This report contains a number of projections and statements about our expected financial condition, operating results, and business plans and objectives. These statements reflect management's estimates based upon our current goals, in light of management's knowledge of existing circumstances and expectations about future developments. Statements about expectations and future performance are "forward looking statements" which describe our goals, objectives and anticipated performance. These statements are inherently uncertain, and some or all of these statements may not come to pass. Accordingly, you should not interpret these statements as promises that we will perform at a given level or that we will take any or all of the actions we currently expect to take. Our future actions, as well as our actual performance, will vary from our current expectations, and under various circumstances these variations may be material and adverse. Some of the factors that may cause our actual operating results and financial condition to fall short of our expectations are set forth in the part of this report entitled "Risk Factors" in PART II, ITEM 1A below. Some of the issues that may have an adverse and material impact on our business, operating results and financial condition include economic conditions that affect consumer demand for our products and the prices we receive for them both domestically and overseas, particularly in certain parts of Asia; our ability to estimate accurately the environmental and other liabilities associated with our assets and operations; government regulation that affects our ability to access our timberlands and harvest logs from those lands; the implications of significant indirect sales to overseas customers, including currency translation, regulatory and tax matters; the effect of financial market conditions on our investment portfolio and related liquidity; environmental and land use regulations that limit our ability to harvest timber and develop property; access to debt financing by our customers as well as ourselves; our ability to consummate proposed or contracted transactions in a manner that will yield revenues; the impacts of climate change and natural disasters on our timberlands and on surrounding areas; and the potential impacts of fluctuations in foreign currency exchange rates as they affect demand for our products and customers' ability to pay. From time to time we identify other risks and uncertainties in our other filings with the Securities and Exchange Commission. The forward-looking statements in this report reflect our estimates as of the date of the report, and we cannot undertake to update these statements as our business operations and environment change.

This discussion should be read in conjunction with the condensed consolidated financial statements and related notes included with this report.

Pope Resources, A Delaware Limited Partnership ("we" or the "Partnership"), is engaged in three primary businesses. The first, and by far most significant segment in terms of owned assets and operations, is the Fee Timber segment. This segment includes timberlands owned directly by the Partnership and operations of the three private equity funds ("Funds"). When we refer to the timberland owned by the Partnership, we describe it as the Partnership's tree farms. We refer to timberland owned by the Funds as the Funds' tree farms. When referring collectively to the Partnership's and Funds' timberland we will refer to them as the Combined tree farms. Operations in this segment consist of growing timber to be harvested as logs for sale to export brokers and domestic manufacturers. The second most significant business in terms of total assets owned is the development and sale of real estate. Real Estate activities primarily take the form of securing permits, entitlements, and, in some cases, installing infrastructure for raw land development and then realizing that land's value by selling larger parcels to buyers who will take the land further up the value chain, either to home buyers or to operators and lessors of commercial property. Since these land projects span multiple years, the Real Estate segment may incur losses for multiple years while a project is developed, and will not recognize operating income until that project is sold. In addition, within this segment we sometimes negotiate and sell conservation easements (CE's) on Fee Timber properties to preclude future development. Our third business, which we refer to as Timberland Management & Consulting, or "TM&C," is raising and investing capital from third parties and the Partnership for private equity timber funds, and thereafter managing those funds for the benefit of all investors.

Our current strategy for adding timberland acreage is centered on our private equity timber fund business model, which consists of raising investment capital from third-party investors and investing that capital, along with our own co-investment, into new timberland properties. We have closed and invested capital from two timber funds, with assets under management now totaling $171 million. Our 20% co-investments in Funds I and II, and our 5% co-investment in Fund III, which collectively totaled $28 million as of June 30, 2012, afford us a share of the Funds' operating cash flows while also allowing us to earn asset management and timberland management fees as well as incentive fees based upon the overall success of each fund. Management also believes that this strategy allows us to maintain more sophisticated expertise in timberland acquisition, valuation, and management than could be cost-effectively maintained for the Partnership's timberlands alone. We believe our co-investment strategy also boosts our credibility with existing and prospective investors by demonstrating that we have both an operational as well as a financial commitment to the Funds' successes.

We have closed on $180 million of committed capital for Fund III, $9 million of which represents our co-investment. The Funds are consolidated into our financial statements with the income attributable to equity owned by third parties reflected in our Condensed Consolidated Statements of Comprehensive Income under the caption "Net (income) loss attributable to noncontrolling interests-ORM Timber Funds."

Land held for sale in western Washington by our Real Estate segment represents property that has been deemed suitable for residential and commercial building sites. The markets for these resources have recently suffered along with regional and national markets, producing a decline in our sales. The challenge for our Real Estate segment centers around how and when to "harvest" a parcel of land and capture the optimum value increment by selling the property, balancing the long-term risks and costs of carrying and developing a property against the potential for income and positive cash flows upon sale.

We have entered into a purchase and sale agreement with two large merchant builders to acquire a combined 79 lots within our Harbor Hill project in Gig Harbor, Washington. We expect the first lot takedown to occur in either fourth quarter of 2012 or first quarter of 2013. Consistent with accounting guidelines, revenue will be recognized on this transaction once it is earned and we concluded we have no material continuing involvement or obligation to the purchaser.

Revenue increased from the second quarter of 2011 to the second quarter of 2012 on a 61% increase in log sale volume, offset by a 9% decline in average log price. Revenue was also aided by a 4.4 million board feet (MMBF) timber deed sale, a transaction in which we sell rights to harvest timber on our timberlands rather than harvesting and selling logs directly. The timber deed sale closed in the second quarter and yielded revenues of $1.0 million from the Partnership's Hood Canal tree farm. Income is down due to a charge to the environmental remediation accrual, which occurs because of a change in scope and extent of the required cleanup at Port Gamble. This accrual and the related Clean-up Action Plan and Consent Decree are discussed later in this report. High log inventories in China have shown signs of decline, however demand is still lukewarm and prices have remained low. High inventories in China, low log prices, and elevated trans-ocean fuel and freight rates continue to dampen the log flow to China. We harvested 35 MMBF in the second quarter of 2012, which included the
4.4 MMBF timber deed sale, compared to 14 MMBF in the first quarter of 2012 and 19 MMBF in the second quarter of 2011. Realized log prices declined $27/MBF, or 5%, from the first to the second quarter of 2012 and $50/MBF, or 9%, from the second quarter of 2011 to the second quarter of 2012. For the six months ended June 30, 2012 and 2011, we harvested 49 MMBF. The 2012 year-to-date volume includes the 4.4 MMBF timber deed sale. Realized log prices during the six months ended June 30, 2012 declined $30/MBF, or 5%, from the same six-month period in 2011. We expect our harvest volume for the full year 2012 to be between 78 and 82 MMBF, with the final total depending on the strength or weakness of log markets. This harvest volume total includes the aforementioned
4.4 MMBF timber deed sale.

                             RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that
impacted our net income for the respective quarter and year-to-date periods
ended June 30, 2012 and June 30, 2011. In addition to the table's numerical
analysis, the explanatory text that follows the table describes certain of these
changes by business segment.

                                                                                        Six Months
                                                                   Quarter Ended          Ended
                                                                     June 30,            June 30,
(in thousands)                                                         Total              Total
Net income (loss) attributable to Pope Resources'
unitholders:
2012 period                                                      $          (9,295 )   $     (8,089 )
2011 period                                                                  3,287            6,967
  Variance                                                       $         (12,582 )   $    (15,056 )
Detail of variance:
Fee Timber
Log volumes (A)                                                  $           6,623     $     (2,295 )
Log price realizations (B)                                                  (1,510 )         (1,583 )
Stumpage sales                                                               1,026            1,026
Production costs                                                            (2,495 )            281
Depletion                                                                   (1,142 )            764
Other Fee Timber                                                              (407 )            (50 )
Timberland Management & Consulting
Other Timberland Management & Consulting                                       (69 )            (23 )
Real Estate
Land and conservation easement sales                                        (2,308 )         (2,308 )
Timber depletion on land sale                                                  150              150
Other Real Estate                                                             (215 )           (182 )
Environmental remediation costs                                            (12,423 )        (12,156 )
General & administrative costs                                                 160               74
Net interest expense                                                            48              119
Other (taxes and noncontrolling interest)                                      (20 )          1,127
Total variances                                                  $         (12,582 )   $    (15,056 )

(A) Volume variance calculated by extending change in sales volume by the average log sales price for the comparison period.
(B) Price variance calculated by extending the change in average realized price by current period
sales volume.

Fee Timber

Fee Timber results include operations from 114,000 acres of timberland owned by the Partnership and 61,000 acres of timberland owned by the Funds. Fee Timber revenue is earned primarily from the harvest and sale of logs from these timberlands which are located in western Washington and northwestern Oregon and, to a lesser extent, from the ground leases for cellular communication towers, gravel mines and quarries, together with the sale of other resources from our timberlands. Our Fee Timber revenue is driven primarily by the volume of timber harvested and the average log price realized on the sale of that harvested timber. Our volume harvested is typically based on manufactured log sales to customers or exporters. However, during the second quarter of 2012, we sold rights to harvest timber (timber deed sale) from the Hood Canal Tree Farm. The metrics used to calculate volumes sold and average price realized during the reporting period exclude the timber deed sale, except where called out as including it. Harvest volumes are generally expressed in million board feet (MMBF) increments and harvest revenue and related costs are generally expressed in terms of revenue or cost per thousand board feet (MBF). Fee Timber expenses, which consist predominantly of harvest, hauling, and depletion costs, vary directly and roughly proportionately with harvest volume and the resulting revenues. Revenue and costs related to harvest activities on timberland owned by the Funds are consolidated into this discussion of operations.

When discussing our Fee Timber operations, we compare current results to both the previous quarter and the corresponding quarter of the prior year, as well as current year-to-date results to the prior year-to-date results. These comparisons provide an opportunity to note trends in log prices and patterns of harvest volumes that affect Fee Timber operating results. Revenue and operating income for the Fee Timber segment for the quarters ended June 30, 2012, March 31, 2012, and June 30, 2011 were as follows:

                                                   Mineral,
                                                  Cell Tower       Total Fee                       Harvest
         (in millions)             Log Sale        & Other          Timber         Operating        Volume
         Quarter ended             Revenue         Revenue          Revenue         Income          (MMBF)
         Partnership tree farms   $     10.3     $        1.3     $      11.6     $       5.1           18.8
              Funds' tree farms          5.8                -             5.8             0.3           11.4
 Total Fee Timber June 30, 2012   $     16.1     $        1.3     $      17.4     $       5.4           30.2

         Partnership tree farms   $      6.6     $        0.4     $       7.0     $       3.2           11.7
              Funds' tree farms          1.5                -             1.5               -            2.8
Total Fee Timber March 31, 2012   $      8.1     $        0.4     $       8.5     $       3.2           14.5

         Partnership tree farms   $      6.6     $        0.4     $       7.0     $       3.1           11.0
              Funds' tree farms          4.3                -             4.3             0.2            7.8
 Total Fee Timber June 30, 2011   $     10.9     $        0.4     $      11.3     $       3.3           18.8

Comparing Q2 2012 to Q1 2012. Fee Timber revenue doubled from $8.5 million in the first quarter of 2012 to $17.4 million in the second quarter of 2012 primarily as a result of doubling harvest volume in the second quarter, only slightly offset by a decline of $27/MBF, or 5%, in realized log prices. The revenue increase was also aided by a 4.4 MMBF timber deed sale during the second quarter of 2012, which appears in the table above in the Mineral, Cell Tower, & Other Revenue column. The harvest volume increase reflects a focus on maximizing net stumpage values by selling to specific domestic sawmills rather than to a lackluster export market. The selected domestic customers were geographically situated in a way that allowed a reduction of haul costs and, in some cases, had specialty markets for Japanese lumber that allowed a higher delivered log price.

Operating income for the second quarter of 2012 increased by $2.2 million, or 69%, from first quarter 2012 results. Income increased as a result of the lift in harvest volume and profit of $765,000 from the timber deed sale, offset by a heavier mix of total harvest from the Timber Funds, which carry a higher depletion expense per MBF. Income was also offset by a 42% increase in operating expenses from the first quarter, a result of road expenses which were elevated from the first quarter of 2012 to prepare and maintain tree farms for harvesting.

The Funds nearly tripled revenue during the second quarter of 2012, generating $5.8 million during the second quarter compared with revenue of $1.5 million in the first quarter of 2012. The increase was driven by a fourfold harvest volume lift from nearly 3 MMBF in the first quarter of 2012 to over 11 MMBF in the second quarter of 2012. This increase in harvest volume also explained the rise in Fund operating income from $12,000 during the first quarter of 2012 to $286,000 during the second quarter of 2012. However, with higher depletion expense per MBF, the added harvest from the Timber Funds did not translate into significantly higher operating income.

Comparing Q2 2012 to Q2 2011. A 60% increase in harvest volume from the second quarter of 2011 to the second quarter of 2012 served to lift Fee Timber revenue by $6.1 million, or 54%, over the comparable period in the prior year, partially offset by a $50/MBF, or 9%, reduction in average realized log price during 2012. Operating income for the second quarter of 2012 rose $2.1 million, or 63%, over same period in 2011 due to the rise in harvest volume, the second quarter 2012 timber deed sale, and a slightly lower mix of harvest from the Timber Funds, which carry higher depletion expense per MBF.

Second quarter 2012 Fund revenue rose 35% to $5.8 million from $4.3 million for the same quarter in 2011 on a nearly 4 MMBF, or 46%, jump in harvest volume. Operating income for the period rose more modestly from $235,000 in 2011 to $286,000 in 2012 as a result of higher operating costs to prepare roads for harvesting.

Revenue and operating income for the Fee Timber segment for year-to-date periods ended June 30, 2012 and June 30, 2011 were as follows:

                                                   Mineral,
                                                  Cell Tower       Total Fee                       Harvest
         (in millions)             Log Sale        & Other          Timber         Operating        Volume
       Six Months Ended            Revenue         Revenue          Revenue         Income          (MMBF)
          Pope Resources Timber   $     16.9     $        1.7     $      18.6     $       8.3           30.5
                   Timber Funds          7.3                -             7.3             0.3           14.2
 Total Fee Timber June 30, 2012   $     24.2     $        1.7     $      25.9     $       8.6           44.7

          Pope Resources Timber   $     17.7     $        0.7     $      18.4     $       8.7           29.9
                   Timber Funds         10.4                -            10.4             1.7           19.2
 Total Fee Timber June 30, 2011   $     28.1     $        0.7     $      28.8     $      10.4           49.1

Comparing YTD 2012 to YTD 2011. Fee Timber revenue for the first half of 2012 declined by $2.9 million, or 10%, over the comparable period in 2011. Absence of a strong Chinese log export market and weakening in prices in 2012 are primarily responsible for the decline in log prices and also served to pull down operating income $1.8 million, or 18%, from 2011 to 2012. Operating income would have been further reduced without the lower mix of harvest from the Timber Funds, which carry a higher depletion expense and therefore lower operating income margin.

Log Volume

We harvested the following log volumes by species from the Combined tree farms,
exclusive of the aforementioned 4.4 MMBF timber deed sale, for the quarters
ended June 30, 2012, March 31, 2012, and June 30, 2011:

   Volume (in MMBF)                                     Quarter Ended
   Sawlogs                Jun-12       % Total      Mar-12       % Total      Jun-11       % Total
            Douglas-fir      19.3            64 %      11.1            77 %      10.1            54 %
            Whitewood         5.8            19 %       0.9             6 %       5.1            27 %
            Cedar             0.3             1 %       0.1             1 %       0.3             1 %
            Hardwood          1.1             4 %       0.4             2 %       0.5             3 %
   Pulpwood
            All Species       3.7            12 %       2.0            14 %       2.8            15 %
   Total                     30.2           100 %      14.5           100 %      18.8           100 %

Comparing Q2 2012 to Q1 2012. Harvest volume more than doubled from the first to the second quarter of 2012. The increase reflects a seasonal bump in harvest volume as wood in higher elevations is more readily accessible in the spring and early summer. This increase was more pronounced for us than usual due to withholding even low-elevation harvest in response to lukewarm early-2012 demand from the China export log market. Douglas-fir harvest volume, as a percent of overall harvest, declined from the first to the second quarter of 2012 due to bringing the Funds' tree farms online and this contributed to a $16/MBF, or 3%, drop in average realized log price. Harvest from the Funds' tree farms increased from 19% of first quarter volume to 33% of second quarter volume. The Funds' tree farms are heavier to whitewood than the Partnership tree farms and, as such, whitewood volume increased from 6% to 19% of the total second quarter harvest mix with a $14/MBF, or 3%, increase in average log price.

Comparing Q2 2012 to Q2 2011. Harvest volumes were up more than 11 MMBF, or 60%, from the second quarter of 2011 to the same period in 2012. The increase reflects decisions in 2011 to heavily front-load 2011 harvest to take advantage of a then-burgeoning China export log market coupled with unusually late winter conditions which prevented access to planned harvest units in the second quarter. These first quarter 2011 influences led to decreased second quarter 2011 harvest activities relative to the second quarter of 2012. The mix of volume coming from the Partnership's and Funds' tree farms was 59% and 41% in 2011, respectively, compared with 67% and 33% in 2012. This small shift in tree farm mix contributed to an overall decline in the relative percentage of whitewood harvest volume from 27% in 2011 to 19% in 2012. The shift is also responsible for increasing Douglas-fir harvest volumes from 54% of second quarter 2011 harvest volume to 64% of second quarter 2012 harvest volume. There was a slight decline in Pulpwood volumes from 15% of second quarter 2011 harvest to 12% of second quarter 2012 harvest due primarily to the mix of the stands harvested in the second quarter of 2012. Pulpwood prices declined 17% quarter-over-quarter as result of the closure of a major regional pulp mill, which served to increase pulpwood inventories and drive down prices. Additionally, sawmills, the low cost supplier preference of pulp mills, continue to gradually increase production, thus further suppressing the demand for, and weakening prices of, chips from whole logs.

Comparing YTD 2012 to YTD 2011. We harvested the following log volumes by species from the Combined tree farms, exclusive of the aforementioned 4.4 MMBF timber deed sale, for the six months ended June 30, 2012 and June 30, 2011:

            Volume (in MMBF)                      Six Months Ended
            Sawlogs                Jun-12       % Total      Jun-11       % Total
                     Douglas-fir      30.4            68 %      29.3            60 %
                     Whitewood         6.7            15 %      11.6            23 %
                     Cedar             0.4             1 %       0.8             2 %
                     Hardwood          1.5             3 %       1.1             2 %
            Pulpwood
                     All Species       5.7            13 %       6.3            13 %
            Total                     44.7           100 %      49.1           100 %

Harvest volumes declined 4 MMBF, or 9%, in the first six months of 2012 over the same period in 2011, with substantially all of this decrease attributable to a decline in 2012 harvest from the Funds. Harvest from the Funds dropped 5 MMBF, or 26%, from 19 MMBF to 14 MMBF in 2011 and 2012, respectively. Harvest from the Partnership tree farms increased 1 MMBF, or 2%, from 30 MMBF to 31 MMBF in 2011 and 2012, respectively. This shift in harvest volume mix from 2011 to 2012 reflects particularly a change in the whitewood export log market at Astoria, Oregon where, in its incipient stage in 2011, the China market paid a very large premium for otherwise lower-valued domestic and even pulpwood whitewood logs. This situation did not re-develop in 2012, and whitewood prices in the geographies of our Funds reflected low export demand and relatively weak local domestic prices as well. This is reflected in the decline of whitewood harvest volumes from 23% of the 2011 mix to 15% of the 2012 mix and a corresponding increase in Douglas-fir volumes from 60% in 2011 to 68% in 2012. Pulpwood volumes remained static, as a relative portion of 2011 and 2012 harvest volume.

Log Prices

Logs from the Combined tree farms serve a number of different domestic and export markets, with domestic mills historically representing our largest market destination. This customer mix shifted, however, in the fourth quarter of 2010 when logs destined for export markets represented the largest share of our total log sales, driven by the China export log market accepting a lower quality product than what has traditionally defined an export log. As a result, significant volumes that theretofore would have been sold to domestic mills instead flowed to the China market beginning with 2010 when our export mix surged to 33% and peaked at 45% in 2011. From 2010 through the third quarter of 2011, the relative strength of the China export market was a driving force for much of our log pricing. This shifted during the fourth quarter of 2011 when oversupply abruptly reduced demand from China and we reacted by tying up contracts with domestic mills that extended into the first quarter of 2012. In the first quarter of 2012 most of our export volume was comprised of higher-value Douglas-fir logs going to Japan. This mix, however, shifted once again during the second quarter of 2012 with improved lumber demand from higher housing starts and a situation where we responded with sales to a limited number of domestic mills for high-grade Douglas-fir logs suitable for milling high-value Japanese lumber grades. This shift allowed us to realize equivalent delivered log prices while generating shorter hauls and thus a higher net log . . .