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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

OR

Commission file number 1-12147

DELTIC TIMBER CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:  (870) 881-9400

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:  None

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, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  x    No  ¨

The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the average of the high and low prices of the Common Stock on the New York Stock Exchange on February 28, 2003, was $158,236,313.29. For purposes of this computation, all officers, directors, and 5% beneficial owners of the registrant (as indicated in Item 12) are deemed to be affiliates. Such determination should not be deemed an admission that such directors, officers, or 5% beneficial owners are, in fact, affiliates of the registrant.

Number of shares of Common Stock, $.01 Par Value, outstanding at February 28, 2003, was 11,900,997.

Documents incorporated by reference:

The Registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders on April 24, 2003.

Table of Contents

TABLE OF CONTENTS—2002 FORM 10-K REPORT

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PART I

Item 1. Business

Introduction

Deltic Timber Corporation (“Deltic” or the “Company”) is a natural resources company engaged primarily in the growing and harvesting of timber. The Company owns approximately 436,800 acres, primarily in Arkansas and north Louisiana, including 431,100 acres of timberland (the “timberlands”).

In addition to its timber operations, Deltic is engaged in the manufacture and marketing of lumber and in real estate development projects in central Arkansas. Sawmill operations consist of two mills, one at Ola in central Arkansas (“the Ola Mill”) and another at Waldo in south Arkansas (“the Waldo Mill”).

The Company also holds a 50 percent interest in Del-Tin Fiber L.L.C. (“Del-Tin Fiber”), a joint venture to manufacture and market medium density fiberboard (“MDF”). Since production began in April 1998, both operating and financial performance have been below expectations. As a result, on April 25, 2002, Deltic announced that Banc One Capital Markets, Inc. had been retained as financial advisor to assist in the evaluation of strategic alternatives for the Company’s investment in Del-Tin Fiber. Subsequently, Deltic’s management and Board of Directors completed its review of strategic alternatives and determined that the MDF business does not represent a growth area for the Company. Consequently, an announcement was made that the Company intends to exit this business upon the earliest, reasonable opportunity provided by the market. As a result of this decision, the Company’s evaluation of possible impairment of the carrying value of its investment in the equity method investee, as required by current accounting standards, resulted in the determination that the Company’s investment was impaired as of December 31, 2002. Therefore, a non-cash write-off of Deltic’s investment in Del-Tin Fiber, amounting to $18.7 million pretax, was recorded during 2002.

The timberlands consist primarily of Southern Pine and include approximately 239,000 acres of all-aged pine forests and 159,000 acres of pine plantations. Estimated pine sawtimber inventory as of December 31, 2002, was 10,421,000 tons. Management considers the timberlands to be the Company’s most valuable asset and the harvest of stumpage to be its most significant source of income. Deltic actively manages its timberlands in order to increase productivity and maximize the long-term value of its timber assets. The Company harvests timber from the timberlands in accordance with its harvest plans and sells timber in the domestic market or converts timber to lumber in its sawmills. In 2002, Deltic harvested 713,779 tons of pine sawtimber from its timberlands.

The Company implemented a timberland acquisition program in late 1996. This ongoing program has enabled the Company to increase harvest levels, while expanding its timber inventory. The Company has and will focus its acquisition program on timberland in its current operating area. Unlike other timber-producing areas of North America, most of the timberland in the southern U.S. is privately held, making it potentially available for acquisition.

The Company’s two sawmills employ modern technology in order to improve efficiency, reduce labor costs, maximize utilization of the timber resource, and maintain high quality standards of production. In addition, each mill is strategically located near significant portions of the timberlands. The Ola Mill is equipped for maximum utilization of smaller diameter logs, while the Waldo Mill can process both smaller and larger diameter logs. The mills produce a variety of products, including dimension lumber, boards, timbers, decking, and at the Waldo Mill, secondary products such as finger-jointed studs. The lumber is sold primarily to wholesalers and treaters in the South and Midwest and is used in residential construction, roof trusses, laminated beams, and remanufactured items. Combined annual capacity of the two mills at December 31, 2002, was 257 million board feet (“MMBF”). The Company’s total finished lumber production was 203 MMBF in 2002 compared to 164 MMBF in 2001 and 169 MMBF in 2000. The current-year increase was due to

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increased operating efficiencies achieved from recently completed capital projects, combined with temporary lumber production curtailments in response to market and weather conditions in both 2000 and 2001.

The Company’s real estate operations were started in 1985 to add value to former timberland strategically located in the growth corridor of west Little Rock, Arkansas. Since that time, the Company has been developing Chenal Valley, a 4,800-acre upscale planned community, centered around two golf courses, designed by Robert Trent Jones, Jr., at Chenal Country Club. The property is being developed in stages, and real estate sales to date have consisted primarily of residential lots sold to builders or individuals and commercial tracts. In addition to Chenal Valley, Deltic is developing Chenal Downs, a 400-acre equestrian development located just outside of Chenal Valley, and Red Oak Ridge, an 800-acre development in Hot Springs, Arkansas.

The Del-Tin Fiber plant is located near El Dorado, Arkansas. Construction of the plant was completed, and initial production began, in 1998. The plant is designed to have an annual capacity of 150 million square feet (“MMSF”), on a 3/4-inch basis, making it one of the largest plants of its type in the world. MDF, which is used primarily in the furniture, flooring, and molding industries, is manufactured from sawmill residuals such as chips, shavings, and sawdust, held together by an adhesive bond.

In August 2000, the Company’s Board of Directors approved the disposal of Deltic’s former Agriculture segment assets, subject to using the sales proceeds to purchase additional Southern Pine timberland, via tax-deferred exchanges. As a result, activities of this segment have been accounted for as discontinued operations. Deltic engaged an agricultural land consulting and brokerage firm to act as advisors in evaluating and marketing about 50,000 acres (approximately 38,800 acres net to Deltic) of farmland located in northeast Louisiana. All former agricultural lands, as well as all related agriculture operational assets, had been sold by December 31, 2001, and the proceeds were used to purchase approximately 37,000 acres of Southern Pine timberland. This initiative provided the Company a significant and unique opportunity to advance its strategy of growing its core forest products business.

Forest Products Industry

The wood products industry is affected by a number of factors, including general economic conditions, interest rates, foreign exchange rates, housing starts, residential repair and remodeling activity, commercial construction, industry capacity and production levels, the availability of raw materials, and weather conditons. In 2002, the domestic industry continued to suffer from an oversupply of lumber. Despite the highest level of housing starts in 16 years and an increase in lumber consumption, greater domestic production combined with increased imports outpaced demand; and lumber prices declined to their lowest levels since 1992.

Although lumber prices declined in 2002, Deltic’s average pine sawtimber price increased due to strong local markets and timing of sales. Improved operations at both sawmills enabled the Mills segment to increase lumber production and reduce its operating loss in 2002 despite a lower average lumber price. Over the past three years, pine sawtimber prices have remained relatively stable while lumber prices have declined significantly, which was a significant factor in the Company’s sawmills operating at a loss for the period.

The southern U.S., in which all of the Company’s operations are located, is a major timber and lumber producing region. There are an estimated 209 million acres of timberland in the region, of which approximately 91 million acres contain softwood, predominately Southern Pine. Unlike other major timber-producing areas in North America, most of this acreage is privately held. The estimated breakdown of ownership of softwood timberland in the southern U.S. is 89 percent private, seven percent national forest, and four percent other public. Although there can be no assurance, management anticipates that the southern U.S. timber resource will be subject to strong demand for the foreseeable future and also believes that the South will have a strategic advantage over other U.S. timber-producing regions due to regulatory, geographic, and other factors.

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Woodlands

The Company owns approximately 431,100 acres of timberland, primarily in Arkansas and north Louisiana, stocked principally with Southern Pine. Management considers the timberlands to be Deltic’s most valuable asset and the harvest of this stumpage to be the Company’s most significant source of income.

The approximate breakdown of the Company’s timberland acreage at year-end 2002 consisted of the following:

The Company’s timberlands are well diversified by age class. The timberland classified as pine forest is primarily managed on an all-aged basis and contains mature timber that is ready to be harvested over the next several years and includes stream-management zones. Pine plantations are primarily less than 25 years old, with the majority ranging in age from 10 to 20 years. Because pine timber generally does not reach sawtimber size until it is 20 to 25 years of age, most of the plantations are not yet included in the Company’s pine sawtimber inventory.

Timber Inventory. The Company’s estimated standing timber inventory is calculated for each tract by utilizing growth formulas based on representative sample tracts and tree counts for various diameter classifications. The calculation of pine inventory is subject to periodic adjustments based on sample cruises and actual volumes harvested. The hardwood inventory shown in the following table is only an approximation, so the physical quantity of such timber may vary significantly from this approximation. Estimated inventory of standing timber as of December 31, 2002, consisted of the following:

The Company’s pine sawtimber is either used in its sawmills or sold to third parties. Products manufactured from this resource include dimension lumber, boards, timbers, decking, and secondary products, used primarily in residential construction. Deltic’s hardwood sawtimber is sold to third parties and is primarily used in the production of railroad ties, flooring, and pallets. Pulpwood consists of logs with a diameter of less than nine inches. Both pine and hardwood pulpwood are sold to third parties for use primarily in the manufacture of paper.

Timber Growth. Timber growth rate is an important variable for forest products companies since it ultimately determines how much timber can be harvested. A higher growth rate permits larger annual harvests as replacement timber regenerates. Growth rates vary depending on species, location, age, and forestry management practices. The growth rate, net of mortality, for Deltic’s southern pine averages five to six percent of standing inventory per annum. The Company considers a 30 to 35 year rotation optimal for most pine plantations.

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Timberland Management. Forestry practices vary by geographic region and depend on factors such as soil productivity, weather, terrain, and timber species, size, age, and stocking. The Company actively manages its timberlands based on these factors and other relevant information to increase productivity and maximize the long-term value of its timber assets. In general, the Company’s timberland management involves harvesting and thinning operations, reforestation, cull timber removal programs, and the introduction of genetically improved seedlings.

Deltic has developed and operates its own seed orchard. Seeds from the orchard are grown by third parties to produce genetically improved seedlings for planting. These seedlings are developed through selective cross-pollination to produce trees with preferred characteristics, including higher growth rates, fewer limbs, straighter trunks, and greater resistance to disease. However, this process does not involve genetic engineering. The seedlings are planted in all-aged stands or a site is completely replanted in the case of a regeneration harvest. During 2002, about 8,900 acres were planted, primarily using seedlings grown from seeds produced at the orchard facility, with approximately 7,900 acres scheduled to be planted in 2003, as the Company continues to reforest understocked tracts. The Company meets or exceeds, in all material respects, the reforestation recommendations of the Arkansas Forestry Commission’s Best Management Practices.

The Company actively utilizes commercial thinning practices. Thinning operations consist of the selective removal of trees within a stand, usually a plantation, and improve overall productivity by enhancing the growth of the remaining trees while generating revenues. Deltic has increased its pine pulpwood harvests over the past several years as its plantations have matured and required thinning.

The Company’s cull timber removal program is designed to control undesirable, competitive vegetation in its forests and to increase pine growth rates and reproduction. Deltic treated 15,000 acres in 2002 compared to 18,800 acres in 2001 under this program.

Harvest Plans. Management views the timberlands as assets with substantial inherent value apart from the sawmills and intends to manage the timberlands on a basis that permits regeneration of the timberlands over time. The Company intends to continue to manage the timberlands on a sustainable-yield basis and has no plans to harvest timber on an ongoing basis at levels that would diminish its timber inventory. In 2002, the Company harvested 713,779 tons of pine sawtimber from its timberlands. Under the current plan, Deltic intends to harvest between 600,000 and 650,000 tons of pine sawtimber in 2003.

The Company’s harvest plans are generally designed to project multi-year harvest schedules. In addition, harvest plans are updated at least annually and reviewed on a monthly basis to monitor performance and to make any necessary modifications to the plans in response to changing forestry conditions, market conditions, contractual obligations, regulatory limitations, and other relevant factors.

Since harvest plans are based on projections of demand, price, availability of timber from other sources, and other factors that may be outside of the Company’s control, actual harvesting levels may vary. Management believes that the Company’s harvest plans are sufficiently flexible to permit modification in response to fluctuations in the markets for logs and lumber.

Access. Substantially all of the timberlands are accessible by a system of low impact and low maintenance roads. Deltic generally uses third-party road crews to conduct construction and maintenance of these roads, and the Company regularly exchanges access easements and cooperates with other area forest products companies and the U.S. Forest Service.

Wildlife Management. The Company has an active wildlife management program for its properties. Deltic leased 415,000 acres and 381,000 acres to hunting clubs in 2002 and 2001, respectively. The Company’s wildlife biologist has conducted white-tailed deer management clinics throughout Arkansas. In addition, Deltic cooperates with federal, state, and private agencies in various wildlife studies. The Company also works with the Arkansas Game and Fish Commission to re-establish the black bear population in South Arkansas.

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Client-Land Management. In addition to managing its own timberlands, Deltic also manages timberlands owned by others under management contracts with one-year renewable terms. This program provided harvest planning, silvicultural improvements, and maintenance work for approximately 62,500 acres in 2002.

Timberland Acquisitions. The Company implemented a timberland acquisition program in late 1996. This ongoing program is designed to enable the Company to continue to increase harvest levels, while expanding its timber inventory. In addition, it will allow the Company to maintain or increase the volume of logs supplied to its sawmills from its own timberlands, when economically feasible.

The Company intends to continue to focus its acquisition program on timberlands in its current operating area that range from fully-stocked to cutover tracts. Unlike other timber-producing areas of North America, most of the timberland in the southern U.S. is privately held, making it potentially available for acquisition. There can be no assurance that timber properties suitable for acquisition will be identified by the Company, or that once identified, such properties will ultimately be acquired by the Company.

Deltic formed an acquisition team to implement its timberland acquisition program. Lands considered for purchase are evaluated based on location, site index, timber stocking, and growth potential. Approximately 110,400 acres of strategically located pine timberland have been added since the inception of the program. Individual land purchases have ranged from 20 acres to 21,700 acres. In January 2003, the Company closed the purchase of 4,979 acres, and in March 2003, closed on the purchase of 1,702 acres.

Land Sales. In 1999, the Company initiated a program to identify for possible sale non-strategic timberland and higher and better use lands. Sales totaled 7,336 acres in 1999, 5,254 acres in 2000, 3,315 acres in 2001, and 3,418 acres in 2002.

Mills

The Company’s two sawmills are located at Ola in central Arkansas and at Waldo in south Arkansas, near significant portions of the timberlands. The mills employ modern technology in order to improve efficiency, reduce labor costs, maximize utilization of the timber resource, and maintain high quality standards of production. Logs processed into lumber are obtained from the timberlands and from public and private landowners. The Company selects logs for processing in its mills based on size, grade, and the prevailing market price. The Ola Mill is equipped for maximum utilization of smaller diameter logs, while the Waldo Mill can process both smaller and larger diameter logs. The mills produce a variety of products, including dimension lumber, boards, timbers, decking, and secondary products such as finger-jointed studs. The lumber is sold primarily to wholesalers and treaters in the South and Midwest and is used in residential construction, roof trusses, laminated beams, and remanufactured items.

Combined annual production capacity of the two mills increased from 226 MMBF at year-end 1999 to 257 MMBF at year-end 2002 following the completion of planned upgrades at both mills. The Company’s lumber output increased during 2002, with production totaling 203 MMBF in 2002 compared to 164 MMBF in 2001 and 169 MMBF in 2000. This increase was due to increased operating efficiencies achieved from recently completed capital projects, combined with temporary lumber production curtailments in response to market and weather conditions in both 2001 and 2000.

Capital Projects. Deltic has invested significant capital in its sawmills in recent years to increase production capacity, decrease costs, and expand the product mix. Major capital projects completed at the Ola Mill over the past several years include: (1) installation of a curve sawing gang and double length infeed to improve log recovery, increase hourly output, and expand product mix (2) the installation of an optimized edger system to increase lumber recovery (3) replacement of the existing planermill with a high-speed planermill and automated sorting system to increase mill output (4) construction of a small log processing system which extracts small diameter logs from pulpwood, thus reducing average log costs (5) addition of a boiler system and steam dry kilns to increase mill capacity and provide the capability to produce higher value

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lumber and (6) expansion of log storage capacity to enable increased production as market conditions improve.

At the Waldo Mill, major capital projects completed over the past several years include: (1) installation of a curve sawing gang to improve log recovery, increase hourly output, and expand product mix (2) installation of a new edger and optimizer to improve recovery (3) installation of a log optimization system to improve lumber recovery (4) extension of the green lumber sorter to increase planermill throughput (5) addition of finger-jointing and remanufacturing facilities which add value to existing production and (6) construction of a new high speed planermill and automated sorting system that provide the finishing capacity necessary to operate two shifts at the sawmill. The Company plans to add a second log debarker for this mill during 2003 to further improve hourly throughput capability.

Raw Materials. In 2002, the Company’s two sawmills processed 913,483 tons of logs, obtained from either the timberlands or purchased from public and private landowners. The timberlands supplied 56 percent, or 511,026 tons, of the mills’ raw material requirements, while the mills processed 69 percent of the 713,779 tons of pine sawtimber harvested from the timberlands.

Various factors, including environmental and endangered species concerns, have limited, and will likely continue to limit, the amount of timber offered for sale by U.S. government agencies. Because of this reduced availability of federal timber for harvesting, the Company believes that its supply of timber from the timberlands is a significant competitive advantage. Deltic has historically supplied a significant portion of the timber processed in the sawmills from its timberlands.

In order to operate its sawmills economically, the Company relies on purchases of timber from third parties to supplement its own timber harvests from the timberlands. The Company has an active timber procurement department for each of its sawmills. As of December 31, 2002, the Company had under contract 179,204 tons of timber on land owned by other parties, including the U.S. Forest Service, which is expected to be harvested over the next three years. During 2002, the Company harvested third-party stumpage and purchased logs from third parties totaling 411,562 tons . Of this volume, purchases from the U.S. Forest Service represented 23 percent. The balance of such volume was acquired from private lands.

As a result of the reduced availability of federal timber in recent years, demand, along with prices, for privately owned timber has increased, and the Company has increased and foresees further increases in its harvesting and purchasing activities from private timberlands. Due to this increased demand and higher timber prices, private timber sources have been prompted to sell their timber commercially. As a result, Deltic’s sources of private timber are many and diverse. The key factors in a landowner’s determination of whether to sell timber to the Company are price, the Company’s relationships with logging contractors, and the ability of the Company to demonstrate the quality of its logging practices to landowners. As a result, a landowner will be more likely to sell timber to a forest products company whose own land has been responsibly managed and harvested. There is a substantial amount of other private timber acreage in proximity to each of Deltic’s sawmills.

Residual Wood Products. The Company pursues waste minimization practices at both of its sawmills. Wood chips are usually sold to paper mills or Del-Tin Fiber, and bark is frequently sold for use as fuel. Bark, sawdust, shavings, and wood chips that cannot be sold are used as “hog fuel” to fire the boilers that heat the drying kilns. The Company expects to continue to sell a significant portion of its Waldo Mill’s residual wood chip production to Del-Tin Fiber pursuant to a fiber supply agreement that expires in 2008. During the four-month period in 2001 that Del-Tin Fiber was shut down, Waldo Mill’s chip production was sold to a third party.

Transportation. Each mill facility has the capability to ship its lumber by truck or rail.

Cyclical Market. While the cyclicality of the lumber market may occasionally require the interruption of operations at one or both of the Company’s sawmills, suspension of milling activities is unusual. Management is not currently anticipating any interruption of operations at either of Deltic’s sawmills, but no assurance can be given that market conditions or other factors will not render such an action economically advisable in the future.

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Real Estate

The Company’s real estate operations were started in 1985 to add value to former timberland strategically located in the growth corridor of west Little Rock, Arkansas. Development activities began with the construction of Chenal Ridge, an 85-lot neighborhood on the western edge of the Little Rock city limits as of 1985. Since that time the Company has been developing Chenal Valley, a 4,800-acre upscale planned community, centered around two Robert Trent Jones, Jr. designed golf courses. The first golf course was completed in 1990. Construction of the second course began in 2001, and is expected to be open for play in the late spring of 2003. The property has been developed in stages, and real estate sales to date have consisted primarily of residential lots sold to builders or individuals and commercial tracts. In addition to Chenal Valley, Deltic is developing Chenal Downs, located just outside of Chenal Valley, and Red Oak Ridge, in Hot Springs, Arkansas. Chenal Downs is a 400-acre equestrian development with controlled access, featuring secluded, five-acre lots. Red Oak Ridge, Deltic’s first development outside the Little Rock area, is an 800-acre upscale community designed for residential, resort, or retirement living.

Chenal Valley is one of the premier upscale residential and commercial development in the Little Rock real estate market. All acreage in Chenal Valley has been annexed by the City of Little Rock. Chenal Downs combines high-end homes with the semi-rural setting of an equestrian development located just outside the Little Rock city limits. Red Oak Ridge has been similarly annexed by the City of Hot Springs.

Residential Development. Lots were offered for sale in Chenal Ridge during the second half of 1986 with closings beginning in 1987, and all 85 lots have been sold. Residential sales in Chenal Valley began in 1989. To date, 1,647 lots have been developed in 17 neighborhoods and 1,544 lots have been sold, with about 1,400 residences constructed or under construction. When fully developed, Chenal Valley will include approximately 4,600 residences. The Company has developed lots in a wide variety of market segments. Lot size has ranged from 0.2 acres to 1 acre, and lot price has ranged from $25,000 per lot to over $250,000 per lot.

The first phase of Chenal Downs was opened in December 1997, followed by a second phase in November 2000, with 38 of the 76 lots developed in the two phases sold at the end of 2002. Lot prices in Chenal Downs range from $89,000 to approximately $170,000. In Red Oak Ridge, the first two neighborhoods were offered for sale in late 1998. These neighborhoods offer a choice of either estate-sized homesites, with many overlooking one of two Deltic-constructed lakes, or garden-home lots. As of the end of 2002, 10 of the 81 lots offered have been sold, and prices for lots currently offered range from about $30,000 to almost $83,000.

Commercial Development. Commercial development in Chenal Valley began with the construction of a Company-owned, 50,000-square-foot office building, which was sold during 2000. Commercial activity to-date has consisted of the sale of approximately 130 acres, including 10 acres in 2000, 14 acres in 2001, and .53 acres in 2002. Commercial property sales to-date have consisted of an office building constructed by the Company on a nine-acre site, multi-family residence sites, convenience store locations, and outparcels surrounding a retail center constructed and owned by Company. Commercial acreage sales are expected to improve for 2003. (On March 12, 2003, Deltic announced the sale of a 28-acre commercial site to Wal-Mart Stores, Inc.) When fully developed, Chenal Valley is planned to include 710 acres of commercial property.

The completion of construction of Rahling Road, a major connector street, in 1998 provides greater access to Chenal Valley’s commercial acreage. Located at the center of this commercial property is a Company-owned 35,000-square-foot retail center. The retail center was completed in early 2000 and offers retail space for lease. The center is surrounded by 14 outparcels, ranging in size from 0.2 to 1.8 acres. To-date, six of these outparcels have been sold.

No commercial acreage is included in the Chenal Downs development. Red Oak Ridge is planned to include approximately 80 acres of commercial property. The Company will begin to develop and offer commercial sites as population density increases.

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Infrastructure. Infrastructure and other improvements to support the development and sale of residential and commercial property are funded directly by the Company and/or through real property improvement districts. Such properties are developed only when sufficient demand exists and substantially all infrastructure is completed. Future infrastructure investments are primarily necessary for the development and sale of additional property.

Development Amenities. In connection with its Chenal Valley development, the Company developed Chenal Country Club, consisting of the above-described golf courses, a clubhouse, and related facilities for use by club members. Since its original construction, Deltic has undertaken substantial remodeling and expansion of the clubhouse as the club membership level has increased. In addition, the Company has built three community parks within the Chenal Valley development for the benefit of the residents of the currently developed residential areas.

Chenal Downs has been developed around an equestrian center, consisting of stables and a training facility, and also includes bridle trails throughout the development. Red Oak Ridge’s primary amenity currently consists of two lakes constructed by the Company, but will also include a community park as residential development expands.

Future Development. A number of factors have added significant value to the undeveloped portion of Chenal Valley. Such factors include: the overall success of Chenal Valley as a residential development and its image as one of the premier developments in central Arkansas, the continued westward growth of Little Rock, the Company’s investment in infrastructure in the area, and the established residential base which is now large enough to support commercial development. Management expects the undeveloped portion of Chenal Valley to provide growth and development opportunities in the future.

Chenal Downs has been fully developed. Development of Red Oak Ridge is in the early stages, consisting of the construction of two lakes as the core amenity, initial infrastructure placement, and the first two of several planned neighborhoods.

Undeveloped Acreage. The success of Chenal Valley has increased the value of the Company’s undeveloped real estate surrounding the development. Sales of undeveloped real estate amounted to 22 acres in 2002, compared to 40 acres in 2001 and 5 acres in 2000. Chenal Valley has also increased the value of Company-owned timberland immediately west of the development as reflected in timberland prices received on sales in this area.

Del-Tin Fiber

Deltic owns 50 percent of the membership interest of Del-Tin Fiber, a joint venture to manufacture and market MDF. The Del-Tin Fiber plant is located near El Dorado, Arkansas. Construction of the plant was completed, and initial production began, in 1998. The plant is designed to have an annual capacity of 150 million square feet (“MMSF”), on a 3/4-inch basis, making it one of the largest plants of its type in the world. However, since production began in April 1998, both operating and financial performance have been below expectations. As a result, on April 25, 2002, Deltic announced that Banc One Capital Markets, Inc. had been retained as financial advisor to assist in the evaluation of strategic alternatives for the Company’s investment in Del-Tin Fiber. Subsequently, Deltic’s management and Board of Directors completed its review of strategic alternatives and determined that the MDF business does not represent a growth area for the Company. Consequently, an announcement was made that the Company intends to exit this business upon the earliest, reasonable opportunity provided by the market. As a result of this decision, the Company’s evaluation of possible impairment of the carrying value of its investment in the equity method investee, as required by current accounting standards, resulted in the determination that the Company’s investment was impaired as of December 31, 2002. Therefore, a non-cash write-off of Deltic’s investment in Del-Tin Fiber, amounting to $18.7 million pretax, was recorded during 2002.

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Medium Density Fiberboard. MDF, which is used primarily in the furniture, flooring, and molding industries, is manufactured from sawmill residuals such as chips, shavings, and sawdust, held together by an adhesive bond. Although the technology has existed for decades, recent improvements in the manufacture of MDF have increased both the quality and consistency of the product. MDF, with its Areal wood@ appearance and the ability to be finely milled and accept a variety of finishes, competes primarily with lumber.

Production. The plant produced 97 MMSF of MDF in 2002 versus 52 MMSF in 2001 and 94 MMSF during 2000. Start-up difficulties and operational problems with the plant’s press and heat energy system limited production to levels significantly below capacity. The problems with the press were corrected in mid-1999. As natural gas prices escalated during the last half of 2000, the decision was made in late January 2001, to temporarily suspend operations until the heat energy system could be modified. Following completion of a capital project to modify this system, the plant resumed operations in June 2001. Rectification of the heat energy system will enable the plant’s operations to increase production levels closer to the plant’s capacity of 150 MMSF per year, as market conditions improve. In addition, manufacturing cost per thousand square feet should be lower, as fixed costs for the facility are allocated to this increased production.

Raw Materials. The Del-Tin plant provides an additional outlet for wood chip production from the Waldo Mill. Pursuant to a fiber supply agreement that expires in 2008, the Company has agreed to sell, and Del-Tin Fiber to buy, substantially all residual wood chips from the Waldo Mill. However, during the period in 2001 that Del-Tin Fiber was shut down, these chips were sold to a third party. In addition, Del-Tin Fiber has an option to purchase residual wood chips from the Ola Mill and pulpwood chips, shavings, and sawdust from the Waldo Mill. Should the Company sell its interest in Del-Tin Fiber, either party may terminate the agreement with 60 days notice. However, due to the proximity of the Waldo Mill to the Del-Tin plant, it is believed the Company would continue to be a logical supplier to the facility if such a sale occurred. During 2002 and 2001, Deltic sold approximately $3,018,000 and $1,924,000, respectively, of these lumber manufacturing by-products to Del-Tin Fiber.

Discontinued Agriculture Operations

In August 2000, the Company’s Board of Directors approved the disposal of Deltic’s former Agriculture segment assets, subject to using the sales proceeds to purchase additional Southern Pine timberland, via tax-deferred exchanges. As a result, activities of this segment have been accounted for as discontinued operations. Deltic engaged an agricultural land consulting and brokerage firm to act as advisors in evaluating and marketing about 50,000 acres (approximately 38,800 acres net to Deltic) of farmland located in northeast Louisiana. All former agricultural lands, as well as all related agriculture operational assets, had been sold by December 31, 2001, and the proceeds were used to purchase approximately 37,000 acres of Southern Pine timberland. This initiative provided the Company a significant and unique opportunity to advance its strategy of growing its core forest products business.

Products and Competition

The Company’s principal forest products are timber; timberland; lumber products, primarily finished lumber; residual wood products; and real estate.

Timber. Timber harvested from the timberlands is utilized by the Company’s sawmills or sold to third parties. The Company’s timber sales to third parties accounted for approximately 13 percent, 14 percent, and 13 percent of consolidated net sales in 2000, 2001, and 2002, respectively.

The Company competes in the domestic timber market with numerous private industrial and non-industrial land and timber owners. Competitive factors with respect to the domestic timber market generally include price, species and grade, proximity to wood manufacturing facilities, and accessibility.

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Land Sales. Timberland sold by the Company to third parties consists of both non-strategic timberland and lands with potential for higher and better use, and amounted to ten percent, seven percent, and three percent of consolidated net sales in 2000, 2001, and 2002, respectively.

Lumber Products. The Company’s sawmills produce a wide variety of products, including dimension lumber, boards, timbers, decking, and secondary products such as finger-jointed studs. Lumber is sold primarily to wholesalers and treaters in the South and Midwest and is used in residential construction, roof trusses, laminated beams, and remanufactured items. During 2000, 2001, and 2002, lumber sales as a percentage of consolidated net sales were approximately 51 percent, 46 percent, and 57 percent, respectively.

The forest products market is highly competitive with respect to price and quality of products. In particular, competition in the commodity-grade lumber market in which the Company competes is primarily based on price. Deltic competes with other publicly held forest products companies operating in the U.S., many of which have significantly greater financial resources than the Company, as well as privately held lumber producers. The Company also competes with producers in Canada and overseas, regions that have increased their share of the U.S. lumber market in recent years. In addition, Deltic’s management expects the Company’s products to experience additional increased competition from engineered wood products and other substitute products. Due to the geographic location of Deltic’s timberlands and its high-quality timber, in addition to the Company’s active timber management program, strategically located and efficient sawmill operations, and highly motivated workforce; Deltic has been able to compete effectively.

Residual Wood Products. The Company’s sawmills produce wood chips, shavings, sawdust, and bark as by-products of the conversion process. During 2000, 2001, and 2002, sales of these residual products accounted for eight percent, seven percent, and nine percent, respectively, of Deltic’s consolidated net sales. Wood chips are the primary source of residual sales and are typically sold to Del-Tin Fiber or to paper mills. In 2002, Deltic’s sawmills produced 298,127 tons of wood chips. The Company expects to continue to sell a significant portion of its wood chip production to Del-Tin Fiber for use in the production of MDF.

Real Estate. The Company develops and markets residential lots and commercial sites. Deltic generally provides the supporting infrastructure. Residential lots are sold to homebuilders and individuals, while commercial sites are sold to developers and businesses. The Company also sells undeveloped acreage. During 2000, 2001, and 2002, the sales of residential lots, commercial sites, and undeveloped acreage as a percentage of consolidated net sales were 12 percent, 18 percent, and 10 percent, respectively. The sale of commercial property can have a significant impact on the Company’s sales, but is unpredictable and irregular.

Seasonality

The Company’s operating segments are subject to variances in financial results due to several seasonal factors. The majority of timber sales are typically generated in the first half of the year due primarily to weather conditions and historically stronger timber prices. Increased housing starts during the spring usually push lumber prices up and, in turn, can result in higher timber prices. Forestry operations generally incur expenses related to silvicultural treatments which are applied during the fall season to achieve maximum effectiveness.

Business Segment Data

Information concerning net sales, operating income, and identifiable assets attributable to each of the Company’s business segments is set forth in Item 7, “Management’s Discussion and Analysis”; and Note 19 to the consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of Part II of this report.

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Decline in Availability of Federal Timber

Various factors, including environmental and endangered species concerns, have limited, and will likely continue to limit, the amount of timber offered for sale by certain U.S. government agencies, which historically have been major suppliers of timber to the U.S. forest products industry. During 2002, the Company acquired approximately 22 percent of its timber supply for its Ola Mill from federal sources, primarily the Ouachita and Ozark National Forests. Any future decline in the availability of timber from federally owned lands will require that the Company, in order to supply the Ola Mill, rely more heavily on harvests from the Company’s timberlands, including harvests from timberlands acquired in the future to the extent that suitable opportunities arise, and on the acquisition of timber from other sources, such as private timber owners. The Company’s Waldo Mill does not currently process any timber acquired from federal sources.

Environmental Matters

The Company is subject to extensive and changing federal, state, and local environmental laws and regulations relating to the protection of human health and the environment, including laws relating to air and water emissions, the use of herbicides on timberlands, regulation of “wetlands”, and the protection of endangered species. Environmental legislation and regulations, and the interpretation and enforcement thereof, are expected to become increasingly stringent. The Company has made, and will continue to make, expenditures to comply with such requirements in the ordinary course of its operations. Historically, these expenditures have not been material and the Company expects that this will continue to be the case. Liability under certain environmental regulations may be imposed without regard to fault or the legality of the original actions, and may be joint and several with other responsible parties. As a result, in addition to ongoing compliance costs, the Company may be subject to liability for activities undertaken on its properties prior to its ownership or operation and by third parties, including tenants. The Company is not involved with any such sites as of this time. The Company leases the rights to drill for oil and gas on some of its lands to third parties. Pursuant to these leases, the lessee indemnifies the Company from environmental liability relating to the lessee’s operations. Based on its present knowledge, including the fact that the Company is not currently aware of any facts that indicate that the Company will be required to incur any material costs relating to environmental matters, and currently applicable laws and regulations, the Company believes that environmental matters are not likely to have a material adverse effect on the Company’s financial condition, results of operations, or liquidity.

In addition, the federal “Endangered Species Act” protects species threatened with possible extinction and restricts timber harvesting activities on private and federal lands. Certain of the Company’s timberlands are subject to such restrictions due to the presence on the lands of the red cockaded woodpecker, a species protected under the Act. There can be no assurance that the presence of this species or the discovery of other protected species will not subject the Company to future harvesting restrictions. However, based on the Company’s knowledge of its timberlands, the Company does not believe that its ability to harvest its timberlands will be materially adversely effected by the protection of endangered species.

Employees

As of February 28, 2003, the Company had 511 employees.

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Item 2. Properties

The Company’s properties, primarily located in Arkansas and north Louisiana, consist principally of fee timber and timberlands, purchased stumpage inventory, two sawmills, and land held for residential and commercial development and sale. As of December 31, 2002, the Company’s gross investment in timber and timberlands; gross property, plant, and equipment; and investment in real estate held for development and sale consisted of the following:

“Timberlands” consist of the historical cost of land on which fee timber is grown and related land acquisitions stated at acquisition cost. “Fee timber” consists of the historical cost of company standing timber inventory, including capitalized reforestation costs, and related timber acquisitions stated at acquisition cost. “Logging facilities” consist primarily of the costs of roads constructed and other land improvements. “Purchased stumpage inventory” consists of the purchase price paid for unharvested third party timber. “Real estate held for development and sale” consist primarily of the unamortized costs, including amenities, incurred to develop the real estate for sale and a retail center held for sale. “Land and land improvements” consist primarily of improvements at the Company’s two sawmill locations. “Buildings and structures” and “Machinery and equipment” primarily consist of the sawmill buildings and equipment and the Company’s two real estate sales offices.

The Company owns all of the properties discussed above. Other than approximately $.2 million of owner-financed acquisitions of timberland, the Company’s properties are not subject to mortgages or other forms of debt financing. (For further information on the location and type of the Company’s properties, see the descriptions of the Company’s operations in Item 1.)

Item 3. Legal Proceedings

From time to time, the Company is involved in litigation incidental to its business. Currently, there are no material legal proceedings.

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

None.

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Executive Officers of the Registrant

The age (at January 1, 2003), present corporate office, and length of service in office of each of the Company’s executive officers and persons chosen to become officers are reported in the following listing. Executive officers are elected annually but may be removed from office at any time by the Board of Directors.

Robert C. Nolan—Age 61; nonemployee Chairman of the Board effective December 17, 1996. For the past 31 years, Mr. Nolan has been Managing Partner of Munoco Company L.C., an Arkansas partnership principally engaged in the exploration for and production of oil and gas. In addition, Mr. Nolan has over 30 years experience in timberland management.

Ron L. Pearce—Age 61; President and Chief Executive Officer and a director of the Company effective December 17, 1996. From June 1993 to December 1996, Mr. Pearce was President of Deltic Farm & Timber Co., Inc. (“Deltic Farm & Timber”), the predecessor corporation of the Company. Prior to such time, Mr. Pearce was Manager of Operations and Planning for Deltic Farm & Timber, a position he held beginning in February, 1991. (On February 20, 2003, Deltic announced that Mr. Pearce intends to retire on August 1, 2003. The Company’s Board of Directors will elect the succeeding President and Chief Executive Officer.)

Clefton D. Vaughan—Age 61; Vice President, Treasurer, and Chief Financial Officer effective January 1, 1997. From October 1994 to December 1996, Mr. Vaughan was Vice President of Murphy Oil Corporation, a position he also held from 1989 through October 1992. From October 1992 to October 1994, Mr. Vaughan was Vice President of Murphy Exploration & Production Company.

W. Bayless Rowe—Age 50; Vice President, General Counsel, and Secretary effective May 1, 2000. From January 1, 1997 to April 2000, Mr. Rowe was General Counsel and Secretary for the Company. From 1988 to December 1996, Mr. Rowe was Secretary and General Attorney of Murphy Oil Corporation.

David V. Meghreblian—Age 44; Vice President of Operations effective May 1, 2000. From November 1996 to April 2000, Mr. Meghreblian was General Manager of Planning and Investor Relations for the Company. Prior to such time, Mr. Meghreblian was General Manager of Project Development, a position he held beginning in November 1995.

Emily R. Evers—Age 52; Controller from 1989 for the Company and its predecessor.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

Common stock of Deltic Timber Corporation is traded on the New York Stock Exchange under the symbol DEL. The following table sets forth the high, low, and ending prices, along with the quarterly dividends declared, for each of the quarters indicated:

¹ Daily closing price.

² At period end.

Common stock dividends were declared for each quarter during 2002 and 2001. As of March 15, 2003, there were approximately 1,690 stockholders of record of Deltic’s common stock.

The following table sets forth information as of December 31, 2002, with respect to Deltic common stock issuable under the Company’s compensation plans.

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Item 6. Selected Financial Data

The following table presents certain selected consolidated financial data for each of the years in the five-year period ended December 31, 2002:

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Deltic Timber Corporation (“Deltic” or the “Company”) is a natural resources company engaged primarily in the growing and harvesting of timber and the manufacture and marketing of lumber. The Company owns approximately 431,100 acres of timberland, primarily in Arkansas and north Louisiana. The Company’s sawmill operations are located at Ola in central Arkansas (the “Ola Mill”) and at Waldo in south Arkansas (the “Waldo Mill”). In addition to its timber and lumber operations, the Company is engaged in real estate development in central Arkansas.

The Company also holds a 50 percent interest in Del-Tin Fiber L.L.C. (“Del-Tin Fiber”), a joint venture to manufacture and market medium density fiberboard (“MDF”). Since production began in April 1998, both operating and financial performance have been below expectations. As a result, on April 25, 2002, Deltic announced that Banc One Capital Markets, Inc. had been retained as financial advisor to assist in the evaluation of strategic alternatives for the Company’s investment in Del-Tin Fiber. Subsequently, Deltic’s management and Board of Directors completed its review of strategic alternatives and determined that the MDF business does not represent a growth area for the Company. Consequently, an announcement was made that the Company intends to exit this business upon the earliest, reasonable opportunity provided by the market. (For additional information about the Company’s investment in Del-Tin Fiber, refer to Note 4 to the consolidated financial statements.)

On December 31, 2002, Deltic redeemed the 600,000 outstanding shares of its 7.54 percent redeemable preferred stock. This was primarily effected by utilizing proceeds from the Company’s issuance of $30 million of privately placed, long-term senior notes on December 20, 2002. These notes bear interest at a fixed stated rate of 6.01 percent. This redemption will produce an after-tax savings to the Company when comparing the non-deductible carrying cost of the preferred stock, in the form of dividends, to the deductible interest expense related to the new debt. Dividends on the preferred stock had amounted to approximately $2.3 million annually.

In August 2000, the Company’s Board of Directors approved the disposal of Deltic’s agriculture segment assets, subject to using the sales proceeds to purchase additional Southern Pine timberland, via tax-deferred exchanges. As a result, activities of this segment have been accounted for as discontinued operations. Deltic engaged an agricultural land consulting and brokerage firm to act as advisors in evaluating and marketing about 50,000 acres (approximately 38,800 acres net to Deltic) of farmland located in northeast Louisiana. The sale of all farmland and related operational assets was successfully concluded during 2001. (For additional information about the Company’s discontinued agriculture operations, refer to Note 2 to the consolidated financial statements.)

The wood products industry is affected by a number of factors, including general economic conditions, interest rates, foreign exchange rates, housing starts, residential repair and remodeling activity, commercial construction, industry capacity and production levels, the availability of raw materials, and weather conditions. In 2002, the domestic industry continued to suffer from an oversupply of lumber. Despite the highest level of housing starts in 16 years and an increase in lumber consumption, greater domestic production combined with increased imports outpaced demand; and lumber prices declined to their lowest levels since 1992.

Although lumber prices declined in 2002, Deltic’s average pine sawtimber price increased due to strong local markets and timing of sales. Improved operations at both sawmills enabled the Mills segment to increase lumber production and reduce its operating loss in 2002 despite a lower average lumber price. Over the past three years, pine sawtimber prices have remained relatively stable while lumber prices have declined significantly, which was a significant factor in the Company’s sawmills operating at loss for the period.

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Results of Operations

Deltic’s operating results for 2002 were a loss of $13.6 million, $1.33 a share after preferred dividends, compared to net income of $10 million, $.65 a share, for 2001 and $13.6 million, $.93 a share for 2000. Included in 2002’s results was a non-cash write-off of the Company’s investment in Del-Tin Fiber totaling $18.7 million and a related deferred tax benefit of $7.3 million. For the years of 2001 and 2000, net income included earnings from discontinued agriculture operations, net of income taxes, of $8.4 million, $.70 a share, and $10.9 million, $.89 a share, respectively. Continuing operations results were a loss of $13.6 million in 2002, $1.33 a share, and income of $1.6 million in 2001, a loss of $.05 a share. (Per share amounts for each year were after preferred dividends.) The decrease of $15.2 million during 2002 was due primarily to the previously mentioned Del-Tin Fiber write-off coupled with lower operating income from Deltic’s Real Estate segment. In 2000, income from continuing operations totaled $2.7 million, $.04 a share.

During 2002, operating income was $10.7 million, a decrease of $5.1 million when compared to 2001. The Company’s Woodlands operations increased $.2 million as a result of higher pine sawtimber price, coupled with an increase in harvest levels of pine sawtimber, partially offset by a reduction in sales of non-strategic timberland and timberland for higher and better use. The Mills segment’s operating results improved $.7 million due primarily to a $20 per thousand board feet (“MBF”) drop in production cost per MBF sold, which more than offset an $8 per MBF decrease in the average lumber sales price. Operating income for Deltic’s Real Estate segment decreased $5.4 million, primarily the result of a reduction in both the number and average sales price of residential lots sold combined with decreased sales of commercial acreage.

Operating income for 2001 decreased $2.3 million compared to 2000, to $15.8 million. The Woodlands segment decreased $6.4 million due primarily to a decrease in sales of non-strategic timberland and timberland for higher and better use, combined with an increase in the cost of fee timber harvested and lower prices for pine sawtimber, partially offset by higher pine sawtimber harvest volume. Deltic’s Mills segment operating results decreased $.7 million as the result of an $18 per MBF drop in the average lumber sales price, partially offset by a $10 per MBF drop in production cost per MBF sold. Real Estate operations increased $5 million and benefited from a 34 percent increase in the number of residential lots sold at a higher average price per lot, combined with increased sales of commercial acreage.

In the following tables, Deltic’s net sales and results of operations are presented for the three years ended December 31, 2002. A detailed review, by segment, of the information presented follows the tables.

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Woodlands

Deltic’s Woodlands operations generated net sales of $37 million in 2002, $38.3 million in 2001, and $41.5 million in 2000. This segment’s operating income totaled $22.5 million in 2002, compared to $22.3 million in 2001 and $28.7 million in 2000.

Selected financial and statistical data for the Woodlands segment is shown in the following table.

During 2002, net sales decreased $1.3 million, or four percent, to $37 million. Pine sawtimber sales increased $3.2 million in 2002 which reflects a $1.7 million increase attributable to higher sales volume and $1.5 million increase due to higher sales price. The Company harvested 713,779 tons of pine sawtimber in 2002, an increase of six percent when compared to 673,055 tons in 2001. To facilitate Deltic’s growth, a timberland acquisition program was begun in late 1996 and has added 110,400 acres to the Company’s timberland base. Average sales price for pine sawtimber was $41 per ton in 2002, which compares to $39 per ton in 2001, an increase of five percent. Hardwood sales decreased $.2 million in 2002 due to lower volume.

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Net sales generated from the sale of non-strategic or higher and better use timberland decreased $4.4 million to $3.4 million during the 2002 period. Timberland sales totaled 3,418 acres at an average price of $1,000 per acre during 2002 versus 3,315 acres at $2,400 per acre in 2001. Other net sales for Woodlands increased slightly.

Net sales were $38.3 million in 2001, a decrease of $3.2 million, or eight percent, when compared to 2000. Sales of pine sawtimber increased $.7 million over 2000, which reflects a $4.2 million increase from higher sales volume, partially offset by a $3.5 million decrease attributable to lower average sales price. Pine sawtimber harvest level increased 19 percent in 2001 to 673,055 tons which compares to 566,557 tons in 2000. Average sales price for the Company’s pine sawtimber was $39 per ton in 2001 versus $45 per ton in 2000, a 13 percent decline. Sales of hardwood sawtimber decreased $.7 million due to the Company selling tracts of Louisiana hardwood timberland during 2000. During 2001, sales of timberland totaled $7.8 million, a decrease of $3.3 million from 2000. Net sales included the sale of 3,315 acres of timberland at an average price of $2,400 per acre in 2001 compared to similar sales of 5,254 acres for $2,100 per acre in 2000. Other net sales for this segment were slightly higher.

Operating income of $22.5 million for 2002 was $.2 million more than in 2001 due to reductions in costs and expenses which more than offset the decrease in net sales discussed above. The cost of timberland sales and related commissions expense decreased $.5 million. Timber replanting expenses decreased $.4 million because the 2001 period experienced higher-than-normal replanting expenses due to the extreme heat and drought conditions which occurred in the Company’s operating area during the summer of 2000. Expense for the Company’s cull timber removal programs was $.2 million less than in 2001. The cost of fee timber harvested was down $.3 million for the year due to harvest mix.

Woodlands’ operating income decreased $6.4 million to $22.3 million in 2001. In addition to the previously mentioned decrease in net sales, the cost of fee timber harvested increased $1.5 million due mainly to higher pine sawtimber harvest levels and a higher cost per ton of timber harvested. A $.4 million increase in timber replanting expenses was the result of the previously discussed heat and drought conditions during the summer of 2000. Commission expense related to timberland acreage sales increased $.5 million.

Mills

Net sales for the Company’s Mills segment were $70.4 million for 2002, compared to $57.4 million for 2001 and $64.9 million for 2000. For 2002, this segment recorded an operating loss of $6.4 million, which compares to losses of $7.1 million and $6.4 million for 2001 and 2000, respectively.

Selected financial and statistical data for the Mills segment is shown in the following table.

In 2002, net sales totaled $70.4 million, an increase of 23 percent when compared to $57.4 million in 2001. Lumber sales increased $11 million due primarily to a $12.3 million increase which resulted from higher sales volume, partially offset by a $1.3 million reduction from lower average sales price. The already depressed lumber market continued to deteriorate during 2002 and resulted in Deltic’s lowest sales realizations since 1992. During 2002, average sales price for lumber was $298 per MBF, a three percent decrease from

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$306 per MBF in 2001. The Company’s sawmills experienced a 26 percent increase in lumber sales volume, to 199.5 million board feet (“MMBF”) from 158.2 MMBF in 2001, due to increased operating efficiencies achieved from recently completed capital projects, combined with temporary lumber production curtailments during 2001. Sales of residual products were up $1.5 million.

When compared to 2000, net sales for 2001 decreased $7.5 million, or 12 percent, to $57.4 million. Decreases in both sales price and volume combined to produce a $7.2 million reduction in lumber sales, $3 million due to price and $4.2 million due to sales volume. Both lumber production and sales were negatively impacted by the depressed lumber market. Average sales price of $306 per MBF was $18 per MBF less than in 2000, and sales volume decreased eight percent, from 172.1 MMBF in 2000 to 158.2 MMBF in 2001. The decrease in sales volume was due to temporary reductions in lumber production during the first five months of 2001 in response to market conditions. Residual product sales were down $1.2 million due, also, to the reduction in lumber production.

A loss from operations of $6.4 million during 2002 compared to 2001’s loss of $7.1 million. The $.7 million improvement was primarily the result of a six percent decrease in the production cost per MBF of lumber sold.

For 2001, operations reported a loss of $7.1 million which compared to a loss of $6.4 million in 2000. The decrease in financial results was due mainly to the reduction in net sales, partially offset by lower manufacturing costs which benefited from a $25 per MBF reduction in raw material cost for logs used in the Company’s sawmills. A $.3 million write-down of the Company’s lumber inventories to reflect its net realizable value was recorded during 2001.

Real Estate

The Company’s Real Estate operations produced net sales of $15.3 million in 2002, $25 million in 2001, and $18 million in 2000. Operating income for this segment was $2 million in 2002, which compares to $7.4 million in 2001 and $2.4 million in 2000.

Selected financial and statistical data for the Real Estate segment is shown in the following table.

Net sales in 2002 decreased $9.7 million, 39 percent, from $25 million in 2001. Revenue from the sale of residential lots was down $7.3 million as a result of a 29 percent decrease in the number of lots sold, from 198 in 2001 to 141 in 2002, combined with a reduction in average sales price due to sales mix, from $85,400 per lot to $68,200. During 2002, 150 lots in three existing neighborhoods were developed and offered for sale in Chenal Valley. Because of weather-related construction delays, an additional 50 lots in a new neighborhood

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adjoining the Company’s second golf course at Chenal Country Club, the amenity around which Chenal Valley is centered, were not offered for sale in 2002 as planned. A .53-acre commercial outparcel tract was sold in 2002 at a sales price of $.1 million. In comparison, commercial sales activity in 2001 included 14 acres at an average price of $160,700 per acre. The sale of 22 acres of undeveloped acreage for $10,000 per acre in 2002 compared to sales of approximately 40 acres for $6,900 per acre in 2001. Chenal Country Club, Inc. produced net sales of $4.9 million for 2002 versus $4.8 million for 2001.

During 2001, net sales of $25 million were $7 million more than in 2000, an increase of 39 percent. Sales of residential lots increased by 34 percent, from 148 lots in 2000 to 198 lots in 2001, with an increase in average sales price from $54,000 to $85,400 per lot due to sales mix. During 2001, 217 lots were developed and offered for sale in four neighborhoods in the Chenal Valley development, including 77 lots in the initial neighborhood on the new golf course. Commercial sales revenue in 2001 totaled $2.3 million for the sale of about 14 acres at an average price per acre of $160,700. In 2000, commercial sales of $5.1 million for approximately 10 acres averaged $496,300 per acre and included the 50,000-square-foot office complex known as the GMAC Building. Sales of about 40 acres of undeveloped real estate for $6,900 per acre were recorded in 2001 which compares to sales of five acres for $1,900 per acre in 2000. Net sales for Chenal Country Club, Inc. totaled $4.8 million in 2001, an increase of $.4 million.

The Real Estate segment’s operating income of $2 million for 2002 decreased $5.4 million when compared to 2001. Operating income was $7.4 million for 2001, an increase of $5 million over 2000. The changes were due primarily to the same factors impacting net sales.

Corporate

Operating expense for Corporate functions was $6.8 million for 2002, which compares to $6.4 million for 2001 and $6.5 million for 2000. The increase of $.4 million during 2002 was due mainly to higher general and administrative expenses.

Eliminations

Intersegment sales of timber from Deltic’s Woodlands segment to the Mills segment were $18.2 million in 2002, $14.3 million in 2001, and $14.9 million in 2000. The $3.9 million increase during 2002 was due primarily to an increase in the percentage of logs supplied to the Company’s manufacturing facilities from its timberlands. The decrease of $.6 million in 2001 was because of a lower average pine sawtimber price. Intersegment timberland sales commissions totaled $.4 million in 2001, compared to zero in 2000 and 2002.

Equity in loss of and write-off of investment in Del-Tin Fiber

For the year ended December 31, 2002, the Company recorded equity in the loss of Del-Tin Fiber, totaling $9.5 million, an increase of $.4 million when compared to 2001’s equity loss of $9.1 million. Deltic’s share of operating losses was $10.9 million in 2000.

On April 25, 2002, Deltic announced that Banc One Capital Markets, Inc. had been retained as financial advisor to assist in the evaluation of strategic alternatives for the Company’s investment in Del-Tin Fiber. Subsequently, Deltic announced that following a review of the strategic alternatives it was determined that the MDF business did not represent a growth area for the Company. Consequently, the Company intends to exit this business upon the earliest, reasonable opportunity provided by the market. As a result of this decision, the Company’s evaluation of possible impairment of the carrying value of its investment in the equity method investee, as required by Accounting Principles Board Opinion (“APB”) 18, resulted in the determination that the Company’s investment was impaired as of December 31, 2002. Therefore, a non-cash write-off of Deltic’s investment in Del-Tin Fiber, amounting to $18.7 million after an accrual of $4.5 million representing the Company’s share of the facility’s 2003 sinking fund obligation, was recorded during 2002. (For additional information about the Company’s investment in Del-Tin Fiber, refer to Note 4 to the consolidated financial statements.)

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Selected financial and statistical data for Del-Tin Fiber is shown in the following table.

For 2002, MDF production volume was 96.7 million square feet (“MMSF”) and sales volume totaled 97.7 MMSF, versus production and sales volume of 52 MMSF and 49.3 MMSF, respectively, for 2001 which was impacted by a four-month shutdown. Average sales price for 2002 was $320 per thousand square feet (“MSF”), a decrease of $19 when compared to $339 per MSF for 2001 due primarily to a change in product mix. Manufacturing costs per MSF for 2002 were down 19 percent due to 2001’s fixed costs being allocated to reduced production.

In January 2001, Del-Tin Fiber’s facility was shut down due to weak market conditions and high natural gas prices and to modify the plant’s heat energy system. After completion of the modifications, production resumed during June 2001. As a result of the four-month shutdown, MDF production volume was down 45 percent, from 94.3 MMSF in 2000 to 52 MMSF in 2001, and sales volume was 49.3 MMSF in 2001 versus 91.1 MMSF in 2000. Although average sales price increased $9 per MSF, from $330 to $339 per MSF, fixed costs were allocated to reduced production causing unit manufacturing costs to increase 17 percent in 2001.

Interest Income/Expense

During 2002, interest income was $.3 million, compared to $.9 million in 2001 and $.5 million in 2000. Interest and other debt expense was $4.5 million in 2002, $5.7 million in 2001, and $4.9 million in 2000. Interest income decreased $.6 million during 2002 and increased $.4 million during 2001 because the year of 2001 benefited from interest earned from agricultural asset and timberland sales proceeds deposited with trustees. The $1.2 million reduction in interest and other debt expense during 2002 was due to decreased average borrowing and reduced interest rates. For 2001, the increase of $.8 million was due to additional borrowings required by Deltic’s timberland acquisition program, other capital projects, stock repurchase program, and advances to Del-Tin Fiber.

Income Taxes

An income tax benefit of $7.7 million was recorded for the Company’s continuing operations for 2002, versus income tax expense of $.7 million for 2001 and $.4 million for 2000. The effective income tax rate for continuing operations was 36 percent, 31 percent, and 13 percent in 2002, 2001, and 2000, respectively. The decrease of $8.4 million during 2002 was the result of a $7.3 million deferred tax benefit related to the Del-Tin Fiber write-off and to lower pretax income exclusive of the write-off. The Company’s income tax expense related to continuing operations increased $.3 million during 2001 due to the impact of recording a state tax benefit for operating loss carryforwards of a lesser amount than in 2000, partially offset by lower pretax income.

Income from Discontinued Operations

For 2001, income from discontinued agriculture operations, net of income tax, was $8.4 million, which compares to $10.9 million for 2000. Income tax expense totaled $5.3 million and $7 million for each year, respectively. The sale of approximately 18,400 acres of farmland at a pretax gain of $13.4 million benefited the year of 2001. The disposal of all agriculture assets was completed during 2001. (For additional information about the Company’s discontinued agriculture operations, refer to Note 2 to the consolidated financial statements.)

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Liquidity and Capital Resources

Cash Flows and Capital Expenditures

Net cash provided by operating activities totaled $32.5 million for the year ended December 31, 2002, which compares to $41.2 million for 2001 and $42.9 million for 2000. Changes in operating working capital, other than cash and cash equivalents, provided cash of $1.5 million in 2002, $2.9 million in 2001, and $2.1 million in 2000. The Company’s accompanying Consolidated Statements of Cash Flows identify other differences between net income/(loss) and cash provided by operating activities for each reported year.

Capital expenditures required cash of $24.2 million in 2002, $63.8 million in 2001, and $43.4 million in 2000. Other owner-financed capital expenditures, not requiring cash, for acquisitions of timberland amounted to $.2 million in 2001. Total capital expenditures, by segment, for the years ended December 31, 2002, 2001, and 2000 are presented in the following table.

Woodlands capital expenditures included timberland acquisitions of approximately 1,900 acres at a cost of $3.2 million in 2002, approximately 28,000 acres at a cost of $42.2 million in 2001, and approximately 15,500 acres at a cost of $22.7 million in 2000. (Purchases of timberland designated as “replacement property”, as required by the tax-deferred exchange of Deltic’s agriculture segment assets, utilized $38.3 million for about 26,200 net acres in 2001 and $17.6 million for about 10,800 net acres in 2000 and are included in capital expenditures of this segment for the respective years.) Reforestation site preparation and planting required expenditures of $1.5 million in 2002, $1.7 million in 2001, and $1.5 million in 2000 and were the result of expansion of the Company’s planting program due to recent acquisitions of timberland and to regeneration harvests.

During 2002, $1.9 million was expended to complete the project to replace the Waldo Mill’s vertical saw assembly with a curve sawing gang at a total cost of $3.9 million. The project has improved log recovery, increased hourly throughput capability, and enabled further diversity of product mix. There were no significant capital projects during 2002 at the Company’s Ola Mill. During 2001, $.9 million was expended to complete payment of the project to replace the Ola Mill’s vertical saw assembly and debarker with a curve sawing gang and faster debarker. The project was completed and placed in service in December 2000, at a total cost of $5.3 million, and has improved log recovery, increased hourly throughput capability, enabled further diversity of product mix, and allowed debarking of larger logs. At the Waldo Mill, $2.1 million was spent during 2001 toward the installation of its curve sawing gang.

Capital expenditures for Real Estate operations related to the cost of lot development totaled $4.5 million in 2002, compared to $4.2 million in 2001 and $5.4 million in 2000. Construction of The Village at Rahling Road, Deltic’s 35,000-square-foot retail center in Chenal Valley, was completed during 2000 and required expenditures of $1.2 million in 2000. In addition, expenditures for tenant-specified interior finishing for this retail center required $.3 million in 2002 and $.2 million in 2001. Site work for adjacent commercial outparcel sites totaled $.2 million in 2000. Infrastructure construction required $.5 million in 2002 and $.7 million in 2001, with no significant such expenditures in 2000. Construction of the new 18-hole golf course

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at Chenal Country Club, initiated in 2001, required expenditures of $3.8 million in 2002 and $4.8 million in 2001. Other expenditures were primarily for various amenity improvements.

Corporate operations had capital expenditures for computer equipment and software of $.1 million in 2002, $.2 million in 2001, and $.1 million in 2000. During 2000, $.2 million was expended for the purchase of an additional investment in a consolidated entity.

Deltic had commitments of $13.8 million for capital projects in progress at December 31, 2002, including $8.3 million for timberland acquisitions, $.6 million for reforestation site preparation and planting; $.8 million for a second debarker at the Waldo Mill to further improve hourly throughput capability; and $3.6 million related to residential lot and commercial development, infrastructure construction, and amenity improvements at the Company’s real estate developments. Commitments at the Chenal Valley development included $2.3 million for development of residential lots in four neighborhoods and $.9 million for various amenity projects, including $.4 million for completion of the second golf course at Chenal Country Club.

The net change in purchased stumpage inventory required cash of $1.8 million in 2002 and provided cash of $4.3 million in 2001 and $.6 million in 2000. Advances to Del-Tin Fiber by the Company amounted to $12.2 million, $14.7 million, and $12.9 million in 2002, 2001, and 2000, respectively. During 2000, $.9 million of U.S. government securities matured. Proceeds from the disposal of agriculture segment assets, primarily 38,800 net acres of farmland and related machinery and equipment, provided cash of $18.1 million in 2001 and $20.9 million in 2000. During 2000, $14.9 million of the proceeds from the sales of both farm and timber land were held by a trustee to be used to acquire timberland designated as “replacement property” for income tax purposes, as required for tax-deferred exchanges. These proceeds were received from the trustee in 2001 and utilized for timberland acquisition expenditures as required. During 2001, $2.2 million of proceeds from sales of appreciated timberland parcels were deposited and held by a trustee in a similar tax-deferred exchange. In 2002, these proceeds were received from the trustee, and $2.1 million was utilized to acquire timberlands as required while the remaining $.1 million was deposited into the Company’s operating funds account and subject to applicable income taxes. An additional $.4 million of similar proceeds was held by a trustee at the end of 2002. As necessary to accomplish the tax-deferred exchange of farmland for timberland, advances in the form of notes receivable, amounting to $16.4 million, were made to accommodating title holders during 2000, with repayments received in 2001. Initiation fees received from members joining Chenal Country Club, which are accounted for as a reduction in the cost basis of the club rather than net sales, amounted to $1.1 million in 2002, $.8 million in 2001, and $.6 million in 2000.

During 2002, Deltic borrowed $63 million under its revolving credit facility and $3.5 million under a short-term facility, with repayments of $61 million and $3.5 million, respectively. In addition, the Company issued $30 million of privately placed, fixed-interest rate, long-term senior notes on December 20, 2002. (Upon this issuance, Deltic applied the proceeds towards its revolving credit facility and then borrowed $30 million under this facility on December 30, 2002, to redeem its outstanding preferred stock.) In 2001, borrowings under available credit facilities provided $14.5 million, with repayments amounting to $18.3 million, and repayments of owner-financed debt required $.5 million. During 2000, the Company borrowed $64.7 million and made debt repayments, totaling $32.1 million, including $.2 million toward owner-financed debt.

Purchases of treasury stock required cash of $.7 million in 2002, $1 million in 2001, and $10 million in 2000. The increase in bank overdraft was $.9 million in 2002 and $1.4 million in 2000, but it decreased $1.4 million, to zero at year-end, during 2001. For the three years ended December 31, 2002, cash required to pay preferred stock dividends totaled $2.3 million in each year. The Company paid dividends on common stock of $3 million in 2002, 2001, and 2000. During 2002, proceeds from stock option exercises amounted to $1.2 million compared to zero in 2001 and 2000. In the fourth quarter of 2001, the Company eliminated certain stock option exercise procedures which resulted in fixed-plan accounting for its stock options. (For additional information about the Company’s stock-based compensation plan, refer to Note 15 to the consolidated financial statements.) In 2002 and 2001, the Company paid $.2 million and $.5 million, respectively, related to the placement of the $30 million of senior notes in 2002 and the negotiated replacement of its revolving credit facility during 2001.

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Financial Condition

Working capital at year-end totaled $2.1 million in 2002 and $13 million in 2001. Deltic’s working capital ratio at December 31, 2002, was 1.2 to 1, compared to 2.8 to 1 at the end of 2001. Cash and cash equivalents at the end of 2002 were $1.1 million compared to $6.1 million at the end of 2001. During 2002, total indebtedness of the Company increased $32 million to $116.2 million at year-end due primarily to borrowings used to redeem its $30 million of preferred stock on December 31, 2002. Deltic’s long-term debt to stockholders’ equity ratio was .713 to 1 at December 31, 2002, compared to .466 to 1 at year-end 2001.

Liquidity

The primary sources of the Company’s liquidity are internally generated funds, access to outside financing, and working capital. The Company’s current strategy for growth continues to emphasize its timberland acquisition program, in addition to expanding lumber production as market conditions allow and developing both residential and commercial properties at Chenal Valley and Red Oak Ridge.

To facilitate these growth plans, the Company has an agreement with a group of banks which provides an unsecured, committed revolving credit facility totaling $105 million. The agreement will expire on July 15, 2004. As of December 31, 2002, $59 million was available in excess of all borrowings outstanding under or supported by the facility. The credit agreement contains restrictive covenants, including limitations on the incurrence of debt and requirements to maintain certain financial ratios. (For additional information about the Company’s current financing arrangements, refer to Note 7 to the consolidated financial statements.)

In December 2000, the Company’s Board of Directors authorized a stock repurchase program of up to $10 million of Deltic common stock. As of December 31, 2002, the Company had expended $1.8 million under this program, with the purchase of 80,300 shares at an average cost of $22.06 per share, of which 31,800 shares at an average cost of $23.44 were purchased during 2002. In its two previously completed repurchase programs, Deltic purchased 479,601 shares at an average cost of $20.89 and 419,542 shares at a $24.68 per share average cost, respectively.

The Company has agreed to a contingent equity contribution agreement with Del-Tin Fiber and the group of banks from whom Del-Tin Fiber has obtained its $89 million credit facility. Under this agreement, Deltic and the other 50 percent owner of the joint venture have agreed to fund any deficiency in contributions to either Del-Tin Fiber’s required sinking fund or debt service reserve, up to a cumulative total of $17.5 million for each owner. In addition, each owner has committed to a production support agreement, under which each owner has agreed to make support obligation payments to Del-Tin Fiber to provide, on the occurrence of certain events, additional funds for payment of debt service until the plant is able to successfully complete a minimum production test. Both owners have also agreed to fund any operating working capital needs until the facility is able to consistently generate sufficient funds to meet its cash requirements. These contingent obligations are not reduced as a result of the Company’s write-off of the carrying value of its investment in Del-Tin Fiber as of December 31, 2002. Due to the probable requirement for Deltic to advance to Del-Tin Fiber amounts equal to its share of the facility’s 2003 quarterly sinking fund obligation, based on the plant’s 2003 cash flow projections, the Company recorded a liability to reflect this amount. This liability, in the amount of $4,478,000, is included in Deferred Revenues and Other Accrued Liabilities in the Company’s 2002 Consolidated Balance Sheet. No additional liability was required for such payments after 2003 due to projected improvement in Del-Tin Fiber’s cash flows and to the Company’s intent to exit the business or to refinance the joint-venture’s long-term debt by the end of 2003.

Tabular summaries of the Company’s contractual cash payment obligations and other commercial commitment expirations, by period, are presented in the following tables. (For information about the Company’s non-contractual cash payment obligations, refer to Note 18 to the consolidated financial statements.)

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Deltic’s management believes that cash provided from its operations and the remaining amount available under its credit facility will be sufficient to meet its expected cash needs and planned expenditures, including those of the Company’s continued timberland acquisition and stock repurchase programs, additional advances to Del-Tin Fiber, and capital expenditures, for the foreseeable future.

The preceding discussion of the Company’s liquidity and capital resources contains “forward-looking statements” which were made in reliance upon the safe harbor provisions of the Private Securities Reform Act of 1995. Such statements reflect the Company’s current expectations and involve risks and uncertainties. Actual results could differ materially from those included in such forward-looking statements.

Other Matters

Impact of Inflation

General inflation has not had a significant effect on the Company’s operating results during the three years ended December 31, 2002. The Company’s timber operations are more significantly impacted by the forces of supply and demand in the southern United States than by changes in inflation. Lumber manufacturing operations are affected by the supply of lumber available in the North American market and by the demand for lumber by both the North American and foreign export markets. Sales of real estate are affected by changes in the general economy and long-term interest rates, specifically as such may manifest themselves in the Central Arkansas region.

Market Risk

Market risk represents the potential loss resulting from adverse changes in the value of financial instruments, either derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates, commodity prices, and equity security prices. The Company handles market risks in accordance with its established policies; however, Deltic does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company does, on occasion, consider the need to enter into financial instruments to manage and reduce the impact of changes in interest rates; however, the Company entered into no such instruments during the three-year period ended December 31, 2002. Deltic held various financial instruments at December 31, 2002 and 2001, consisting of financial assets and liabilities reported in the Company’s Consolidated Balance Sheets and off-balance sheet exposures resulting from contractual debt guarantees and letters of credit issued for the benefit of Deltic, primarily in connection with its purchased stumpage procurement and real estate operations. (For additional information regarding these financial instruments, refer to Note 12 to the consolidated financial statements.)

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Interest Rate Risk—The Company is subject to interest rate risk from the utilization of financial instruments, such as term debt and other borrowings. The fair market value of long-term, fixed-interest rate debt is subject to interest rate risk. Generally, the fair value of fixed-interest rate debt will increase as interest rates fall and will decrease as interest rates rise. Conversely, for floating rate debt, interest rate changes generally do not affect the instruments’ fair value, but do impact future earnings and cash flows, assuming other factors are held constant. The estimated fair values of the Company’s funds held by trustee; long-term debt, including current maturities; contractual guarantees of debt; and letters of credit at December 31, 2002, were $.4 million, $118.1 million, $15.5 million, and $1.3 million, respectively.

A one percentage-point increase in prevailing interest rates would result in decreases in the estimated fair value of long-term debt of $7.1 million and contractual guarantees of debt of $.5 million, while the fair value of the Company’s funds held by trustee and letters of credit would be unchanged. Initial fair values were determined using the current rates at which the Company could enter into comparable financial instruments with similar remaining maturities. The estimated pretax earnings and cash flows impact for 2002 resulting from a one percentage-point increase in interest rates would be approximately $.5 million, holding other variables constant.

Foreign-Exchange Rate Risk—The Company currently has no exposure to foreign-exchange rate risk because all of its financial instruments are denominated in U.S. dollars.

Commodity Price Risk—The Company has no financial instruments subject to commodity price risk.

Equity Security Price Risk—None of the Company’s financial instruments have potential exposure to equity security price risk.

The preceding discussion of the Company’s estimated fair value of its financial instruments and the sensitivity analyses resulting from hypothetical changes in interest rates are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect the Company’s current expectations and involve uncertainties. These forward-looking market risk disclosures are selective in nature and only address the potential impact from financial instruments. They do not include other potential effects which could impact Deltic’s business as a result of changes in interest rates, foreign-exchange rates, commodity prices, or equity security prices.

Critical Accounting Policies

The Company has identified nine of its current accounting policies as being, in management’s view, critical to the portrayal of the Company’s financial condition and results of operations, in addition to requiring significant judgement on the part of management as it pertains to certain factors inherent in the policies. These policies, along with explanations of the key factors identified and considered by management, are described below. (For a listing of all significant accounting policies of the Company, refer to Note 1 to the consolidated financial statements.)

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Related-Party Transactions

The Company has committed to provide to Del-Tin Fiber a portion of the plant’s fiber and wood supply at market prices. This arrangement benefits Del-Tin Fiber by ensuring a portion of its raw material needs while providing the Company with a purchaser of residual by-products produced by its lumber mills, if needed. The market price that Deltic receives for these transactions is determined by the average price paid during the immediate preceding year by Del-Tin Fiber to other suppliers of the products purchased from the Company. During 2002 and 2001, Deltic sold Del-Tin Fiber approximately $3 million and $1.9 million, respectively, of these residual by-products. (The increase for 2002 was due to Del-Tin Fiber being shut down for approximately four months during 2001.)

During the process of disposing of its former agriculture operations’ farmland, the Company sold 12,600 net acres in 2000 to Epps Plantation, LLC, which is owned by the Charles H. Murphy Family Investments Limited Partnership, for $14.4 million. The estate of Charles Murphy holds a significant ownership of the Company’s common stock; and four of the Company’s directors are related to the late Charles Murphy. In addition, approximately 450 net acres were sold in 2000 to Munoco Company L.C. (“Munoco”) for $.3 million. The managing partner of Munoco is Robert C. Nolan, Chairman of Deltic’s Board of Directors and a nephew of the late Charles Murphy. The directors who are related to Mr. Murphy, including Robert C. Nolan, recused themselves from all discussions and actions related to these transactions. The sales price for all tracts involved in these transactions was derived from an approved market index formula which produced prices in excess of the average of the appraised value of the tracts. During 2000, Deltic also sold 2,600 net acres of non-strategic hardwood timberland located near its former farmland to Epps Plantation, LLC for $4.9 million. However, the Company does not anticipate similar related-party land transactions on a recurring basis. (For

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additional information regarding these related-party transactions, refer to Notes 2 and 4 to the consolidated financial statements.)

Impact of Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 rescinds SFAS 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that statement, SFAS 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements, in addition to SFAS 44, Accounting for Intangible Assets of Motor Carriers. SFAS 145 also amends SFAS 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Effective dates for SFAS 145 vary by issue addressed. Adoption of SFAS 145 is not expected to have a material impact on the Company’s financial statements.

In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred, and is effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of SFAS 146 is not expected to have a material impact on the Company’s financial statements.

In October 2002, the FASB issued SFAS 147, Acquisitions of Certain Financial Institutions. SFAS 147 amended SFAS 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions; SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets; and FASB Interpretation 9, Applying APB 16 and 17 When a Savings and Loan Association or Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method. SFAS 147 requires that acquisitions of financial institutions be accounted for using the purchase method and the recoverability of any intangible assets recognized at acquisition be evaluated using the same provisions as for other long-lived assets that are held and used. SFAS 147 is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The effective date for evaluating previously recognized intangible assets for impairment was October 1, 2002. SFAS 147 will not have an impact on the Company’s financial statements.

In November 2002, the FASB issued Financial Accounting Standards Board Interpretation No. (“FIN”) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted the disclosure requirements in connection with its guarantee of funding the debt sinking fund requirements of Del-Tin Fiber. (For additional information about these disclosures regarding Del-Tin Fiber, refer to Note 4 to the consolidated financial statements.)

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure. SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more

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prominent disclosures about the method of accounting for stock-based compensation and the effect of the method used on reported results in both annual and interim financial statements. The Company currently applies the accounting measurement provisions of APB 25 to account for stock-based compensation and has not adopted the measurement provisions of SFAS 123, as amended by SFAS 148; however, it has adopted the disclosure requirements of both SFAS 123 and SFAS 148. (For additional information about the Company’s stock-based compensation, refer to Note 15 to the consolidated financial statements.)

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 is an interpretation of Accounting Research Bulletin 51, Consolidated Financial Statements, and addresses consolidation by business enterprises of variable interest entities, which have the following characteristics: (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties and/or (2) the equity investors lack one or more of the essential characteristics of a controlling financial interest. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Adoption of FIN 46 is not expected to have a material impact on the Company’s financial statements.

Disposal of Agricultural Assets

In August 2000, Deltic’s Board of Directors approved the project to dispose of the Company’s agricultural land holdings for pine timberland in a tax-efficient manner. The Company engaged an agricultural land consulting and brokerage firm to act as advisors in evaluating and marketing about 50,000 acres (approximately 38,800 acres net to Deltic) of farmland located in northeast Louisiana. As of December 31, 2001, the Company had closed on the sale of all of its former agriculture lands, as well as all related agriculture operational assets. Proceeds from the farmland sales were deposited with a qualified intermediary and used to acquire pine timberland designated as “replacement property”, in accordance with IRS provisions for a tax-deferred exchange. (For additional information about the Company’s disposal of its agriculture assets, refer to Note 2 to the consolidated financial statements.)

Environmental Matters

Deltic is committed to protecting the environment and has certain standards with which it must comply based on federal, state, and local laws for the protection of the environment. Costs of compliance through 2002 have not been material, and the Company’s management currently has no reason to believe that such costs will become material for the foreseeable future.

Contingencies

The Company is involved in litigation incidental to its business from time to time. Currently, there are no material legal proceedings outstanding.

Outlook

Pine sawtimber harvested from Deltic’s fee lands in 2003 is projected to decrease from 2002’s level to 600,000 to 650,000 tons due to the completion of the Company’s three-year harvest plan for well-stocked timberland acreage acquired in 1998. The program to consider sales of timberland which may be identified as non-strategic or have a higher and better use will continue, with sales of 3,000 to 5,000 acres anticipated for 2003. Although lumber production is projected to increase, output is subject to market conditions and is estimated at 200 to 250 MMBF for 2003. Based on continued growth in west Little Rock, Arkansas, the Company expects the number of residential lot sales to be about 175 to 200 lots for the year of 2003, barring declines in economic growth or residential construction activity. Commercial acreage sales are expected to improve from 2002’s level. (On March 11, 2003, Deltic announced the sale of a 28-acre commercial tract

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located in Chenal Valley to Wal-Mart Stores, Inc.) Due to the Company’s commitment to fund its share of any Del-Tin Fiber operating working capital needs until the facility is able to consistently generate sufficient funds to meet its cash requirements or Deltic’s ownership interest in the facility is sold, the Company will continue to recognize losses related to Del-Tin Fiber to the extent of these advances. The Company is engaged in efforts to determine market interest for its Del-Tin Fiber ownership, and intends to continue its efforts to improve the plant’s operating and financial performance.

The Company’s capital expenditure budget for the year of 2003 was prepared during the fall of 2002 and provides for expenditures totaling $38.4 million. The Woodlands capital budget includes $18.3 million for timberland acquisitions, which will be dependent on the availability of acreage at prices that meet the Company’s criterion for timber stocking, growth potential, site index, and location. (Included in this amount was $8.3 million for an acquisition of 4,979 acres of timberland for which Deltic was negotiating purchase at December 31, 2002, which closed in January 2003. This transaction was included in the Company’s reported commitments at year-end.) During 2003, various sawmill projects are expected to require $3.7 million, including $.8 million for a second log debarker at the Waldo Mill and $.7 million to install a J-hook sorter, unscrambler, and trimmer at the Ola Mill. Depending on market conditions, expenditures for residential lot development totaling $8 million are projected to add about 300 lots to available inventory. Expenditures of $1.1 million will be required during 2003 for completion of construction of Chenal Country Club’s second golf course and completion of construction of new tennis courts and additional clubhouse parking. These projects will enable club membership to increase, and the second course has facilitated development of additional residential neighborhoods, the second of which is currently being developed to be offered for sale in the latter part of the first quarter of 2003. Capital and other expenditures are under constant review, and these budgeted amounts may be adjusted to reflect changes in the Company’s estimated cash flows from operations, borrowings under credit facilities, or general economic conditions.

Despite a strong housing market, lumber supply continues to outpace demand due to overproduction in North America and increased imports from overseas, resulting in weak lumber prices. The implementation of duties on Canadian lumber imports in May 2002 exacerbated the imbalance, as a number of Canadian producers responded by increasing production. The situation may improve in the near term as the industry enters the spring building season. However, any sustained recovery in the lumber market is dependent upon a reduction in supply or a satisfactory resolution of the Canadian trade issue. Although the regional market for pine sawtimber has remained relatively stable during this period of weak lumber prices, sawtimber prices could decline slightly in 2003 if the lumber market does not improve. Demand for the Company’s residential lots continues to be strong and is expected to remain so as long as interest rates stay at or near current levels.

Certain statements contained in this report that are not historical in nature constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects”, “anticipates”, “intends”, “plans”, “estimates”, or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements reflect the Company’s current expectations and involve certain risks and uncertainties, including those disclosed elsewhere in this report. Therefore, actual results could differ materially from those included in such forward-looking statements.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Information with respect to quantitative and qualitative disclosures about market risk of the Company is set forth under the caption “Other Matters—Market Risk” in Item 7 of Part II of this report.

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Item 8. Financial Statements and Supplementary Data

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2002 and 2001

(Thousands of dollars)