and market indicators fluctuate. In the fourth quarter of 2012, we recorded strong advisory services revenues partially attributed to sellers' desire to complete deals prior to the year-end and pending tax increases. This may result in lower advisory activity in early 2013. We anticipate that interest rates will remain at historically low levels throughout 2013 consistent with policy statements communicated by the U.S. Federal Reserve. The low interest rate environment, which aided our tax-exempt financing revenues in 2012, will continue to provide a favorable environment for refinancing of existing debt. We generated robust fixed income institutional brokerage revenue in 2012, particularly related to our strategic trading activities. These revenues will vary from period to period as a result of the timing of transactions based on market opportunities and other economic factors. Our asset management performance in 2013 will continue to be dependent upon equity valuations and our investment performance, which can impact the amount of client inflows and outflows of assets under management. Lastly, over the past few years, there has been a market trend of assets flowing out of equities into fixed income or alternative asset classes. We believe there are early indications that this trend may be reversing.

Results of Operations

Financial Summary

The following table provides a summary of the results of our operations and the
results of our operations as a percentage of net revenues for the periods
indicated.
                                               Year Ended December 31,                            As a Percentage of Net Revenues
                                                                        2012        2011          for the Year Ended December 31,
(Dollars in thousands)        2012           2011          2010         v2011       v2010        2012           2011          2010
Revenues:
Investment banking         $ 230,929     $  200,500     $ 237,847       15.2  %    (15.7 )%      47.2  %        46.4  %       49.6  %
Institutional brokerage      172,023        136,096       162,539       26.4       (16.3 )       35.2           31.6          33.9
Asset management              65,215         63,307        55,948        3.0        13.2         13.3           14.7          11.7
Interest                      48,844         55,440        51,703      (11.9 )       7.2         10.0           12.8          10.8
Other income                   1,231          8,313         6,685      (85.2 )      24.4          0.3            1.9           1.4

Total revenues               518,242        463,656       514,722       11.8        (9.9 )      106.0          107.3         107.2

Interest expense              29,290         31,573        34,788       (7.2 )      (9.2 )        6.0            7.3           7.2

Net revenues                 488,952        432,083       479,934       13.2       (10.0 )      100.0          100.0         100.0

Non-interest expenses:
Compensation and benefits    296,882        265,015       280,047       12.0        (5.4 )       60.7           61.3          58.4
Occupancy and equipment       26,454         28,430        30,034       (7.0 )      (5.3 )        5.4            6.6           6.3
Communications                20,543         22,121        22,832       (7.1 )      (3.1 )        4.2            5.1           4.8
Floor brokerage and
clearance                      8,054          8,925        11,347       (9.8 )     (21.3 )        1.6            2.1           2.4
Marketing and business
development                   19,908         22,640        21,642      (12.1 )       4.6          4.1            5.2           4.5
Outside services              27,998         27,570        30,265        1.6        (8.9 )        5.7            6.4           6.3
Restructuring-related
expense                        3,642              -        10,699        N/M         N/M          0.7              -           2.2
Goodwill impairment                -        120,298             -        N/M         N/M            -           27.8             -
Intangible asset
amortization expense           6,944          7,256         6,474       (4.3 )      12.1          1.4            1.7           1.3
Other operating expenses       9,516         10,017        12,777       (5.0 )     (21.6 )        1.9            2.3           2.7

Total non-interest
expenses                     419,941        512,272       426,117      (18.0 )      20.2         85.9          118.6          88.8

Income/(loss) from
continuing operations
before income tax expense     69,011        (80,189 )      53,817        N/M         N/M         14.1          (18.6 )        11.2

Income tax expense            19,470          9,120        32,163      113.5       (71.6 )%       4.0            2.2           6.7

Income/(loss) from
continuing operations         49,541        (89,309 )      21,654        N/M         N/M         10.1          (20.8 )         4.5

Discontinued operations:
Income/(loss) from
discontinued operations,
net of tax                    (5,807 )      (11,248 )       2,276      (48.4 )       N/M         (1.2 )         (2.6 )         0.5

Net income/(loss)             43,734       (100,557 )      23,930        N/M         N/M          8.9          (23.3 )         5.0

Net income/(loss)
applicable to
noncontrolling interests       2,466          1,463          (432 )     68.6  %      N/M          0.5            0.3          (0.1 )

Net income/(loss)
applicable to Piper
Jaffray Companies          $  41,268     $ (102,020 )   $  24,362        N/M         N/M          8.4  %       (23.6 )%        5.1  %

N/M - Not meaningful

For the year ended December 31, 2012, we recorded net income applicable to Piper Jaffray Companies, including continuing and discontinued operations, of $41.3 million. Net revenues from continuing operations for the year ended December 31, 2012 were $489.0 million, a 13.2 percent increase from the year-ago period. In 2012, investment banking revenues were $230.9 million, compared with $200.5 million in 2011, due to higher public finance and advisory services revenues. For the year ended December 31, 2012, institutional brokerage revenues increased 26.4 percent to $172.0 million, compared with $136.1 million in the prior year, driven by strong fixed income strategic trading revenues. In 2012, asset management fees were $65.2 million, up modestly compared with 2011. Net interest income in 2012 decreased 18.1 percent to $19.6 million, compared with $23.9 million in 2011. The decrease was primarily the result of a strategic decision to further diversify from overnight funding sources to short term funding sources with extended terms. These short term funding sources with extended terms typically have higher interest costs than overnight financing obtained from repurchase obligations. The change in net interest income is also partly attributable to a decline of our

average long inventory balances. For the year ended December 31, 2012, other income was $1.2 million, compared with $8.3 million in the prior year as we recorded higher investment gains associated with our merchant banking activities in 2011. In 2012, non-interest expenses from continuing operations increased 7.1 percent to $419.9 million, compared with $392.0 million in 2011, which excludes the pre-tax goodwill impairment charge of $120.3 million. This increase was driven by increased variable compensation due to improved operating performance.

For the year ended December 31, 2011, we recorded a net loss applicable to Piper Jaffray Companies, including continuing and discontinued operations, of $102.0 million. Included in this loss was a $118.4 million after-tax charge for the impairment of goodwill related to our Capital Markets reporting unit. Net revenues from continuing operations for the year ended December 31, 2011 were $432.1 million, a 10.0 percent decrease from the year-ago period. In 2011, investment banking revenues were $200.5 million, compared with $237.8 million in 2010. This decline was due to lower equity underwriting and public finance underwriting revenues, as well as decreased advisory services revenues. For the year ended December 31, 2011, institutional brokerage revenues decreased 16.3 percent to $136.1 million, compared with $162.5 million in the prior year, driven by decreased performance in cash equities and taxable fixed income products. In 2011, asset management fees were $63.3 million, compared with $55.9 million in 2010. The increased revenues were driven by a full year of revenue for ARI, which we acquired on March 1, 2010, offset by lower performance fees. Net interest income in 2011 increased 41.1 percent to $23.9 million, compared with $16.9 million in 2010. The increase was primarily the result of higher interest income earned on higher average net inventory balances, particularly related to municipal securities. Other income increased to $8.3 million in 2011, compared with $6.7 million in the prior year, due to higher investment gains associated with our merchant banking activities. Non-interest expenses increased to $512.3 million for the year ended December 31, 2011. Excluding the goodwill impairment charge of $120.3 million, non-interest expenses were $392.0 million in 2011, compared with $426.1 million in the prior year. This decline was driven by a decrease in variable compensation due to lower operating performance in 2011 and $10.7 million of expense incurred in 2010 to restructure the firm's European operations.

Consolidated Non-Interest Expenses from Continuing Operations

Compensation and Benefits - Compensation and benefits expenses, which are the largest component of our expenses, include salaries, incentive compensation, benefits, stock-based compensation, employment taxes, income associated with the forfeiture of stock-based compensation and other employee costs. A portion of compensation expense is comprised of variable incentive arrangements, including discretionary incentive compensation, 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 incentive compensation payments, which generally occur in February, has a greater impact on our cash position and liquidity than is reflected on our consolidated statements of operations.

For the year ended December 31, 2012, compensation and benefits expenses increased 12.0 percent to $296.9 million from $265.0 million in 2011, due to increased variable compensation expense driven by higher net revenues and operating profits. Compensation and benefits expenses as a percentage of net revenues was 60.7 percent in 2012, compared with 61.3 percent in 2011. The lower compensation ratio in 2012 was driven by increased revenues and our mix of business as we recorded significantly higher fixed income strategic trading revenues in 2012, which have a lower compensation payout.

Compensation and benefits expenses decreased 5.4 percent to $265.0 million in 2011, from $280.0 million in 2010. This decrease was due to lower variable compensation costs resulting from reduced net revenues and profitability. Compensation expense in 2010 was reduced by a $5.0 million compensation expense reversal related to a performance-based restricted stock award granted to our leadership team that was no longer expected to be earned. Compensation and benefits expenses as a percentage of net revenues were 61.3 percent for 2011, compared with 58.4 percent for 2010. The higher compensation ratio was primarily driven by the impact of fixed compensation costs on a reduced revenue base and the impact of the compensation expense reversal, which decreased the 2010 compensation rate by 1.0 percent.

Occupancy and Equipment - For the year ended December 31, 2012, occupancy and equipment expenses decreased 7.0 percent to $26.5 million, compared with $28.4 million in 2011. The decrease was primarily due to cost saving initiatives.

Occupancy and equipment expenses decreased 5.3 percent to $28.4 million in 2011, compared with $30.0 million in 2010. The decrease was primarily attributable to lower occupancy costs due to the consolidation of office space in New York City, which occurred in the fourth quarter of 2010.

Communications - Communication expenses include costs for telecommunication and data communication, primarily consisting of expenses for obtaining third-party market data information. For the year ended December 31, 2012, communication expenses decreased 7.1 percent to $20.5 million, compared with $22.1 million in 2011. The decrease was primarily attributable to lower market data service expenses.

In 2011, communication expenses were $22.1 million, a 3.1 percent decrease from 2010.

Floor Brokerage and Clearance - For the year ended December 31, 2012, floor . . .