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POPE RESOURCES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

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

For the quarterly period ended June 30, 2006

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

Commission File Number 1-9035

POPE RESOURCES, A DELAWARE

LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

91-1313292
(IRS Employer Identification Number)

19245 10th Avenue NE, Poulsbo, WA 98370

Telephone: (360) 697-6626

(Address of principal executive offices including zip code)

(Registrant's telephone number including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in rule 12b-2 of the Securities and Exchange Act of 1934).

Large Accelerated Filer o Accelerated Filer x None Accelerated Filer o

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

Partnership units outstanding at August 1, 2006: 4,682,121

Pope Resources

Index to Form 10-Q Filing

For the Quarter Ended June 30, 2006

Description	Page Number
Part I. Financial Information
Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Earnings	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	7-13

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-34

Item 3. Quantitative and Qualitative Disclosures about Risk	34

Item 4. Controls and Procedures	34

Part II. Other Information
Item 1. Legal Proceedings	35
Item 1A. Risk Factors	35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3. Defaults Upon Senior Securities	36
Item 4. Submission of Matters to a Vote of Security Holders	36
Item 5. Other Information	37
Item 6. Exhibits	37

Signatures	38

P A R T I - FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

Pope Resources
June 30, 2006 and December 31, 2005

(Thousands)
	2006		2005

Assets
Current assets:
Cash and cash equivalents	$	2,679	$	3,361
Short-term investments		20,000		15,000
Accounts receivable		3,805		1,049
Land held for sale at cost		2,947		4,371
Current portion of contracts receivable		13		14
Prepaid expenses and other		225		336
Total current assets		29,669		24,131

Properties and equipment at cost:
Land held for development		11,723		9,661
Land and land improvements		15,359		15,542

Roads and timber (net of accumulated depletion of $41,857 and $37,030)		48,714		53,019
Buildings and equipment (net of accumulated depreciation of $6,601 and $6,488)		3,434		3,340
		79,230		81,562
Other assets:
Contracts receivable, net of current portion		958		483
Other		166		182
		1,124		665
Total assets	$	110,023	$	106,358

Liabilities and Partners' Capital
Current liabilities:
Accounts payable	$	1,260	$	1,147
Accrued liabilities		1,400		3,865
Current portion of long-term debt		1,342		1,602
Deferred revenue		1,245		304
Environmental remediation		47		152
Minority interest		36		325
Other current liabilities		73		59
Total current liabilities		5,403		7,454

Long-term debt, net of current portion		30,919		32,281
Other long term liabilities		321		218

Partners' capital (units outstanding 4,643 and 4,646)		73,380		66,405

Total liabilities and partners' capital	$	110,023	$	106,358

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

Pope Resources
For the Three Months and Six Months Ended June 30, 2006 and 2005


(Thousands, except per unit data)	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005

Revenues	$	15,610		$	16,131		$	31,693		$	32,787
Cost of sales		(8,414	)		(7,410	)		(14,839	)		(15,214	)
Operating expenses		(2,559	)		(2,671	)		(5,028	)		(5,004	)
Environmental remediation		-			(108	)		-			(108	)
General and administrative expenses		(902	)		(847	)		(1,906	)		(1,695	)
Income from operations		3,735			5,095			9,920			10,766

Other income (expense):
Interest expense		(469	)		(709	)		(997	)		(1,445	)
Interest income		252			74			471			93
		(217	)		(635	)		(526	)		(1,352	)

Income before income taxes and minority interest		3,518			4,460			9,394			9,414

Income tax benefit (provision)		8			(263	)		(437	)		(510	)

Income before minority interest		3,526			4,197			8,957			8,904

Minority interest benefit (expense)		14			(128	)		(119	)		(229	)

Net income	$	3,540		$	4,069		$	8,838		$	8,675


Allocable to general partners	$	46		$	53		$	116		$	114
Allocable to limited partners		3,494			4,016			8,722			8,561

Earnings per unit:
Basic	$	0.76		$	0.89		$	1.91		$	1.89
Diluted	$	0.74		$	0.86		$	1.86		$	1.83

Weighted average units outstanding:
Basic		4,641			4,596			4,638			4,578
Diluted		4,753			4,757			4,750			4,740

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Pope Resources
Six Months Ended June 30, 2006 and 2005


(Thousands)	2006			2005
Cash flows provided by operating activities
Net income	$	8,838		$	8,675
Add back (deduct) non-cash charges (credits):
Deferred revenue		941			(685	)
Depletion		4,692			7,066
Equity based compensation		195			-
Depreciation and amortization		359			319
Deferred taxes		(19	)		510
Minority interest		119			229
Cost of land sold		2,869			166
Change in working capital accounts:
Accounts receivable		(2,756	)		(2,660	)
Contracts receivable		(474	)		(177	)
Other current assets		129			114
Accounts payable		113			(82	)
Accrued liabilities		(1,039	)		(270	)
Deposits		15			(5	)
Environmental remediation		(105	)		(362	)
Other long term liabilities		103			(25	)
Other		1			1
Net cash flows provided by operating activities		13,981			12,814

Cash flows from investing activities:
Capital expenditures		(5,816	)		(1,691	)
Purchase of short-term investments		(5,000	)		(8,007	)

Net cash used in investing activities		(10,816	)		(9,698	)

Cash flows from financing activities:
Option exercises		248			1,531
Repayment of operating line of credit		-			(758	)
Tax benefit from equity based compensation		34			-
Minority interest distribution		(167	)		(26	)
Repayment of long-term debt		(1,623	)		(1,667	)
Unitholder distribution		(2,339	)		(1,379	)

Net cash used in financing activities		(3,847	)		(2,299	)

Net increase (decrease) in cash and cash equivalents		(682	)		817
Cash and cash equivalents at beginning of year		3,361			757

Cash and cash equivalents at end of the six-month period	$	2,679		$	1,574

See accompanying notes to condensed consolidated financial statements.

POPE RESOURCES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

The condensed consolidated financial statements as of June 30, 2006 and December 31, 2005 and for the three months (quarter) and six-month periods ended June 30, 2006 and June 30, 2005 have been prepared by Pope Resources, A Delaware Limited Partnership (“the Partnership”) pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). The condensed consolidated financial statements are unaudited, but, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2005, is derived from the Partnership’s audited consolidated financial statements and notes thereto for the year ended December 31, 2005, and should be read in conjunction with such financial statements. The results of operations for the interim periods are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2006.

2.	The financial statements in the Partnership's 2005 Annual Report on Form 10-K include a summary of significant accounting policies of the Partnership and should be read in conjunction with this Quarterly Report on Form 10-Q.

3.	Basic net earnings per unit are based on the weighted average number of units outstanding during the period. Diluted net earnings per unit are based on the weighted average number of units and dilutive unit options outstanding at the end of the period.

	Quarter Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Weighted average units outstanding (in thousands):
Basic		4,641		4,596		4,638		4,578
Dilutive effect of unit options		112		161		112		162
Diluted		4,753		4,757		4,750		4,740

Options to purchase 258,000 units at prices ranging from $9.30 to $37.73 per unit were outstanding as of June 30, 2006. For computing the dilutive effect of unit options for the quarter ended June 30, 2006, options to purchase 1,100 units at prices ranging from $33.15 to $37.73 were not included in the calculation during the three and six-month periods ended June 30, 2006.

Options to purchase 293,000 units at prices ranging from $9.30 to $37.73 per unit were outstanding as of June 30, 2005. For computing the dilutive effect of unit options for the quarter ended June 30, 2005, options to purchase 457 units at prices ranging from $35.00 to $37.73 were not included in the calculation because the option exercise prices were greater than the average market prices of units during the period. For the six-month period ended June 30, 2005, options to purchase 298 units at prices ranging from $36.82 to $37.73 were not included in the calculation during the three and six-month periods ended June 30, 2005.

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) Share Based Payment (SFAS No. 123R) using the modified prospective approach and accordingly have not restated prior period results. SFAS 123R established the accounting for equity instruments exchanged for employee services. Under SFAS 123R, share-based compensation cost is measured at the grant date based on the calculated fair value of the award. We have also changed our accounting for equity-based compensation awarded to retirement eligible directors and employees to expense the award over the lesser of vesting period or the period between the grant date and eligibility for retirement. The impact of the adoption of SFAS 123R on our earnings was $100,000 or $.03 per diluted unit for the quarter ended June 30, 2006, and $249,000 or $.06 per diluted unit for the six months ended June 30, 2006, which includes $70,000 of expense related to the treatment of the 2006 restricted unit grant to retirement eligible employees and board members.

Prior to the adoption of SFAS No. 123R, we accounted for equity based compensation granted to employees in accordance with Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations. The following table presents the impact of our adoption of SFAS 123R on selected line items from our condensed consolidated statement of earnings for the quarter and six-month periods ended June 30, 2006 (in thousands, except per unit amounts):


	For the Quarter				For the Six Months
	Ended June 30, 2006				Ended June 30, 2006
	Following		If Reported		Following		If Reported
	FAS 123R		Following APB 25		FAS 123R		Following APB 25
Condensed statement of earnings:
Operating profit	$	3,735	$	3,835	$	9,920	$	10,169

Income before income taxes
and minority interest	$	3,518	$	3,618	$	9,394	$	9,643

Net income	$	3,540	$	3,640	$	8,838	$	9,087

Earnings per unit:
Basic	$	0.76	$	0.78	$	1.91	$	1.96
Diluted	$	0.74	$	0.77	$	1.86	$	1.92

In 2005, we adopted the 2005 Unit Incentive Plan. Following adoption of this new plan the Board of Directors began issuing restricted units instead of unit options as its primary method of granting equity based compensation. Units issued as a result of option exercises and restricted unit grants are funded through the issuance of new units. As of June 30, 2006, total compensation expense related to non-vested awards not yet recognized was $914,000 with a weighted average 41 months remaining to vest.

In addition to accounting and disclosure presented in accordance with Accounting Principles Board (APB) No. 25, we also provided the disclosures required under SFAS No. 123, Accounting for Stock Based Compensation (SFAS No. 123) as amended by SFAS No. 148, Accounting for Stock Based Compensation - Transition and Disclosures. As a result, no expense was reflected in our net income for the period ended June 30, 2005 for unit options, as all options granted had an exercise price equal to the market value of the underlying units on the grant date.

The table below reflects our proforma net income per share for the period shown had compensation for unit options been determined based on the fair value at the grant date, consistent with the methodology prescribed under SFAS No. 123:

	Quarter ended			Six months ended
	June 30,			June 30,
(In thousands except per unit amounts)	2005			2005

Net income as reported	$	4,069		$	8,675

Compensation expense recognized		-			-

Subtract proforma compensation
expense under SFAS 123		(35	)		(70	)

Proforma net income under SFAS 123	$	4,034		$	8,605

As reported:
Basic	$	0.89		$	1.89
Diluted	$	0.86		$	1.83

Proforma net income per unit:
Basic	$	0.88		$	1.88
Diluted	$	0.85		$	1.82

The fair value of options was calculated using the Black-Scholes option-pricing model, with the following assumptions during the second quarter of 2005:

	2005
Expected life		5 years
Risk free interest rate		4.00% - 4.49%
Dividend yield		1.2% - 1.6%
Volatility		25.0% - 27.5%
Weighted average value	$	8.46

The expected life was determined using our experience, the volatility was determined using the historical average volatility of the Partnership’s units and the risk free interest rate represents the yield on a treasury note.

Restricted Units:

Pope Resources changed the primary form of equity compensation from unit options to restricted units upon adoption of the 2005 Unit Incentive Plan. The Human Resources Committee makes awards of restricted units to directors and senior managers of the Partnership and its subsidiaries. The restricted unit grants ordinarily vest over four years and are compensatory in nature. Restricted unit awards entitle the recipient to full distribution rights during the vesting period but are restricted from disposition and may be forfeited until the units vest. The fair value, as calculated using the intrinsic value method, is charged to income over the vesting period.

Restricted unit activity for the first six months of 2006 was as follows:

				Weighted Average
				Grant date
	Units			Fair Value ($)
Outstanding at December 31, 2005		20,000			33.44
Grants		19,000			34.75
Forfeited		(1,500	)		33.44
Outstanding at March 31, 2006		37,500			34.10
No activity		-			-
Outstanding at June 30, 2006		37,500			34.10

Unit Options:

Unit options have not been granted since December 2005. Units options granted prior to January 1, 2006 were non-qualified options granted at an exercise price not less than 100% of the fair value on the grant date. Unit options granted to employees vested over four or five years. Board members had the option of receiving their annual retainer in the form of unit options and those options vested immediately as they were granted monthly for services rendered during the month. Options granted had a life of 10 years.

Unit option activity for the first six months of 2006 was as follows:

	Options			Price ($)
Unvested at December 31, 2005		77,500			13.02
Vested at December 31, 2005		200,500			16.57
Outstanding at December 31, 2005		278,000			15.58
Activity Q1 2006:
Forfeitures		(4,800	)		12.00
Exercises		(12,000	)		12.44
Oustanding at March 31, 2006		261,200			15.79
Vesting during the quarter		33,012			13.12
Vested at March 31, 2006		221,512			16.28
Unvested at March 31, 2006		39,688			13.06
Activity Q2 2006:
Exercises		(3,450	)		12.58
Outstanding at June 30, 2006		257,750			15.83
Vested at June 30, 2006		218,062			16.34
Unvested at June 30, 2006		39,688			13.06

The aggregate intrinsic value of all options outstanding at June 30, 2006 was $3.5 million. The aggregate intrinsic value of all exercisable options at June 30, 2006 was $3.2 million. The total intrinsic value of options exercised was $72,000 and $331,000 during the three-month and six-month periods ended June 30, 2006, respectively. The weighted average remaining contractual term for all outstanding options at June 30, 2006 was 5.3 years. The weighted average remaining contractual term for all exercisable options at June 30, 2006 was 5.5 years.

The total fair value of units vested as of June 30, 2006 was $927,000. There were 1,085,815 and 1,073,115 units available for issuance under the 2005 Unit Incentive Plan as of December 31, 2005 and June 30, 2006, respectively.

5.	Supplemental disclosure of cash flow information: For the six months ended June 30, 2006 and 2005, interest paid net of amounts capitalized amounted to $1,221,000 and $1,444,000, respectively. Income taxes paid for the six months ended June 30, 2006 and 2005 amounted to $182,000 and $4,000.

6.	Revenue, operating income, and EBITDDA which management uses as a measure of segment profit or loss for the quarters and six-month periods ended June 30, 2006 and 2005, by segment are as follows:

				Timberland
Three Months Ended	Fee			Management &			Real
June 30 (Thousands)	Timber			Consulting			Estate			Other			Consolidated
2006
Revenue internal	$	10,451		$	546		$	4,626		$	-		$	15,623
Eliminations		(2	)		(2	)		(9	)		-			(13	)
Revenue external		10,449			544			4,617			-			15,610

Cost of sales		(5,368	)		-			(3,046	)					(8,414	)

Operating expenses internal		(1,069	)		(519	)		(984	)		(902	)		(3,474	)
Eliminations		2			12			(1	)		-			13
Operating expenses external		(1,067	)		(507	)		(985	)		(902	)		(3,461	)

Income (loss) from operations internal		4,014			27			596			(902	)		3,735
Eliminations		-			10			(10	)		-			-
Income (loss) from operations external	$	4,014		$	37		$	586		$	(902	)	$	3,735

EBITDDA reconciliation:
Minority interest		-			14			-			-			14
Depletion		2,119			-			-			-			2,119
Depreciation and amortization		62			20			43			50			175
EBITDDA	$	6,195		$	71		$	629		$	(852	)	$	6,043

2005
Revenue internal	$	13,221		$	1,845		$	1,077		$	-		$	16,143
Eliminations		(1	)		(2	)		(9	)		-			(12	)
Revenue external		13,220			1,843			1,068			-			16,131

Cost of sales		(7,234	)		-			(176	)		-			(7,410	)

Operating expenses internal		(1,048	)		(1,043	)		(700	)		(847	)		(3,638	)
Eliminations		(8	)		20			-			-			12
Operating expenses external		(1,056	)		(1,023	)		(700	)		(847	)		(3,626	)

Income (loss) from operations internal		4,939			802			201			(847	)		5,095
Eliminations		(9	)		18			(9	)		-			-
Income (loss) from operations external	$	4,930		$	820		$	192		$	(847	)	$	5,095

EBITDDA reconciliation:
Minority interest		-			(128	)		-			-			(128	)
Depletion		3,123						100			-			3,223
Depreciation and amortization		37			27			38			65			167
EBITDDA	$	8,090		$	719		$	330		$	(782	)	$	8,357

				Timberland
Six Months Ended	Fee			Management &			Real
June 30 (Thousands)	Timber			Consulting			Estate			Other			Consolidated
2006
Revenue internal	$	24,175		$	2,587		$	4,970		$	-		$	31,732
Eliminations		(2	)		(19	)		(18	)		-			(39	)
Revenue external		24,173			2,568			4,952			-			31,693

Cost of sales		(11,778	)		-			(3,061	)		-			(14,839	)

Operating expenses internal		(2,165	)		(1,257	)		(1,645	)		(1,906	)		(6,973	)
Eliminations		16			22			1			-			39
Operating expenses external		(2,149	)		(1,235	)		(1,644	)		(1,906	)		(6,934	)

Income (loss) from operations internal		10,232			1,330			264			(1,906	)		9,920
Eliminations		14			3			(17	)		-			-
Income (loss) from operations external	$	10,246		$	1,333		$	247		$	(1,906	)	$	9,920

EBITDDA reconciliation:
Minority interest		-			(119	)		-			-			(119	)
Depletion		4,692			-			-			-			4,692
Depreciation and amortization		133			36			77			113			359
EBITDDA	$	15,071		$	1,250		$	324		$	(1,793	)	$	14,852


2005
Revenue internal	$	26,883		$	3,460		$	2,465		$	-		$	32,808
Eliminations		-			(3	)		(18	)		-			(21	)
Revenue external		26,883			3,457			2,447			-			32,787

Cost of sales		(14,767	)		-			(447	)		-			(15,214	)

Operating expenses internal		(2,144	)		(1,814	)		(1,175	)		(1,695	)		(6,828	)
Eliminations		-			19			2			-			21
Operating expenses external		(2,144	)		(1,795	)		(1,173	)		(1,695	)		(6,807	)

Income (loss) from operations internal		9,972			1,646			843			(1,695	)		10,766
Eliminations		-			16			(16	)		-			-
Income (loss) from operations external	$	9,972		$	1,662		$	827		$	(1,695	)	$	10,766

EBITDDA reconciliation:
Minority interest and investment income		-			(229	)		-			-			(229	)
Depletion		6,961			-			105			-			7,066
Depreciation and amortization		68			48			69			134			319
EBITDDA	$	17,001		$	1,481		$	1,001		$	(1,561	)	$	17,922

ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains a number of projections and statements about our expected financial condition, operating results, and business plans and objectives. These statements reflect our management's estimates based on our current goals, in light of currently known circumstances and management's expectations about future developments. Statements about expectations and future performance are “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Because these statements describe our goals, objectives and anticipated performance, they 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 “Item 1A: Risk Factors ” below and other factors discussed elsewhere in this report or in our annual report on Form 10-K for the fiscal year ended December 31, 2005. Other issues that may have an adverse and material impact on our business, operating results and financial condition are discussed 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 financial statements and related notes included with this report.

EXECUTIVE OVERVIEW

Pope Resources, A Delaware Limited Partnership (“we” or the “Partnership”), was organized in October 1985 as a result of a spin-off by Pope & Talbot, Inc. (“P&T”). 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. Operations in this segment consist of growing timber to be harvested as logs for sale to export 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 and entitlements, and, in some cases, installing infrastructure for raw land development and then realizing that land’s value by selling parcels to buyers who may take the land further up the “value chain” ordinarily in smaller parcels either to home buyers or commercial property operators or lessors. Since these land projects span multiple years, the Real Estate segment may incur losses for multiple years until a major project is sold, which then results in operating income. Our third business is providing timberland-related services to third parties. These services may take the form of large-scale timberland management, forestry consulting, or acquisition or disposition services. We are currently managing nearly 300,000 acres of timberlands in Oregon for Cascade Timberlands LLC. Additionally, now that we have closed ORM Timber Fund I, LP, we are seeking to add to our timberland ownership, albeit indirectly, through the Partnership’s co-investment in the fund. Successful acquisitions by the fund would also result in additional management fees for the Timberland Management & Consulting segment.

Management’s major opportunity and challenge is to profitably grow our revenue base. For our Fee Timber and Timberland Management & Consulting segments, the revenue base is typically thought of in terms of acres owned or under management. Our Real Estate opportunities and challenges center on identifying properties in our portfolio of owned assets with potential development value. Once identified, we attempt to maximize that value through securing entitlements and, in some cases installing infrastructure, prior to selling the property.

RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that impact our net income for each of the quarter and six-month periods ended June 30, 2006 and June 30, 2005. In addition to the table’s detailed numeric analysis, the explanatory text that follows the table describes many of these changes by business segment:

QUARTER AND YEAR TO DATE VARIANCE ANALYSIS
(Amounts in $000's except per unit data)

	Quarter ended			Six months ended
Net income:	June 30, 2006 and 2005			June 30, 2006 and 2005
2nd Quarter 2006	$	3,540		$	8,838
2nd Quarter 2005		4,069			8,675
Variance	$	(529	)	$	163

Detail of earnings variance:
Fee Timber
Log price realizations (A)	$	433		$	1,050
Log volumes (B)		(3,296	)		(3,857	)
Depletion		1,005			2,275
Production costs		862			714
Other Fee Timber		80			91
Timberland Management & Consulting					-
Management fee changes		(673	)		(1,411	)
Disposition fee changes		-			1,343
Other Timberland Management & Consulting		(110	)		(266	)
Real Estate					-
Environmental remediation liability		108			108
Land sales		707			(101	)
Depletion		99			99
Other Real Estate		(520	)		(686	)
General & administrative costs		(55	)		(211	)
Interest expense		240			448
Other (taxes, minority int., interest inc.)		591			567
Total change in earnings	$	(529	)	$	163

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

Fee Timber

Fee Timber revenue is earned primarily from the harvest and sale of logs from the Partnership’s nearly 115,000 acres of fee timberland located in western Washington and, to a lesser extent, from leases of our timberland to sand and gravel pit operators and cellular communication tower purveyors. Revenue from the sales of timberland tracts will also appear periodically in results for this segment. Our Fee Timber revenue is driven primarily by the volume of timber harvested, which we ordinarily express in terms of millions of board feet, or “MMBF”, and by the average prices realized on log sales, which we express in dollars per thousand board feet, or “MBF”.

When discussing our Fee Timber operations, we compare current results to both the previous quarter and the corresponding quarter of the prior year. Both of these comparisons are made to help the reader gain an understanding of the trends in market price and harvest volumes that affect Fee Timber results of operations. Revenue and operating income for the Fee Timber segment for the quarters ended June 30, 2006, March 31, 2006 and June 30, 2005 are as follows:

Quarter Ended:	Log Sale Revenue	Mineral, Cell Tower & Other Revenue	Total Fee Timber Revenue	Operating Income
June 30, 2006	$10.0 million	$0.4 million	$10.4 million	$4.0 million
March 31, 2006	13.4 million	0.3 million	13.7 million	6.2 million
June 30, 2005	12.9 million	0.3 million	13.2 million	4.9 million

The decrease in revenue and operating income for the current quarter relative to the first quarter of 2006 is primarily attributable to a 5.4 MMBF decrease in harvest volume. Harvest volume was accelerated in the first quarter of 2006 due to strong log markets. We have a continuing practice of front-loading our planned annual harvest activities because of management’s expectation that this strategy can optimize our Fee Timber revenue by concentrating harvest volume when log supplies in our market areas are restricted. Fee Timber revenue in the current quarter is $2.8 million lower than the comparable period in 2005 due to a 5.7 MMBF decline in harvest volume partially offset by higher prices in the current period. The decline in harvest volume for the quarter is consistent with our planned reduction in our annual harvest to 57 MMBF in 2006 from 74 MMBF in 2005.

Revenue and operating income for the Fee Timber segment for the six-month periods ended June 30, 2006 and 2005 were as follows:

Quarter Ended:	Log Sale Revenue	Mineral, Cell Tower & Other Revenue	Total Fee Timber Revenue	Operating Income
June 30, 2006	$23.4 million	$0.8 million	$24.2 million	$10.2 million
June 30, 2005	26.2 million	0.7 million	26.9 million	10.0 million

In connection with a planned reduction for the year, harvest volume decreased 15% during the first six months of 2006 from the corresponding period in 2005. Harvests in 2005 included volume from two timberland acquisitions acquired in 2004 with a large component of merchantable timber that was liquidated to recoup most, if not all, of the purchase prices paid. A partial offset to this downward impact when comparing revenue between periods was an increase in average price realized from $578/MBF in 2005 to $606/MBF in 2006. Operating income increased despite this decrease in harvest volume due to a $2.3 million decrease in depletion expense. Depletion expense in 2005 was high relative to the current period because of harvest from one of our 2004 timberland acquisitions, which had a separate, higher-cost depletion pool. The proportion of volume harvested from that separate depletion pool has declined in 2006.

Log Volume

The Partnership harvested the following log volumes from its timberlands for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and the six-month periods ended June 30, 2006 and 2005:

Log volumes (MBF):	Quarter Ended
Sawlogs	June-06		% Total			March-06		% Total			June-05		% Total
Douglas-fir		11,842		71	%		16,440		75	%		12,195		55	%
Whitewood		1,149		7	%		1,997		9	%		4,113		18	%
Cedar		227		1	%		359		2	%		1,730		8	%
Hardwoods		1,144		7	%		562		2	%		1,299		6	%
Pulp
All Species		2,288		14	%		2,675		12	%		3,026		13	%
Total		16,650		100	%		22,033		100	%		22,363		100	%

Log volumes (MBF):	Six Months Ended
Sawlogs	June-06		% Total			June-05		% Total
Douglas-fir		28,282		73	%		25,876		57	%
Whitewood		3,145		8	%		7,528		17	%
Cedar		586		2	%		3,208		7	%
Hardwoods		1,706		4	%		2,788		6	%
Pulp
All Species		4,964		13	%		5,963		13	%
Total		38,683		100	%		45,363		100	%

Through June 30, 2006, we have harvested 68% of our targeted 57 MMBF annual harvest for this year. Our Hood Canal tree farm is located at relatively low elevations where harvest activities can be completed year around, allowing us to take advantage of a slight premium on our log sales when other tree farms cannot be harvested due to adverse weather conditions. As we did in early 2005, we took advantage of attractive log prices in the first half of 2006, by increasing the proportion of our total annual harvest volume taken early in the year. Harvest activities in the second quarter of 2006 were moderated from the first quarter resulting in a decline in harvest volume from the first-quarter of 2006. Our harvest mix in the second and first quarters of 2006 consisted predominantly of Douglas-fir, whereas in each of 2005’s quarters we harvested more hardwoods and lower-grade softwoods. The species mix harvested in 2005 was impacted more significantly than was the case in 2006 by harvest units located on timberland acquired in 2004 which included a large component of cedar and whitewood.

Log Prices

While harvest volume is largely within management’s control, one additional factor that impacts our Fee Timber income is the price we realize upon selling our logs into the market. As noted above, we try to maximize Fee Timber revenue by accelerating harvest volumes during times of attractive log markets. However, log prices are a result of a broader range of economic and political factors and are largely beyond our ability to control, except at the margins. We realized the following log prices from our fee timberlands for the quarters ended June 30, 2006, March 31, 2006 and June 30, 2005 and the six-month periods ended June 30, 2006 and 2005:


	Quarter Ended
	30-Jun-06		31-Mar-06		30-Jun-05
Average price realizations (per MBF):
Sawlogs
Douglas-fir	$	665	$	681	$	644
Whitewood		452		439		487
Cedar		1,182		873		981
Hardwoods		670		598		563

All Species		260		251		205
Pulp
Overall		603		608		577

	Six Months Ended
	30-Jun-06		June-05
Average price realizations (per MBF):
Sawlogs
Douglas-fir	$	675	$	644
Whitewood		443		480
Cedar		993		943
Hardwoods		646		597
Pulp
All Species		255		212

Overall		606		578

Douglas-fir: Douglas-fir represents the primary tree species growing on our timberlands and this species is noted for its structural characteristics that make it generally preferable to other softwoods and hardwoods for the production of construction grade lumber and plywood. The price realized on Douglas-fir logs decreased 2% for the current quarter versus the first quarter of 2006 and increased 3% from the comparable quarter in 2005. The modest decrease in Douglas-fir log price realized in the second quarter of 2006 compared to the first quarter of 2006 is attributed to the seasonal increase in local log supply and a softening in the lumber market which can result in downward pressure on log prices. On a year-to-date basis Douglas-fir prices have increased nearly 5%. New mill capacity has resulted in increased demand that corresponds to increased price support for delivered Douglas-fir log volume. Management expects third quarter 2006 Douglas-fir bid prices will be largely consistent with the current quarter.

Whitewood: “Whitewood” is a term used to describe several softwood species, but for us primarily refers to western hemlock. Though generally considered to be of a lower quality than Douglas-fir, these logs are also used for manufacturing construction grade lumber and plywood. The average price realized on whitewood increased 3% for the current quarter in 2006 versus the first quarter of 2006 and decreased 7% from the comparable quarter in 2005. Harvest volume in 2005 included a large component of high quality whitewood sawlogs from the 2004 timberland acquisition which increased our average price realization in prior year. Management expects that whitewood prices for third quarter 2006 will be consistent with the current quarter.

Cedar: Cedar prices have increased 35% in the current quarter versus the first quarter of 2006 and 20% from the comparable quarter in prior year. Cedar prices typically weaken in the winter months as demand declines, largely because cedar lumber is used primarily as fencing material. Peak demand for this product is in the summer months, with corresponding lower demand and log prices at the beginning and end of the calendar year. On a year-to-date basis, our realized cedar price has increased 5% from the prior year. The strong price realized in both the current quarter and for the first six months of 2006 reflects a general decline in cedar volume available in the Puget Sound area. A factor contributing to this decline in supply is a reduction in cedar imported from Canada. Canada has experienced weather related declines in timber harvest during 2006 resulting in less volume available for export to the Puget Sound market. Bids received for third quarter 2006 cedar volume have strengthened slightly from second quarter price levels.

Hardwood: “Hardwood” can refer to many different species, but on our tree farms primarily represents red alder and, to a lesser extent, large leaf maple. The price realized from the sale of red alder sawlogs has increased steadily over the last couple years as new red alder mills have opened to take advantage of strong lumber pricing attributable to the growing acceptance of solid sawn red alder lumber products. These mills manufacture lumber for use in furniture construction. The 12% increase in hardwood price realized in the current quarter relative to the first quarter of 2006 and the 19% increase over the price realized in the second quarter of 2005 is due to an increase in the quality of logs sold. On a year-to-date basis, our realized price for hardwood has increased 8% in 2006 from the prior year. This increase is also due to an increase in the quality of hardwood logs sold in the current year. Bids received for third quarter 2006 hardwood volume are consistent with the current quarter.

Pulp: Pulp refers to a lower quality log of any species that is manufactured into wood chips. These chips are used to manufacture many products including bleached pulp for paper production and kraft linerboard for bag and cardboard box production. The price realized from the sale of pulp logs is primarily driven by local pulp log inventories. Pulp prices in the current quarter increased nearly 4% from the first quarter of 2006 and 27% from the comparable period in prior year. On a year-to-date basis pulp prices are up 20% over the level realized during the first six months of 2005. The increases in pulp prices result from a decline in sawmill production. Strong log prices combined with a weakening market for lumber has resulted in an increase in sawmill downtime which has in turn reduced the supply of wood chips available to the Puget Sound market. Based on bids for pulp logs to be delivered during the third quarter of 2006 management expects a continued strengthening of this market due to tight inventories of wood chips.

Customers

The table below categorizes logs sold by customer type for the quarters ended June 30, 2006, March 31, 2006 and June 30, 2005 and for the six-month periods ended June 30, 2006 and 2005:

	Q2 2006				Q1 2006				Q2 2005
Destination	Volume*		Price		Volume*		Price		Volume*		Price
Domestic mills		12.7	$	651		18.8	$	657		18.9	$	635
Export brokers		1.7		706		0.5		684		0.5		601
Pulp		2.3		260		2.7		251		3.0		205
Total		16.7	$	603		22.0	$	608		22.4	$	577
* Volume in MMBF

	Six Months Ended
	30-Jun-06				30-Jun-05
Destination	Volume*		Price		Volume*		Price
Domestic mills		31.6	$	655		37.3	$	634
Export brokers		2.1		701		2.1		637
Pulp		5.0		255		6.0		212
Total		38.7	$	606		45.4	$	578
* Volume in MMBF

Over the last several years, a strong domestic market for high-quality “peeler” logs used for producing a range of products requiring veneer components has emerged that has shifted log volume away from an already diminished export market. Volume sold to domestic lumber mills represents 76% of volume sold in the second quarter of 2006, versus 85% for both the first quarter of 2006, and the comparable period in 2005. The decrease in the proportion of log volume sold to domestic mills in the second quarter of 2006 relative to both the first quarter of 2006 and the comparable quarter in 2005 is due to some strengthening of the log export market relative to the price that domestic mills pay for the same export-quality log. The proportion of log volume sold to export brokers is more consistent when comparing year-to-date results in 2006 and 2005.

Cost of Sales

Cost of sales for the Fee Timber segment consists of harvest and haul costs and depletion expense. Harvest and haul costs represent the direct cost incurred to convert standing timber into logs and deliver those logs to their point of sale. Depletion expense represents the estimated cost of acquiring and growing the harvested timber. The applicable depletion rate is derived by dividing the aggregate cost of timber and capitalized road expenditures by the estimated volume of merchantable timber available for harvest at the beginning of that year. The depletion rate is then applied to the volume harvested in a given period to calculate depletion expense for that period. Fee Timber cost of sales for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and the six-month periods ended June 30, 2006 and 2005 are as follows:

Quarter Ended:	Harvest, Haul and Other	Depletion	Total Cost of Sales
June 30, 2006	$3.3 million	$2.1 million	$5.4 million
March 31, 2006	3.8 million	2.6 million	6.4 million
June 30, 2005	4.1 million	3.1 million	7.2 million

Six Months Ended:	Harvest, Haul and Other	Depletion	Total Cost of Sales
June 30, 2006	$7.1 million	$4.7 million	$11.8 million
June 30, 2005	7.8 million	7.0 million	14.8 million

Quarter Ended:	Harvest and Haul per MBF	Depletion per MBF	Total Cost of Sales
June 30, 2006	$195	$127	$322
March 31, 2006	174	117	291
June 30, 2005	184	140	324

Six Months Ended:	Harvest and Haul per MBF	Depletion per MBF	Total Cost of Sales
June 30, 2006	$184	$121	$305
June 30, 2005	173	153	326

Cost of sales has decreased in the second quarter of 2006 versus the first quarter of 2006 and the comparable period in prior year. These decreases are due in part to declines in harvest volume to 16.7 MMBF in the current quarter from 22.0 MMBF in the first quarter of 2006 and 22.4 MMBF in the second quarter of 2005, respectively. In addition to the change in harvest volume, cost of sales in the second quarter of 2005 included a higher proportionate component of volume harvested from a separate, high-rate depletion pool that also contributed to an abnormally elevated cost of sales in that prior year period. The separate depletion pool was created following a fourth quarter 2004 timberland acquisition, and applied only to timber harvested from that property based on the acquisition cost of that property and the property’s timber available for harvest. On a year-to-date basis, cost of sales has decreased $3.0 million from 2005 to 2006 with the decline also due to reductions in harvest volume and a decrease in average depletion rate discussed above. Harvest volume decreased to 38.7 MMBF from 45.4 MMBF for the first six months of 2006 and 2005, respectively. Year-to-date harvest volume from the separate depletion pool decreased to 6.2 MMBF in 2006 from 12.4 MMBF for the first six months of 2005. These two factors combined to result in a decrease in year-to-date depletion expense from $153/MBF for 2005 to $121/MBF for 2006.

Harvest and haul costs per MBF have increased in the second quarter of 2006 from both the first quarter of 2006 and 2005’s comparable period. Harvest costs vary based upon the physical site characteristics of the specific acres harvested during the period. For example, difficult-to-access sites or those located on steep hillsides are more expensive to harvest. Furthermore, haul costs vary based upon the distance between the harvest area and the mill customer’s location. Harvest and haul costs increased from the first quarter of 2006 due to an increase in harvest units located on more difficult to access property relative to the first quarter of 2006. Harvest and haul costs per MBF have increased from the comparable quarter in prior year due to a combination of more difficult to access harvest units and an increase in fuel costs. On a year to date basis the per MBF cost of harvest and haul costs have increased $11/MBF due primarily to the increase in fuel costs. Fuel costs impact both the cost of hauling logs to customers and the cost of operating the equipment used to harvest and manufacture logs. We expect high fuel costs to continue to impact harvest and haul costs for the balance of the year.

Depletion expense for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 was calculated as follows:

	Quarter ended June 30, 2006
	Pooled		Separate		Combined
Volume harvested (MBF)		13,685		2,965		16,650
Rate/MBF	$	69	$	397	$	127
Depletion expense	$	942,000	$	1,177,000	$	2,119,000

	Quarter ended March 31, 2006
	Pooled		Separate		Combined
Volume harvested (MBF)		18,820		3,213		22,033
Rate/MBF	$	69	$	397	$	117
Depletion expense	$	1,299,000	$	1,274,000	$	2,573,000

	Quarter ended June 30, 2005
	Pooled		Separate		Combined
Volume harvested (MBF)		17,284		5,079		22,363
Rate/MBF	$	72	$	370	$	140
Depletion expense	$	1,246,000	$	1,879,000	$	3,125,000

	Six Months Ended June 30, 2006
	Pooled		Separate		Combined
Volume harvested (MBF)		32,505		6,178		38,683
Rate/MBF	$	69	$	397	$	121
Depletion expense	$	2,242,000	$	2,450,000	$	4,692,000

	Six Months Ended June 30, 2005
	Pooled		Separate		Combined
Volume harvested (MBF)		32,965		12,398		45,363
Rate/MBF	$	72	$	370	$	153
Depletion expense	$	2,376,000	$	4,586,000	$	6,962,000

As noted above, we created a separate depletion cost pool in the fourth quarter of 2004 for a particular timberland acquisition because of a different acquisition cost for the amount of harvestable timber. This separate depletion cost pool carries a higher depletion rate than is applicable to our combined depletion cost pool. The calculations outlined above point out the significant role that the separate depletion cost pool for timber acquired in late 2004 plays in defining the aggregate rate for each period described above. For example, as the proportionate harvest volume from the separate depletion cost pool increased in the second quarter of 2006 relative to the first quarter of 2006 the aggregate weighted average depletion rate increased to $127/MBF from $117/MBF. The depletion rate used for the separate depletion pool increased in 2006 from 2005 due to a decline in the estimated timber volume available for harvest from this particular timber tract.

Operating Expenses

Fee Timber operating expenses for each of the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 were $1.1 million. Operating expenses for both the six-month periods ended June 30, 2006 and June 30, 2005 were $2.1 million. Operating expenses include management, silviculture and the cost of both maintaining existing roads and building temporary roads required for harvest activities.

Timberland Management & Consulting

Revenue and operating income for the Timberland Management & Consulting segment for the quarters and six-month periods ended June 30, 2006 and 2005 were as follows:


Quarter Ended:	Revenue	Operating Income
June 30, 2006	$0.5 million	$0.0 million
June 30, 2005	1.8 million	0.8 million


Six Months Ended:	Revenue	Operating Income
June 30, 2006	$2.6 million	$1.3 million
June 30, 2005	3.5 million	1.7 million

Revenue and operating income for the quarter ended June 30, 2006 were $544,000 and $37,000, respectively, which represents respective $1.3 million and $783,000 declines from the comparable period in 2005. The decrease in revenue and operating income is due to a decline in acres under management for our primary timberland management client. On a year-to-date basis, revenue and operating income declined $889,000 and $329,000, respectively, between 2005 and 2006. This decline is also due to a drop in acres under management for our primary timberland management client, partially offset by a disposition fee earned in the first quarter of 2006. Revenue and operating income in 2005 were primarily generated through providing timberland management and consulting services to this same timberland management client. Operating results for all periods presented include costs related to our private equity timber fund.

On August 1, 2005, we announced that management had obtained capital commitments of $61.8 million, of which the Partnership has committed $12.4 million, for the launch of a private equity timber fund. Olympic Resource Management LLC is the general partner for the fund and the Partnership is a limited partner. We are actively searching for timber properties for the fund to acquire and have placed bids on a number of timber properties. Due to the strong market for timberland we have not yet successfully placed any of the committed capital from the private equity timber fund.

Operating Expenses

Timberland Management & Consulting operating expenses for the quarters ended June 30, 2006 and 2005 were $507,000 and 1.0 million, respectively. Operating expenses for the six-month periods ended June 30, 2006 and 2005 were $1.2 million and 1.8 million, respectively. The decrease in operating expenses is attributable to the reduction in acres we manage for our primary client as a result of timberland sales and a reduction in operating expenses associated with the timber fund.

Real Estate

The Partnership’s Real Estate segment consists primarily of revenue from the sale of land together with residential and commercial property rents. The Partnership’s real estate holdings are located primarily in Pierce, Kitsap, and Jefferson Counties in Washington State.

Revenue and operating income for the Real Estate segment for the quarters ended June 30, 2006 and 2005 were as follows:


Quarter Ended:	Revenue	Operating Income
June 30, 2006	$4.6 million	$0.6 million
June 30, 2005	1.1 million	0.2 million


Six Months Ended:	Revenue	Operating Income
June 30, 2006	$5.0 million	$0.2 million
June 30, 2005	2.4 million	0.8 million

Real Estate revenue is generated through the sale of land and rural residential lots, and to a lesser extent from real property rents, most of which are earned at the Port Gamble townsite. Raw land sales are generally made for something other than residential or commercial use and are normally completed with very little capital investment prior to sale. Rural residential lot sales are made to developers or individuals where the lot is expected to be used for a residential dwelling with a general requirement to undertake some capital improvements such as zoning, road building, or utility access improvements prior to completing the sale.

Real Estate revenue for the quarter and six-month periods ended June 30, 2006 and 2005 consist of the following:

For the three months ended:

Description

Revenue

Gross Margin

Acres Sold

Revenue/Acre

Gross Margin/ Acre

Rural Residential