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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

( X )

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

For the quarterly period ended September 30, 2011

( )

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	91-1313292
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

	Large Accelerated Filer o	Accelerated Filer x
	Non-accelerated Filer o	Smaller Reporting Company o

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

Partnership units outstanding at November 4, 2011: 4,387,903

Pope Resources

Index to Form 10-Q Filing

For the Quarter Ended September 30, 2011

Description	Page Number
Part I. Financial Information

Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Operations	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3. Quantitative and Qualitative Disclosures about Market Risk	35

Item 4. Controls and Procedures	36

Part II. Other Information

Item 1. Legal Proceedings	36

Item 1A. Risk Factors	36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3. Defaults Upon Senior Securities	38

Item 4. Submission of Matters to a Vote of Security Holders	38

Item 5. Other Information	38

Item 6. Exhibits	38

Signatures	39

P A R T I – FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Pope Resources, a Delaware Limited Partnership
September 30, 2011 and December 31, 2010
(Thousands)
	2011		2010
ASSETS
Current assets
Partnership cash and cash equivalents	$	166	$	237
ORM Timber Funds cash and cash equivalents		1,073		2,186
Cash and cash equivalents		1,239		2,423
Accounts receivable, net		1,160		543
Building and land held for sale		1,148		3
Current portion of contracts receivable		18		219
Prepaid expenses and other		708		805
Total current assets		4,273		3,993
Properties and equipment, at cost
Timber and roads, net of accumulated depletion
of $67,626 and $60,044		158,055		164,961
Timberland		34,111		33,980
Land held for development		28,370		27,737
Buildings and equipment, net of accumulated
depreciation of $6,090 and $7,739		5,968		3,854
Total properties and equipment, at cost		226,504		230,532
Other assets
Contracts receivable, net of current portion		569		652
Other		685		660
Total other assets		1,254		1,312
Total assets	$	232,031	$	235,837

LIABILITIES, PARTNERS' CAPITAL AND NONCONTROLLING INTERESTS
Current liabilities
Accounts payable	$	1,499	$	868
Accrued liabilities		2,849		2,656
Current portion of long-term debt		31		30
Deferred revenue		467		674
Other current liabilities		361		588
Total current liabilities		5,207		4,816
Long-term liabilities
Long-term debt, net of current portion		47,380		50,468
Other long-term liabilities		1,722		1,746
Partners' capital and noncontrolling interests
General partners' capital (units issued and outstanding 60 and 60)		1,036		992
Limited partners' capital (units issued and outstanding 4,269 and 4,203)		73,660		69,998
Noncontrolling interests		103,026		107,817
Total partners' capital and noncontrolling interests		177,722		178,807
Total liabilities, partners' capital, and noncontrolling interests	$	232,031	$	235,837

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Pope Resources, a Delaware Limited Partnership
For the Three Months and Nine Months Ended September 30, 2011 and 2010
(Thousands, except per unit data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

Revenue	$	7,522		$	8,591		$	39,465		$	22,646
Cost of timber and land sold		(4,449	)		(4,566	)		(20,366	)		(10,997	)
Operating expenses		(2,887	)		(2,127	)		(8,105	)		(6,092	)
Real estate environmental remediation		(2	)		(5	)		(346	)		(568	)
General and administrative expenses		(950	)		(1,004	)		(3,192	)		(3,397	)
Income (loss) from operations		(766	)		889			7,456			1,592

Other income (expense)
Interest expense		(559	)		(493	)		(1,674	)		(1,355	)
Debt extinguishment costs		-			-			-			(1,250	)
Capitalized interest		108			142			314			460
Interest income		10			30			32			91
Realized gain on investments		-			-			-			11
Total other expense		(441	)		(321	)		(1,328	)		(2,043	)

Income (loss) before income taxes		(1,207	)		568			6,128			(451	)
Income tax benefit (expense)		(19	)		37			(158	)		25
Net income (loss)		(1,226	)		605			5,970			(426	)

Net loss attributable to noncontrolling interests
ORM Timber Funds		664			445			435			801
Net income (loss) attributable to unitholders	$	(562	)	$	1,050		$	6,405		$	375

Allocable to general partners	$	(8	)	$	14		$	89		$	5
Allocable to limited partners		(554	)		1,036			6,316			370
	$	(562	)	$	1,050		$	6,405		$	375

Earnings (loss) per unit attributable to unitholders
Basic	$	(0.14	)	$	0.23		$	1.42		$	0.07
Diluted	$	(0.14	)	$	0.22		$	1.42		$	0.07

Weighted average units outstanding
Basic		4,329			4,567			4,321			4,546
Diluted		4,329			4,603			4,323			4,583

Distributions per unit	$	0.35		$	0.25		$	0.85		$	0.45

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources, a Delaware Limited Partnership
Nine Months Ended September 30, 2011 and 2010
(Thousands)
	2011			2010
Net income (loss)	$	5,970		$	(426	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depletion		7,618			3,909
Capitalized development activities, net of reimbursements		(743	)		(743	)
Equity-based compensation		738			568
Excess tax benefit from equity-based compensation		-			(104	)
Depreciation and amortization		526			485
Gain on investments		-			(11	)
Deferred taxes		(43	)		(183	)
Cost of land sold		110			67
Write-off of debt issuance costs		-			32
Cash flows from changes in operating accounts
Accounts receivable, net		(637	)		(708	)
Contracts receivable		284			157
Prepaid expenses and other current assets		79			89
Accounts payable and accrued liabilities		825			1,742
Deferred revenue		(207	)		60
Other current liabilities		38			20
Environmental remediation		(264	)		378
Other long-term liabilities		(24	)		(26	)
Net cash provided by operating activities		14,270			5,306

Cash flows from investing activities
Redemption of investments		-			1,497
Reforestation and roads		(886	)		(339	)
Buildings and equipment		(3,548	)		(235	)
ORM Timber Fund II, Inc. land acquisition		(140	)		(58,206	)
Net cash used in investing activities		(4,574	)		(57,283	)

Cash flows from financing activities
Repayment of line of credit, net		(3,064	)		-
Repayment of long-term debt		(23	)		(1,031	)
Extinguishment of long-term debt		-			(18,554	)
Proceeds from issuance of long-term debt		-			31,000
Debt issuance costs		-			(283	)
Unit repurchases		-			(355	)
Proceeds from option exercises, net		516			573
Payroll taxes paid upon restricted unit vesting		(226	)		-
Excess tax benefit from equity-based compensation		-			104
Cash distributions to unitholders		(3,727	)		(2,080	)
Cash distributions - ORM Timber Funds, net of distributions to Partnership		(4,348	)		-
Capital call - ORM Timber Fund II, Inc.		-			38,800
Preferred stock issuance - ORM Timber Fund II, Inc.		-			125
Preferred stock distribution - ORM Timber Fund II, Inc.		(8	)		(8	)
Net cash provided by (used in) financing activities		(10,880	)		48,291

Net decrease in cash and cash equivalents		(1,184	)		(3,686	)
Cash and cash equivalents at beginning of period		2,423			7,180
Cash and cash equivalents at the end of the nine-month period	$	1,239		$	3,494

See accompanying notes to condensed consolidated financial statements.

POPE RESOURCES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2011

The condensed consolidated financial statements as of September 30, 2011 and December 31, 2010 and for the three- and nine-month periods then ended 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, 2010, is derived from the Partnership’s audited consolidated financial statements and notes thereto for the year ended December 31, 2010, and should be read in conjunction with such financial statements and notes. The results of operations for the interim periods are not indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2011.

2.	The financial statements in the Partnership's 2010 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.

Basic net earnings (loss) per unit are calculated by dividing net income (loss) attributable to unitholders, adjusted for non-forfeitable distributions paid out to unvested restricted unitholders and Fund II preferred shareholders, by the weighted average units outstanding during the period. Diluted net earnings (loss) per unit are calculated by dividing net income (loss) attributable to unitholders, adjusted for non-forfeitable distributions paid out to unvested restricted unitholders and Fund II preferred shareholders, by the weighted average units outstanding during the year plus additional units that would have been outstanding assuming the exercise of in-the-money unit equivalents using the treasury stock method, unless the assumed exercise is antidilutive.

The table below displays how we arrived at options used to calculate dilutive unit equivalents and subsequent treatment of dilutive unit equivalents based on net income (loss) for the period:

	Quarter Ended						Nine Months Ended
	September 30,						September 30,
(Thousands)	2011			2010			2011		2010
Average per unit trading price	$	45.17		$	25.75		$	43.34	$	26.13
Total options outstanding at end of period		6			103			6		103
Less: options with strike price above average trading price (out-of-the-money)		-			(2	)		-		(2	)
Options used in calculation of dilutive unit equivalents		6			101			6		101

Net income (loss) attributable to Pope Resources’ unitholders	$	(562	)	$	1,050		$	6,405	$	375

Dilutive unit equivalents used to calculate dilutive EPS		2			36			2		37
Less: unit equivalents considered anti-dilutive due to net loss in period		(2	)		-			-		-
Dilutive unit equivalents used to calculate dilutive EPS		-			36			2		37

The following table shows how we arrived at basic and diluted income (loss) per unit:

	Quarter Ended						Nine Months Ended
	September 30,						September 30,
(Thousands)		2011			2010			2011			2010
Net income (loss) attributable to Pope Resources' unitholders	$	(562	)	$	1,050		$	6,405		$	375
Less:
Net income attributable to unvested restricted unitholders		(20	)		(16	)		(250	)		(29	)
Dividends paid to Fund II preferred shareholders		(4	)		(4	)		(12	)		(8	)
Net income (loss) for calculation of EPS	$	(586	)	$	1,030		$	6,143		$	338

Weighted average units outstanding (in thousands):
Basic		4,329			4,567			4,321			4,546
Dilutive effect of unit equivalents		-			36			2			37
Diluted		4,329			4,603			4,323			4,583

Earnings (loss) per unit: Basic	$	(0.14	)	$	0.23		$	1.42		$	0.07
Earnings (loss) per unit: Diluted	$	(0.14	)	$	0.22		$	1.42		$	0.07

Options to purchase 5,500 units at prices ranging from $10.75 to $17.40 were outstanding at September 30, 2011. There were no out-of-the money options to exclude from the calculation of dilutive unit equivalents for the quarter or nine months ended September 30, 2011. Options to purchase 102,810 units at prices ranging from $9.30 to $37.73 per unit were outstanding as of September 30, 2010. As of September 30, 2010, 1,869 options at prices ranging from $28.50 to $37.73 were excluded from the calculation of dilutive unit equivalents as they were out-of-the-money and, as such, anti-dilutive.

The Partnership granted 20,500 restricted units pursuant to a new management incentive compensation program in January 2011. These restricted units vest ratably over four years with the grant date fair value equal to the market price on the date of grant. We recognized $197,000 of equity compensation expense related to these restricted units in the first nine months of 2011 which includes accelerated expense related to retirement-eligible employees.

Supplemental disclosure of cash flow information: interest paid, net of amounts capitalized, totaled $1.3 million and $898,000 for the nine months ended September 30, 2011 and 2010, respectively. Income taxes paid in the first nine months of 2011 was $46,000 compared to $5,000 of income taxes paid in the first nine months of 2010.

6.	The majority of the Company’s financial instruments are carried at fair value. Those include cash, cash equivalents, accounts receivable, and contracts receivable. Pursuant to accounting guidance, these instruments for the period presented are considered a Level 1 fair value measurement.

The Partnership's long-term debt is not actively traded and, as such, fair values were estimated using discounted cash flow analyses, based on the Partnership’s current estimated incremental borrowing rates for similar types of borrowing arrangements, which are considered level 3 inputs. As of September 30, 2011 and December 31, 2010, consolidated fixed-rate debt outstanding had a fair value of approximately $46.6 million and $41.9 million, respectively.

7.	The Partnership has two general partners: Pope MGP, Inc. and Pope EGP, Inc. In total, these two entities own 60,000 partnership units. The allocation of distributions and loss between the general and limited partners is pro rata across all units outstanding.

In the presentation of the Partnership’s revenue and operating income (loss) by segment all intersegment revenue and expense is eliminated to determine externally reported operating income (loss) by business segment. The tables that follow reconcile internally reported income (loss) from operations to externally reported income (loss) from operations by business segment, for the three and nine months ended September 30, 2011 and 2010:

	Fee Timber
Three Months Ended	Pope Resources			ORM Timber			Total			Timberland Management &			Real
September 30, (Thousands)	Timber			Funds			Fee Timber			Consulting			Estate			Other			Consolidated
2011
Revenue internal	$	4,334		$	2,737		$	7,071		$	488		$	575		$	-		$	8,134
Eliminations		(112	)		-			(112	)		(488	)		(12	)		-			(612	)
Revenue external		4,222			2,737			6,959			-			563			-			7,522

Cost of timber and land sold		(1,896	)		(2,472	)		(4,368	)		-			(81	)		-			(4,449	)

Operating, general and
administrative expenses internal		(1,272	)		(909	)		(2,181	)		(445	)		(875	)		(950	)		(4,451	)
Eliminations		12			488			500			112			-			-			612
Operating, general and
administrative expenses external		(1,260	)		(421	)		(1,681	)		(333	)		(875	)		(950	)		(3,839	)

Income (loss) from operations
internal		1,166			(644	)		522			43			(381	)		(950	)		(766	)
Eliminations		(100	)		488			388			(376	)		(12	)		-			-
Income (loss) from operations
external	$	1,066		$	(156	)	$	910		$	(333	)	$	(393	)	$	(950	)	$	(766	)

2010
Revenue internal	$	6,581		$	1,721		$	8,302		$	412		$	340		$	-		$	9,054
Eliminations		(54	)		-			(54	)		(397	)		(12	)		-			(463	)
Revenue external		6,527			1,721			8,248			15			328			-			8,591

Cost of timber and land sold		(2,915	)		(1,648	)		(4,563	)		-			(3	)		-			(4,566	)

Operating, general and
administrative expenses internal		(845	)		(566	)		(1,411	)		(361	)		(823	)		(1,004	)		(3,599	)
Eliminations		12			394			406			57			-			-			463
Operating, general and
administrative expenses external		(833	)		(172	)		(1,005	)		(304	)		(823	)		(1,004	)		(3,136	)

Income (loss) from operations
internal		2,821			(493	)		2,328			51			(486	)		(1,004	)		889
Eliminations		(42	)		394			352			(340	)		(12	)		-			-
Income (loss) from operations
external	$	2,779		$	(99	)	$	2,680		$	(289	)	$	(498	)	$	(1,004	)	$	889

	Fee Timber
Nine Months Ended	Pope Resources			ORM Timber			Total			Timberland Management &			Real
September 30, (Thousands)	Timber			Funds			Fee Timber			Consulting			Estate			Other			Consolidated
2011
Revenue internal	$	$22,918		$	13,173		$	36,091		$	1,577		$	3,744		$	-		$	41,412
Eliminations		(334	)		-			(334	)		(1,577	)		(36	)		-			(1,947	)
Revenue external		22,584			13,173			35,757			-			3,708			-			39,465

Cost of timber and land sold		(9,434	)		(10,507	)		(19,941	)		-			(425	)		-			(20,366	)

Operating, general and
administrative expenses internal		(3,382	)		(2,699	)		(6,081	)		(1,448	)		(2,869	)		(3,192	)		(13,590	)
Eliminations		39			1,577			1,616			331			-			-			1,947
Operating, general and
administrative expenses external		(3,343	)		(1,122	)		(4,465	)		(1,117	)		(2,869	)		(3,192	)		(11,643	)

Income (loss) from operations
internal		10,102			(33	)		10,069			129			450			(3,192	)		7,456
Eliminations		(295	)		1,577			1,282			(1,246	)		(36	)		-			-
Income (loss) from operations
external	$	$9,807		$	1,544		$	11,351		$	(1,117	)	$	414		$	(3,192	)	$	7,456

*Includes $346,000 of environmental remediation expense

2010
Revenue internal	$	18,504		$	3,427		$	21,931		$	1,002		$	844		$	-		$	23,777
Eliminations		(108	)		-			(108	)		(987	)		(36	)		-			(1,131	)
Revenue external		18,396			3,427			21,823			15			808			-			22,646

Cost of timber and land sold external		(8,014	)		(2,977	)		(10,991	)		-			(6	)		-			(10,997	)

Operating, general and
administrative expenses internal		(2,443	)		(1,385	)		(3,828	)		(1,041	)		(2,922	)		(3,397	)		(11,188	)
Eliminations		39			971			1,010			121			-			-			1,131
Operating, general and
administrative expenses external		(2,404	)		(414	)		(2,818	)		(920	)		(2,922	) *		(3,397	)		(10,057	)

Income (loss) from operations
internal		8,047			(935	)		7,112			(39	)		(2,084	)		(3,397	)		1,592
Eliminations		(69	)		971			902			(866	)		(36	)		-			-
Income (loss) from operations
external	$	7,978		$	36		$	8,014		$	(905	)	$	(2,120	)	$	(3,397	)	$	1,592

*Includes $568,000 of environmental remediation expense

The Funds were formed by Olympic Resource Management LLC (ORMLLC), a wholly owned subsidiary of Pope Resources, for the purpose of attracting capital to purchase timberlands. The objective of these Funds is to generate a return on investments through the acquisition, management, value enhancement and sale of timberland properties. Both Funds will operate for a term of ten years from the end of the drawdown period, with Fund I terminating August 2017 and Fund II terminating March 2021. Pope Resources and ORMLLC together own 20% of each Fund and both Funds are consolidated into the Partnership’s financial statements. The Funds’ statements of operations included management fees paid to ORMLLC which are eliminated in consolidation. The Partnership’s consolidated balance sheet included assets and liabilities of the Funds as of September 30, 2011 and December 31, 2010, which were as follows:

ORM Timber Funds

(Thousands)	September 30, 2011		December 31, 2010
Assets:
Cash and cash equivalents	$	1,073	$	2,186
Other current assets		447		413
Total current assets		1,520		2,599
Timber and roads, net		120,731		125,456
Timberlands		18,747		18,607
Other assets		130		141
Total assets	$	141,128	$	146,803
Liabilities and equity:
Current liabilities	$	1,253	$	954
Current portion of long-term debt		31		30
Long-term debt		11,044		11,068
Total liabilities		12,328		12,052
Funds' equity		128,800		134,751
Total liabilities and equity	$	141,128	$	146,803

10.

During the third quarter of 2011, the Partnership had net incremental borrowings of $1.2 million on its operating line of credit, increasing the outstanding borrowings from $5.3 million at June 30, 2011 to $6.5 million at September 30, 2011. For the nine months ended September 30, 2011, the Partnership repaid $3.1 million on the operating line of credit, reducing outstanding borrowings from $9.6 million at December 31, 2010. The outstanding borrowings are recorded within long-term debt because the line of credit does not mature until 2013 and predictability of cash flows in light of operating needs is not reliable enough to suggest a meaningful and accurate bifurcation of what portion of the line of credit can or will be paid down in the near term

Accrued interest relating to all debt instruments was $492,000 and $453,000 at September 30, 2011 and December 31, 2010, respectively, and is included in accrued liabilities.

11.

The Partnership has an accrual for estimated environmental remediation costs of $1.7 million as of September 30, 2011 and $1.9 million as of December 31, 2010. The environmental remediation liability represents estimated payments to be made to monitor and remedy certain areas in and around the townsite and millsite at Port Gamble, Washington, and at Port Ludlow, Washington.

During the third quarter of 2011, the Washington State Department of Ecology (DOE) performed some additional sampling during the quarter that will inform modification of the Remedial Investigation and Feasibility Study (RI/FS). The updated RI/FS is scheduled to be issued by the end of 2011, followed by the development of a clean-up action plan and consent decree.

Additionally, during the third quarter of 2011 the DOE issued a “No Further Action” letter related to a separate remediation effort completed during the third quarter at Port Gamble confirming we have no further remediation obligations for the project. Total charges for this project were approximately $478,000.

The environmental remediation accrual also contains costs estimated in connection with a site located within the resort community of Port Ludlow. During the third quarter of 2011, additional investigative work was performed to further refine the characterization and extent of the contamination. During the fourth quarter of 2011, we will continue monitoring the site with the intent to obtain data which point toward feasibility of remedies if and when appropriate.

The environmental liability at September 30, 2011 is $1.7 million. Statistical models have been used to estimate the liability and suggest a potential aggregate range of loss of $744,000 to $3.8 million.

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 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; 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; 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.

EXECUTIVE OVERVIEW

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 two 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 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 raised two timber funds that have acquired a total of $150 million in commercial timberland properties. Our 20% co-investment in the Funds, which totals $28 million, affords us a share of the Funds’ operating cash flows while 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.

Land held for sale in western Washington by our Real Estate segment is suitable primarily 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 primary challenges of our Real Estate segment center 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 of carrying and developing a property against the potential for income and positive cash flows upon sale.

Revenue and net income declined from the second to the third quarter in response to an expected increase in regional supply of logs and lumber as the arrival of summer marks the peak of logging operations in high elevation areas. This decline in harvest volume from the Combined tree farms results primarily from management’s strategy for timing our harvest volume to coincide with what we believe will be relatively higher log pricing. For example, we shifted what might otherwise have been third-quarter harvest volume into the second quarter of 2011 to avoid competing with a seasonal influx of wood into the market and softening of log prices. As a result we harvested 12 million board feet (MMBF) in the third quarter of 2011 compared to 19 MMBF in the second quarter of 2011 and 16 MMBF harvested in the third quarter of 2010. Realized log prices declined 5%, or $27 per thousand board feet (MBF), from $582/MBF to $555/MBF, between the second and third quarters of 2011. For the nine months ended September 30, 2011 we harvested 61 MMBF compared to 42 MMBF for the first nine months of 2010. We expect our harvest volume for the full year 2011 to be between 86 and 89 MMBF, with the final total depending on the strength or weakness of log markets as well as weather patterns in the final quarter of the year.

We have a unit repurchase program which permits repurchases through December 2011. Between December 2008 and December 2010, we repurchased roughly 125,000 units with a weighted average unit purchase price of $20.04 and we have an unutilized authorization for unit repurchases of $2.5 million. On December 31, 2010, we repurchased 334,340 units from a single unitholder, outside the scope of the formal repurchase program, for $35.50 per unit (which excludes a $0.05 per unit commission paid on settlement). The units represented 7.2% of the total units outstanding at that time and were retired. We did not make any unit repurchases during the first nine months of either 2011 or 2010.

RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that impacted our net income (loss) for the respective quarter and year-to-date periods ended September 30, 2011 and September 30, 2010. In addition to the table’s numerical analysis, the explanatory text that follows the table describes certain of these changes by business segment.

	Quarter Ended			Nine Months Ended
	September 30,			September 30,
(Thousands)	Total			Total
Net income (loss) attributable to Pope Resources' unitholders:
2011 period	$	(562	)	$	6,405
2010 period		1,050			375
Variance	$	(1,612	)	$	6,030
Detail of variance:
Fee Timber
Log volumes (A)	$	(2,001	)	$	8,511
Log price realizations (B)		732			5,684
Production costs		46			(5,376	)
Depletion		149			(3,559	)
Other Fee Timber		(696	)		(1,923	)
Timberland Management & Consulting
Operating results		(44	)		(212	)
Real Estate
Land and conservation easement sales		83			2,403
Timber depletion on HBU sale		-			(150	)
Other Real Estate		19			59
Environmental remediation costs		3			222
General & administrative costs		54			205
Net interest expense		(120	)		(524	)
Debt extinguishment costs		-			1,250
Other		163			(560	)
Total variances	$	(1,612	)	$	6,030

(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. To a lesser extent, Fee Timber revenue also includes amounts realized from leasing cellular communication towers, gravel pits and other mineral resources from our timberlands. Our Fee Timber revenue is driven primarily by the volume of timber harvested, which is generally expressed in thousand board feet (MBF) or million board feet (MMBF). 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. These comparisons offer an understanding of 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 September 30, 2011, June 30, 2011, and September 30, 2010 were as follows:

(Millions) Quarter Ended	Log Sale Revenue		Mineral, Cell Tower & Other Revenue		Total Fee Timber Revenue		Operating Income (Loss)			Harvest Volume (MMBF)
Partnership tree farms	$	3.8	$	0.4	$	4.2	$	1.1			7
Funds' tree farms		2.7		-		2.7		(0.2	)		5
Total Fee Timber September 30, 2011	$	6.5	$	0.4	$	6.9	$	0.9			12

Partnership tree farms	$	6.6	$	0.4	$	7.0	$	3.1			11
Funds' tree farms		4.3		-		4.3		0.2			8
Total Fee Timber June 30, 2011	$	10.9	$	0.4	$	11.3	$	3.3			19

Partnership tree farms	$	6.1	$	0.4	$	6.5	$	2.8			12
Funds' tree farms		1.7		-		1.7		(0.1	)		4
Total Fee Timber September 30, 2010	$	7.8	$	0.4	$	8.2	$	2.7			16

Comparing Q3 2011 to Q2 2011. Fee Timber revenue declined $4.4 million, or 39%, from second quarter as a result of a 7 MMBF, or 37%, decrease in volume harvested combined with a $27/MBF, or 5%, decrease in average log price realized. Harvest operations ordinarily are at their peak during the third quarter a time when harvest units are most accessible in the Pacific Northwest. This seasonal pattern typically results in a large volume flow of logs to markets and, subsequently, some softening in log prices as customers have more alternatives for log purchases. Operating income for the third quarter 2011 decreased by $2.4 million, or 73%, from second quarter results primarily as a result of lower harvest volumes, but also reflects increased harvest and road maintenance costs. The increased costs to harvest units with steep terrain helped to erode stumpage values realized. Road maintenance costs comprised $743,000, or 44%, of Combined operating expenses in the third quarter compared with $517,000, or 40%, of Combined operating expenses in the second quarter of 2011. Road maintenance costs increased as we worked to prepare roads for current and future harvest operations. The Funds generated $2.7 million of revenue in the third quarter of 2011 compared with revenue of $4.3 million in the second quarter of 2011. The Funds generated an operating loss of $156,000 during the third quarter compared to operating income of $235,000 during the second quarter on a 3 MMBF reduction in harvest volume. The decline in operating income was driven by a decrease in harvest volume and harvesting from units requiring higher cost cable logging.

Comparing Q3 2011 to Q3 2010. Fee Timber revenue for the third quarter of 2011 declined by $1.3 million, or 16%, over the comparable period in the prior year. The decrease in revenue is due to a 4 MMBF, or 26%, decrease in harvest volume offset partially by a $62/MBF, or 13%, increase in average log price realized. Stronger log pricing in the third quarter of 2011 relative to the comparable period in 2010 was driven by both strong export log markets and the indirect impact of heightened export lumber demand by China, which put upward pressure on domestic log prices. Operating income for the third quarter of 2011 decreased $1.8 million, or 66%, over the third quarter of 2010 due primarily to the reduced harvest volume. In addition, road maintenance costs increased from $330,000, or 33%, of Combined tree farm operating expenses in 2010 to $743,000, or 44%, of Combined tree farm operating expenses in 2011 as roads were being prepared for higher levels of future harvest operations. Third quarter 2011 Fund revenue increased 59% to $2.7 million from $1.7 million for the same quarter in 2010 on a 1 MMBF, or 34%, increase in harvest volume. Operating loss, however, for the period increased from $99,000 in 2010 to $156,000 in 2011 because higher harvest costs offset the effects of higher revenue between the two periods.

(Millions) Nine Months Ended		Log Sale Revenue		Mineral, Cell Tower & Other Revenue		Total Fee Timber Revenue		Operating Income	Harvest Volume (MMBF)
Partnership tree farms	$	21.4	$	1.1	$	22.5	$	9.8	37
Funds' tree farms		13.2		-		13.2		1.5	24
Total Fee Timber September 30, 2011	$	34.6	$	1.1	$	35.7	$	11.3	61

Partnership tree farms	$	17.3	$	1.1	$	18.4	$	8.0	36
Funds' tree farms		3.1		0.3		3.4		-	6
Total Fee Timber September 30, 2010	$	20.4	$	1.4	$	21.8	$	8.0	42

Comparing YTD 2011 to YTD 2010. For the nine months ended September 30, 2011, Fee Timber revenue, operating income, and harvest volume increased $13.9 million, $3.3 million, and 19 MMBF, respectively, over the comparable period in 2010. Log prices for the first nine months of 2011 were $81/MBF, or 17%, higher than the first nine months of 2010. This is primarily attributable to the rise of the export market that began in the fourth quarter of 2010 and continued through the first nine months of 2011, albeit with some softening later in the third quarter. The surge of the export market motivated us to harvest not only our planned annual volume but also a portion of deferred volumes that accumulated between 2008 and 2010 on both Partnership and Fund tree farms. Fund revenue and harvest volume increased four-fold during the first nine months of 2011 compared to the same period in 2010. Year-to-date operating income for the Funds increased from $36,000 in 2010 to $1.5 million in 2011 on increased harvest volume from the Funds. The increase in Fund operating income was less dramatic than the increase in revenue would suggest because of the high depletion rates on Fund properties.

Log Volume

We harvested the following log volumes by species from the Combined tree farms for the quarters ended September 30, 2011, June 30, 2011, and September 30, 2010:

Volume (in MBF)		Quarter Ended
Sawlogs		Sep-11		% Total			Jun-11		% Total			Sep-10		% Total
	Douglas-fir		5,900		50	%		10,165		54	%		10,804		68	%
	Whitewood		2,644		22	%		5,092		27	%		1,527		9	%
	Cedar		236		2	%		280		1	%		175		1	%
	Hardwood		654		6	%		512		3	%		275		2	%
Pulpwood
	All Species		2,378		20	%		2,772		15	%		3,090		20	%
Total			11,812		100	%		18,821		100	%		15,871		100	%

Comparing Q3 2011 to Q2 2011. Harvest volumes declined 7 MMBF, or 37%, from the second to the third quarter of 2011 based on the decision to avoid competing with large seasonal volumes of wood entering the market. In concert with this seasonal supply surge, average log prices softened $27/MBF, or 5%, from the second to the third quarter.

Since the fourth quarter of 2010, export demand from China, which has remained largely indifferent to species, prompted us to shift to harvest units with a greater proportion of whitewood volume. However, a backlog of inventory in the China market led to some slack in export pricing during the third quarter. We responded by lowering harvest levels and diverting volume into domestic and pulpwood markets. This served to lower the percentage of Douglas-fir and whitewood sawlog harvest, while increasing pulpwood harvest during the quarter. During the third quarter of 2011, Douglas-fir comprised 64% of the 7 MMBF harvested from the Partnership’s tree farms, while whitewood comprised 8% of that total. On the other hand, the Funds’ third quarter 2011 harvest of 5 MMBF consisted of 30% Douglas-fir and 42% whitewood. The Douglas-fir component for Combined tree farms was 50% of the total harvest and whitewood 22% after blending the two disparate species mixes. Similarly, in the second quarter of 2011, Douglas-fir and whitewood harvest made up approximately 70% and 11%, respectively, of the 11 MMBF harvested from the Partnership’s tree farms while the Funds’ Douglas-fir and whitewood harvest components were 31% and 50%, respectively, of the 8 MMBF of Fund volume harvested. Blending these divergent species patterns yielded a Combined Q2 2011 harvest mix of 54% Douglas-fir and 27% whitewood. While emphasizing whitewood harvests would normally result in lower average log realizations, the strong demand from China and Korea that was largely indifferent as to species tempered this expected price-dampening effect. With log deliveries to sawmills curtailed due to continuing soft domestic lumber demand, the resulting shortage of sawmill residual chips continued to produce demand for chips from whole logs, thus driving up pulpwood prices. As a result, some harvest units heavy to pulpwood were targeted for third quarter harvest, thereby increasing pulpwood volumes to 20% of total third quarter 2011 harvest from 15% of total second quarter 2011 harvest.

Comparing Q3 2011 to Q3 2010. We deliberately decreased harvest volumes by 26% in the third quarter of 2011 from the third quarter of 2010, as noted above, due to an anticipated seasonal influx of log volume and softening export prices. By contrast, during the same period in 2010, we had increased harvest volumes to take advantage of nascent price surges in the export log market. In the third quarter of 2010, we harvested 4 MMBF from the Funds’ tree farms compared to 5 MMBF of Fund harvest in the third quarter of 2011. In the third quarter of 2011, 78% of the Combined whitewood harvest came from the Funds’ tree farms, which served to increase the whitewood mix from 9% in 2010 to 22% in 2011 and reduce the Douglas-fir mix from 68% in 2010 to 50% in 2011. Cedar and pulpwood volumes stayed constant from 2010 to 2011, while hardwood increased modestly by 2% to 6% of the log mix.

Comparing YTD 2011 to YTD 2010. We harvested the following log volumes by species from the Combined tree farms for the nine months ended September 30, 2011 and September 30, 2010:

Volume (in MBF):		Nine Months Ended
Sawlogs		Sep-11		% Total			Sep-10		% Total
	Douglas-fir		35,155		58	%		30,561		73	%
	Whitewood		14,212		23	%		3,337		8