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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, 2003

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 29, 2004, was $216,725,661. 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 29, 2004, was 12,021,269.

Documents incorporated by reference:

The Registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders on April 22, 2004.

Table of Contents

TABLE OF CONTENTS - 2003 FORM 10-K REPORT

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PART I

Introduction

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. Deltic owns approximately 434,000 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”). Deltic is a calendar-year company for both financial and income tax reporting.

The Company is organized into four segments: (1) Woodlands, which manages the Company’s timberlands; (2) Mills, which consists of Deltic’s two sawmills that manufacture a variety of lumber products; (3) Real Estate, which includes the Company’s three real estate developments and a related country club operation; and (4) Corporate, which consists of executive management, planning, accounting, information systems, human resources, treasury, income tax, and legal staff functions that provide support services to the operating business units. (The Company currently does not allocate the cost of maintaining these support functions to its operating units.)

The Company’s timberlands consist primarily of Southern Pine, known in the industry as a type of “softwood”. Deltic considers its timberlands to be the Company’s most valuable asset and the harvest of stumpage to be its most significant source of income; accordingly, Deltic actively manages its timberlands in order to increase productivity and maximize the long-term value of these timber assets. The Company harvests timber from the timberlands in accordance with its harvest plans and sells such timber in the domestic market or converts it to lumber in its sawmills. Stumpage supplied to the Company’s sawmills is transferred at prices that approximate market. The Company implemented a timberland acquisition program in late 1996, and this ongoing program has enabled the Company to increase harvest levels over time, while expanding its timber inventory. Thus far, the Company has focused its acquisition program on timberland in its current operating area. The Company also initiated a program in 1999 to identify for possible sale non-strategic timberland and higher and better use lands.

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 standards for production quality. In addition, each mill is strategically located near significant portions of the timberlands. The mills produce a variety of lumber products, including dimension lumber, boards, timbers, decking, and secondary manufacturing products, such as finger-jointed studs. These lumber products are sold primarily to wholesale distributors, lumber treaters, and truss manufacturers in the South and Midwest and are used mainly in residential construction, roof trusses, and laminated beams. Combined annual capacity of the two mills at December 31, 2003 was 300 million board feet (“MMBF”). The Company’s total finished lumber production was 215 MMBF in 2003 compared to 203 MMBF in 2002 and 164 MMBF in 2001. The current year increase was due to increased operating efficiencies achieved in 2003. In 2001, production was temporarily curtailed in response to poor market and weather conditions.

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. The property is being developed in stages, and real estate sales to-date have consisted primarily of residential lots, which are sold to builders or individuals, and commercial sites. In addition to Chenal Valley, Deltic has developed Chenal Downs, a 400-acre development located just outside Chenal Valley, and Red Oak Ridge, an 800-acre development in Hot Springs, Arkansas.

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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 moulding industries, is manufactured from sawmill residuals such as chips, shavings, and sawdust, held together by an adhesive bond.

Since production began at Del-Tin Fiber in 1998, both operating and financial performance have been below the expectations established at the time that the decision to construct the plant was made. 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 these strategic alternatives and determined that the MDF business did not represent a growth area for the Company. Consequently, an announcement was made that the Company intended to exit the MDF 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 joint-venture was based primarily upon the estimated cash flows from a sale of the Company’s interest during 2003 and resulted in a determination that the Company’s investment was impaired as of December 31, 2002. The investment was written off, to zero, and the write-off amounted to $18.7 million before income taxes.

Due to the Company’s commitment to fund its share of any of the facility’s operating working capital needs until the facility was able to consistently generate sufficient funds to meet its cash requirements or Deltic’s ownership was sold, the Company recognized losses in Del-Tin Fiber equal to the extent of these advances during 2003. For the year, such advances approximated the Company’s equity share of losses for the plant; accordingly, the investment in Del-Tin Fiber at December 31, 2003, was zero. The Company continued to also utilize its management resources to work with Del-Tin’s management and the joint-venture partner to improve operating performance at the plant. As a result of these improvements, on December 11, 2003, Deltic’s Board of Directors revised its intent regarding the Company’s investment in Del-Tin Fiber and ceased efforts to sell the Company’s interest in the joint venture, while continuing to focus on improving operating and financial results of the plant. Due to this decision, the 2003 evaluation of fair value for the investment was based primarily upon the future net cash flows from Del-Tin Fiber’s operations over the remaining life of the plant. The estimated fair value from this evaluation indicated that no impairment existed as of December 31, 2003. For future years, the Company will resume equity method accounting and record its equity share of the operating results of the joint venture.

Forest Products Industry

With the exception of its diversification in real estate development, Deltic is primarily a wood products producer operating in a commodity-based business environment. This environment is affected by a number of factors, including general economic conditions, interest rates, foreign exchange rates, housing starts, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, and weather conditions. Despite a record level for U.S. housing starts and an increase in U.S. lumber consumption in 2003, the domestic industry continued to suffer from an oversupply of softwood lumber due to overproduction in North America and increased imports, primarily from Canada. These factors resulted in reduced lumber prices for the first six months of the year and was an extension of a weakened lumber market that had already seen a three-year low cycle. Given its relative size and the nature of most commodity markets, the Company has little or no control over pricing levels for its wood products.

Although lumber prices improved slightly in 2003, Deltic’s average pine sawtimber price was essentially unchanged. Improved operations enabled the Mills segment to increase lumber production and reduce its operating loss in 2003. Over the past three years, pine sawtimber prices have remained relatively stable while lumber prices have been depressed and volatile, which was a significant factor in the Company’s sawmills operating at a loss for the period.

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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.

Woodlands

The Company owns approximately 434,000 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 2003 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, 2003, 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

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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.

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 2003, about 7,500 acres were planted, primarily using seedlings grown from seeds produced at the orchard facility, with another approximately 7,500 acres scheduled to be planted in 2004, 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.

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 about 15,000 acres in both 2003 and 2002 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 2003, the Company harvested 614,477 tons of pine sawtimber from its timberlands. Under the current plan, Deltic intends to harvest between 550,000 and 575,000 tons of pine sawtimber in 2004.

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.

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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 to hunting clubs in both 2003 and 2002. 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.

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 59,500 acres in 2003.

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 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 118,800 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.

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, 3,418 acres in 2002, and 4,130 acres in 2003.

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 wholesale distributors, lumber treaters, and truss manufacturers in the South and Midwest and is used in residential construction, roof trusses, and laminated beams.

Combined annual production capacity of the two mills increased from 226 MMBF at year-end 1999 to 300 MMBF at year-end 2003 following the completion of planned upgrades at both mills. The Company’s lumber output increased during 2003, with production totaling 215 MMBF in 2003 compared to 203 MMBF in 2002 and 164 MMBF in 2001. This increase was due to increased operating efficiencies achieved in 2003. In 2001, production was temporarily curtailed in response to poor market and weather conditions.

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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 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 (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 and (7) installation of a second log debarker in order to further improve hourly throughput capability.

Raw Materials. In 2003, the Company’s two sawmills processed 975,939 tons of logs, obtained from either the timberlands or purchased from public and private landowners. The timberlands supplied 44 percent, or 434,848 tons, of the mills’ raw material receipt requirements, while the mills obtained 71 percent of the 614,477 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 function for each of its sawmills. As of December 31, 2003, the Company had under contract 225,033 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 2003, the Company harvested third-party stumpage and purchased logs from third parties totaling 563,040 tons . Of this volume, purchases from the U.S. Forest Service represented ten 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.

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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.

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 was opened for play in the summer 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 developments 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, 1,764 lots have been developed in 20 neighborhoods and 1,728 lots have been sold, with about 1,593 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 41 of the 76 lots developed in the two phases sold by the end of 2003. 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 2003, 19 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 235 acres, including 14 acres in 2001, .53 acres in 2002, and 72 acres in 2003 . Commercial property sales to-date have consisted of retail store locations, 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. 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

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retail space for lease. The center is surrounded by 14 outparcels, ranging in size from 0.2 to 1.8 acres. To-date, ten 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.

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.

The Company owns approximately 58,000 mostly contiguous acres, the eastern border of which begins about two miles west of Chenal Valley. Continued development in the growth corridor of west Little Rock has significantly affected land values in the area, and is expected to create real estate development opportunities for much of this land. In February, 2004, the Company initiated the governmental approval process by filing a preliminary plat with the City of Little Rock Planning Commission for its first real estate development in this acreage. This 1,170 acre upscale development, called The Ridges at Nowlin Creek, is slated to comprise 302 estate sized lots and is planned for development in four stages

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 and 40 acres in 2001.

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.

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Since production began at Del-Tin Fiber in 1998, both operating and financial performance have been below the expectations established at the time that the decision to construct the plant was made. 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 these strategic alternatives and determined that the MDF business did not represent a growth area for the Company. Consequently, an announcement was made that the Company intended to exit the MDF 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 joint-venture was based primarily upon the estimated cash flows from a sale of the Company’s interest during 2003 and resulted in a determination that the Company’s investment was impaired as of December 31, 2002. The investment was written off, to zero, and the write-off amounted to $18.7 million before income taxes.

Due to the Company’s commitment to fund its share of any of the facility’s operating working capital needs until the facility was able to consistently generate sufficient funds to meet its cash requirements or Deltic’s ownership was sold, the Company recognized losses in Del-Tin Fiber equal to the extent of these advances during 2003. For the year, such advances approximated the Company’s equity share of losses for the plant; accordingly, the investment in Del-Tin Fiber at December 31, 2003, was zero. The Company continued to also utilize its management resources to work with Del-Tin’s management and the joint-venture partner to improve operating performance at the plant. As a result of these improvements, on December 11, 2003, Deltic’s Board of Directors revised its intent regarding the Company’s investment in Del-Tin Fiber and ceased efforts to sell the Company’s interest in the joint venture, while continuing to focus on improving operating and financial results of the plant. Due to this decision, the 2003 evaluation of fair value for the investment was based primarily upon the future net cash flows from Del-Tin Fiber’s operations over the remaining life of the plant. The estimated fair value from this evaluation indicated that no impairment existed as of December 31, 2003. For future years, the Company will resume equity method accounting and record its equity share of the operating results of the joint venture.

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 “real wood” appearance and the ability to be finely milled and accept a variety of finishes, competes primarily with lumber.

Production. The plant produced 133 MMSF of MDF in 2003 versus 97 MMSF in 2002 and 52 MMSF during 2001. Prior to 2003, 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 has enabled the plant’s operations to increase production levels closer to the plant’s capacity of 150 MMSF per year, as market conditions improved. In addition, manufacturing cost per thousand square feet has decreased, as certain variable costs of manufacturing have been lowered and fixed costs for the facility are being allocated to the 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. During 2003, 2002, and 2001, Deltic sold approximately $4,099,000, $3,018,000 and $1,924,000, respectively, of these lumber manufacturing by-products to Del-Tin Fiber.

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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. The sale of all farmland and related agriculture operational assets, as well as the acquisition of “replacement property” in the form of timberland, was successfully concluded during 2001. 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 14 percent, 13 percent, and nine percent of consolidated net sales in 2001, 2002, and 2003, 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.

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 seven percent, three percent, and six percent of consolidated net sales in 2001, 2002, and 2003, 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 wholesaler distributor, lumber treaters, and truss manufacturers in the South and Midwest and is used in residential construction, roof trusses, and laminated beams. During 2001, 2002, and 2003, lumber sales as a percentage of consolidated net sales were approximately 46 percent, 57 percent, and 45 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 2001, 2002, and 2003, sales of these residual products accounted for seven percent, nine percent, and seven 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 2003, Deltic’s sawmills produced 303,004 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.

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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 2001, 2002, and 2003, the sales of residential lots, commercial sites, and undeveloped acreage as a percentage of consolidated net sales were 18 percent, 10 percent, and 21 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.

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 2003, the Company acquired approximately 14 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

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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.

Access to SEC Filings

The Company maintains an internet website at www.deltic.com. The Company makes available free of charge under the Investor Relations section of its website its annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and all amendments to any of those reports, as soon as reasonably practicable after providing such reports to the Securities and Exchange Commission.

Employees

As of February 29, 2003, the Company had 416 employees.

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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, 2003, 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 $.1 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.)

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

None.

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Executive Officers of the Registrant

The age (at January 1, 2004), 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.

Ray C. Dillon - Age 48; President and Chief Executive Officer and a director of the Company effective July 1, 2003. Prior to joining the Company, Mr. Dillon was employed at Gaylord Container Corporation, where from April, 2000 through December, 2002, he was Executive Vice President, and preceding his election as Executive Vice President, he was Vice President, Primary Product Operations from April 1997.

Clefton D. Vaughan - Age 62; 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 51; 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.

Kent L. Streeter - Age 43; Vice President of Operations effective November 16, 2003. Prior to joining the Company, Mr. Streeter was Operations Manager of a large paper mill located in the Southeastern United States from January 1997, which has been owned since April 2002, by Temple-Inland, Inc. and prior to that by Gaylord Container Corporation.

David V. Meghreblian - Age 45; Vice President of Real Estate effective November 16, 2003. From May 2000 to November 2003, Mr. Meghreblian was Vice President of Operations for the Company. From November 1996 to April 2000, Mr. Meghreblian was General Manager of Planning and Investor Relations for Deltic. Prior to such time, Mr. Meghreblian was General Manager of Project Development, a position he held beginning in November 1995.

Emily R. Evers - Age 53; Controller from 1989 for the Company and its predecessor.

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PART II

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:

Common stock dividends were declared for each quarter during 2003 and 2002. As of February 29, 2004, there were approximately 1,583 stockholders of record of Deltic’s common stock.

The following table sets forth information as of December 31, 2003, with respect to Deltic common stock issuable under the Company’s compensation plans.

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The following table presents certain selected consolidated financial data for each of the years in the five-year period ended December 31, 2003:

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Introduction

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. Deltic owns approximately 434,000 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”). Deltic is a calendar-year company for both financial and income tax reporting.

The Company is organized into four segments: (1) Woodlands, which manages the Company’s timberlands; (2) Mills, which consists of Deltic’s two sawmills that manufacture a variety of lumber products; (3) Real Estate, which includes the Company’s three real estate developments and a related country club operation; and (4) Corporate, which consists of executive management, planning, accounting, information systems, human resources, treasury, income tax, and legal staff functions that provide support services to the operating business units. (The Company currently does not allocate the cost of maintaining these support functions to its operating units.)

The Company’s timberlands consist primarily of Southern Pine, known in the industry as a type of “softwood”. Deltic considers its timberlands to be the Company’s most valuable asset and the harvest of stumpage to be its most significant source of income; accordingly, Deltic actively manages its timberlands in order to increase productivity and maximize the long-term value of these timber assets. The Company harvests timber from the timberlands in accordance with its harvest plans and sells such timber in the domestic market or converts it to lumber in its sawmills. Stumpage supplied to the Company’s sawmills is transferred at prices that approximate market. The Company implemented a timberland acquisition program in late 1996, and this ongoing program has enabled the Company to increase harvest levels over time, while expanding its timber inventory. Thus far, the Company has focused its acquisition program on timberland in its current operating area. The Company also initiated a program in 1999 to identify for possible sale non-strategic timberland and higher and better use lands.

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 standards for production quality. In addition, each mill is strategically located near significant portions of the timberlands. The mills produce a variety of lumber products, including dimension lumber, boards, timbers, decking, and secondary manufacturing products, such as finger-jointed studs. These lumber products are sold primarily to wholesale distributors, lumber treaters, and truss manufacturers in the South and Midwest and are used mainly in residential construction, roof trusses, and laminated beams.

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. The property is being developed in stages, and real estate sales to-date have consisted primarily of residential lots, which are sold to builders or individuals, and commercial sites. In addition to Chenal Valley, Deltic has developed Chenal Downs, a 400-acre development located just outside 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 moulding industries, is manufactured from sawmill residuals such as chips, shavings, and sawdust, held together by an adhesive bond.

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Executive Overview

With the exception of its diversification in real estate development, Deltic is primarily a wood products producer operating in a commodity-based business environment. This environment is affected by a number of factors, including general economic conditions, interest rates, foreign exchange rates, housing starts, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, and weather conditions. Despite a record level for U.S. housing starts and an increase in U.S. lumber consumption in 2003, the domestic industry continued to suffer from an oversupply of softwood lumber due to overproduction in North America and increased imports, primarily from Canada. These factors resulted in reduced lumber prices for the first six months of the year and were an extension of a weakened lumber market that had already seen a three-year low cycle. Given its relative size and the nature of most commodity markets, the Company has little or no control over pricing levels for its wood products. Sales of real estate are affected by general economic conditions and interest rates, specifically as such factors are manifested in the Company’s operating area of central Arkansas. A strong housing market, helped by low interest rates and an improving economy, benefited the Company’s residential and commercial real estate sales activity during 2003.

Four significant accomplishments for the year of 2003 were: (1) the Woodlands segment met planned timber harvest levels at budgeted sales prices, despite pressure from a thin-margined, commodity-based lumber market; (2) Deltic achieved substantial improvements in productivity at one of its sawmills, while installing critical equipment to enhance manufacturing capacity at the other; (3) the Company’s Real Estate operations had outstanding performance in both residential and commercial sales activity; and (4) Del-Tin Fiber improved its operations and reduced its operating losses by approximately one-half compared to 2002.

Woodlands segment operating results for 2003 were enhanced by an increase in sales of timberland for higher and better use and non-strategic timberland at higher average sales prices than realized in 2002. During the current year, the Company sold 4,130 acres of timberland at an average price of $2,000 per acre, which included a choice 275-acre tract from Deltic’s 58,000-acre timberland holdings just west of the Chenal Valley real estate development. While the Company expects timberland sales activity in 2004 will approximate the acreage sold in 2003, it expects the mix of properties sold to reduce average sales prices from the 2003 level as plans reflect more of the acreage sold to be non-strategic timberland. Non-strategic timberland is composed primarily of tracts too small to allow efficient timber management, those geographically isolated from other Company fee lands, and acreage otherwise not deemed strategic to Deltic’s operations or growth. The Company has implemented a plan to sell some such acreage in the southwest portion of Arkansas, where outlets for timber consist primarily of paper manufacturers desiring pulpwood for raw material rather than sawmills utilizing pine sawtimber logs.

For 2003, the pine sawtimber harvest level was decreased 14 percent, from 714,000 tons to 614,000 tons, due to the completion, in 2002, of the Company’s three-year harvest plan for well-stocked timberland acreage acquired in 1998. The 2003 harvest level represents a harvest that allows the Company to manage its timber on a sustainable-yield basis. Despite downward pressure from the depressed lumber market in the first half of 2003, Deltic was able to harvest its planned level of pine sawtimber while maintaining relatively stable sales prices. The Company’s ability to sell pine sawtimber at acceptable prices in the future will be largely dependent upon the market for manufactured lumber and other wood products.

For the Mills segment, the status of the lumber market and the resulting impact on the Company’s commodity softwood lumber products continues to significantly impact operating strategies and financial results. The implementation of duties on Canadian lumber imports in May 2002 exacerbated the existing oversupply of lumber in the U.S., as a number of Canadian producers responded by increasing production in efforts to reduce their per-unit manufacturing costs. This situation persisted for the entire first half of 2003 until the impact of significant fires on the West Coast of the U.S. and in the Province of British Columbia, work stoppages in British Columbia, and weakening of the U.S. dollar (and resulting strengthening of the Canadian dollar) began to reduce production and import levels. These events led to an improvement in prices for lumber products for the last half of 2003. A record-breaking year in 2003 for both single-family home construction and sales of existing single-family homes, which typically results in repair and remodeling expenditures, raised lumber consumption. Also aiding demand and price levels for Southern Pine lumber was the impact of lumber

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treaters ramping up production in the last half of 2003 before the ban on treatment of residential lumber products with the traditional preservative, chromated copper arsentate, took effect. As with any commodity market, the Company expects the historical volatility of lumber prices to continue in the future; however resolution of the trade dispute with Canada regarding imports of softwood lumber could help to stabilize, or possibly improve, the markets for the Company’s lumber products.

Since commodity-based markets rarely benefit from real price growth after inflation for their products, Deltic has concentrated management’s attention, in regard to its manufacturing operations, on improving sales realizations through product and customer mix enhancements and improving production efficiencies and the cost structure at its lumber mills. These production efficiency improvements are largely dependent upon increases in hourly production rates and mill uptime percentage. For 2003, the average sawmill production per hour at the Company’s two mills increased eight percent, while planermill production improved ten percent. In an additional effort to further improve productivity and efficiencies at its Ola Mill, the Company eliminated a shift effective September 1, 2003. Resulting decreased production from this mill will allow Deltic to supply a significant portion of total log supply requirements from strategically located Company fee timberlands. In the future, the Company anticipates that a more significant percentage of logs supplied to both of its mills will come from such fee lands.

Real Estate sales activity levels for the Company’s real estate developments are affected by economic conditions that influence the level of housing starts in the central Arkansas region, including general economic conditions and interest rates. Low mortgage interest rates in 2003 aided demand for residential lots in Chenal Valley, as evidenced by the Company’s 196 lots sold in 2003, which reduced available uncommitted inventory in this development to only 11 lots at the end of 2003. Weather-related delays prevented the Company from offering for sale the 128 lots planned for completion in Chenal Valley during the fourth quarter of 2003. However, construction of these plus an additional 32 lots, for a total of 160 lots in three neighborhoods, was completed in January and offered for sale on January 29, 2004. The Company plans to develop another 249 lots later in 2004. In Deltic’s other two developments, Red Oak Ridge and Chenal Downs, 90 developed lots were uncommitted as of year-end 2003. Future annual lot development levels will be dependent upon the demand for the Company’s residential lots, which is expected to remain strong as long as interest rates remain at or near current levels.

The $77,600 average sales price for residential lots sold in 2003 increased 14 percent when compared to 2002. Average price for a reporting period is largely dependent on the mix of lots sold in that period. Deltic’s lot development plans provide for a mix of lot offerings that represent all real estate market segments for a planned community. Of the 196 residential lots sold in 2003, 49 were located in the first two neighborhoods adjoining Chenal Country Club’s new 18-hole golf course designed by Robert Trent Jones, Jr. compared to 20 in the prior year. Such golf course lots represent the highest market segment in the development. The mix of lot offerings for any given year will be driven by remaining lot availability and expected demand.

The increase in commercial real estate sales activity during 2003 was a significant benefit to the year’s results. In 2003, commercial sales totaled approximately 72 acres for $12.6 million. With the number of residents in Chenal Valley and other west Little Rock areas growing steadily and the momentum created from previous sales of commercial acreage, such as the 29-acre site sold to Wal-Mart in the first quarter of 2003, interest in remaining commercial offerings is increasing. As of December 31, 2003, about 475 acres, or 67 percent, of the 710 acres of property currently zoned as commercial in Chenal Valley is available for sale in future periods. 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 this development’s population density increases.

Operating results for Del-Tin Fiber are affected primarily by the overall MDF market and plant operating performance. For much of 2003, the U.S. MDF market was oversupplied, and China’s MDF industry is growing rapidly. In addition, segments of the U.S. furniture manufacturing industry have relocated to the Far East; furniture manufacturers are a primary purchaser of MDF. However, with continued strong levels of housing starts and repair and remodeling activity in the U.S., industry analysts project MDF consumption to grow five to six percent in 2004 and possibly return to double-digit growth rates after 2006. The level of imports has continued to grow steadily, but the weakening U.S. dollar could slow further increase early in 2004. In 2003,

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the MDF market was affected by the level of inventories accumulated by producers during 2002, lower consumption by furniture manufacturers as this industry suffered attrition, and usage patterns in industrial markets switching away from industrial end-use of thicker panels, as in furniture, to construction-related markets such as laminate flooring and mouldings. Most producers in the industry need further price increases, in addition to manufacturing cost reductions, to become profitable in the short-term. The predicted increases in consumption should strengthen the market unless import levels surge.

Operationally, Del-Tin Fiber made significant advances during the last half of 2003. The plant’s management focused on raising the plant’s uptime percentage to be in line with the industry average and reduced the plant’s manning level to improve its cost structure. In addition, the facility greatly improved the percentage of its production of premium-grade product which increased sales realizations. Change in the product mix at the plant also positively impacted average sales prices, as the percentage of “thin board” was increased due to improvements in the plant’s operating performance. Future efforts are being concentrated on improving productivity levels and plant efficiencies and to making additional reductions in the plant’s manufacturing cost per MSF as hourly production rates increase and improvements to the raw material mix for the operations are implemented.

Significant Events

Since production began at Del-Tin Fiber in 1998, both operating and financial performance have been below the expectations established at the time that the decision to construct the plant was made. 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 these strategic alternatives and determined that the MDF business did not represent a growth area for the Company. Consequently, an announcement was made that the Company intended to exit the MDF 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 joint-venture was based primarily upon the estimated cash flows from a sale of the Company’s interest during 2003 and resulted in a determination that the Company investment was impaired as of December 31, 2002. The investment was written off, to zero, and the write-off amounted to $18.7 million before income taxes.

Due to the Company’s commitment to fund its share of any of the facility’s operating working capital needs until the facility was able to consistently generate sufficient funds to meet its cash requirements or Deltic’s ownership was sold, the Company recognized equity in Del-Tin Fiber equal to the extent of these advances during 2003. For the year, such advances approximated the Company’s equity share of losses for the plant; accordingly, the investment in Del-Tin Fiber at December 31, 2003, was zero. The Company also continued to utilize its management resources to work with Del-Tin’s management and the joint-venture partner to improve operating performance at the plant. As a result of these improvements, on December 11, 2003, Deltic’s Board of Directors revised its intent regarding the Company’s investment in Del-Tin Fiber and ceased efforts to sell the Company’s interest in the joint venture, while continuing to focus on improving operating and financial results of the plant. Due to this decision, the 2003 evaluation of fair value for the investment was based primarily upon the future net cash flows from Del-Tin Fiber’s operations over the remaining life of the plant. The estimated fair value from this evaluation indicated that no impairment existed as of December 31, 2003. For future years, the Company will record its equity share of the operating results of the joint venture. (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 has produced an after-tax savings and reduced net cash outflows for the Company when comparing the non-deductible carrying cost of the preferred stock.

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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, as well as the acquisition of “replacement property” in the form of timberland, was successfully concluded during 2001. (For additional information about the Company’s discontinued agriculture operations, refer to Note 2 to the consolidated financial statements.)

Results of Operations

In the following tables, Deltic’s net sales and results of operations are presented for the three years ended December 31, 2003. Explanations of significant variances and additional analyses for the Company’s consolidated and segmental operations follow the tables.

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Consolidated

Included in the 2002 consolidated results of operations was a non-cash write-off of the Company’s investment in Del-Tin Fiber totaling $18.7 million and a related tax benefit of $7.3 million. The $22.3 million increase in net income during 2003 was the result of improved operating results for all three of the Company’s operating segments in 2003, improved financial results from Del-Tin Fiber, and the Del-Tin Fiber write-off in 2002.

Operating income for 2003 increased $13.9 million compared to 2002. The Woodlands segment increased $2.3 million due primarily to an increase in sales of both timberland for higher and better use and non-strategic timberland, partially offset by a planned reduction in the pine sawtimber harvest level combined with a slightly lower average pine sawtimber price. Deltic’s Mills segment operating results improved $1.5 million as a result of a $12 per thousand board feet (“MBF”) rise in average lumber sales price and a $2 per MBF decrease in production cost per MBF sold. Real Estate operating income increased $11.1 million and benefited from increases in sales of commercial acreage and the number and average sales price of residential real estate lots sold.

During 2002, operating income decreased $5.1 million when compared to 2001. The Company’s Woodlands operations increased $.2 million as a result of a higher average 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 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.

Woodlands

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

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Net sales in 2003 increased $1.2 million when compared to 2002. Sales of pine sawtimber decreased $4.8 million, or 16 percent, from 2002, which reflects a $4 million decrease from lower sales volume combined with a $.8 million decrease attributable to lower average price. The pine sawtimber harvest level decreased 14 percent in 2003, in accordance with the Company’s planned reduction in harvest. Sales of hardwood sawtimber increased $.8 million due to the Company selling a higher-than-planned volume to take advantage of a strong hardwood market in 2003, as evidenced by a 24 percent increase in average sale price. During 2003, sales of timberland increased $4.7 million from 2002, due to selling more acres of timberland at a higher average price in 2003 compared to 2002.

During 2002, net sales decreased $1.3 million, or four percent. 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 increased the pine sawtimber harvest six percent when compared to 2001. Average sales price for pine sawtimber increased five percent in 2002 versus 2001. Net sales generated from the sale of non-strategic or higher and better use timberland decreased $4.4 million during the 2002 period.

Woodlands operating income increased $2.3 million in 2003. In addition to the increase in net sales, the cost of fee timber harvested decreased $1.8 million due mainly to the lower pine sawtimber harvest level and to harvest mix. Operating income 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.

Mills

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

When compared to 2002, net sales for 2003 increased $8.7 million, or 12 percent, of which $2.2 million was due to the price change, and $6.5 million was due to the greater sales volume. Average sales price in 2003 was $12 per MBF more than in 2002, and sales volume increased ten percent. Both lumber production and sales volumes were positively impacted by the improved lumber market in 2003 compared to 2002.

In 2002, net sales increased 23 percent when compared to 2001. Lumber sales increased $11 million due primarily to a $12.3 million increase from higher sales volume, partially offset by a $1.3 million reduction from lower average sales price. The Company’s sawmills experienced a 26 percent increase in lumber sales volume due to increased operating efficiencies achieved from completed capital projects, combined with temporary lumber production curtailments during 2001. Sales of residual products were up $1.5 million.

The improvement in operating results for 2003 was due to the increase in net sales and the slightly lower manufacturing cost per MBF of lumber sold due to the Company’s efforts to improve both production efficiencies and the cost structure at its mills. The $.7 million improvement between 2001 and 2002 was primarily the result of a six percent decrease in the production cost per MBF of lumber sold.

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Real Estate

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

During 2003, net sales were $18.5 million more than in 2002, an increase of 121 percent. The number of residential lots sold increased by 39 percent, with an increase in average sales price per lot due to sales mix. During 2003, 118 lots were developed and offered for sale in three new neighborhoods in the Company’s Chenal Valley development, including 50 lots in the second neighborhood on the development’s new golf course. (The Company had planned to offer 252 lots during 2003, but weather-related delays forced the additional offerings into early 2004.) Net sales for Chenal Country Club, Inc. in 2003 totaled $5.2 million, an increase of $.3 million.

Net sales in 2002 decreased $9.7 million, 39 percent, from 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, combined with a reduction in average sales price due to sales mix. 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 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.) Chenal Country Club, Inc. produced net sales of $4.9 million for 2002 versus $4.8 million for 2001.

The changes in the Real Estate segment’s operating income were due primarily to the same factors impacting net sales.

Corporate

The increase in operating expense for Corporate functions of $1.6 million in 2003 was due primarily to nonrecurring charges to the Company’s retirement plans resulting from special termination benefits awarded to certain employees upon retirement or severance and increased incentive plan expenses due to the improved operating results.

Eliminations

Intersegment sales of timber from Deltic’s Woodlands segment to the Mills segment were $15.9 million in 2003, $18.2 million in 2002, and $14.3 million in 2001. The $2.3 million decrease during 2003 was due primarily to decreased volume as the Company’s mills reduced the percentage of log receipts coming into their log yards from intersegment sales and to a slightly lower average price. Intersegment timberland sales commissions totaled $.3 million in 2003, compared to zero in 2002 and $.4 million in 2001.

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Equity in Del-Tin Fiber

For the year ended December 31, 2003, equity loss in Del-Tin Fiber, excluding the write-off in 2002, recorded by the Company decreased $4.8 million when compared to 2002’s equity loss.

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

Average sales price for 2003 increased $19 per MSF when compared to 2002 due to a change in product mix to include a greater percentage of thin board and the increase in premium grade production. Manufacturing cost per thousand square feet (“MSF”) sold for 2003 was down 19 percent due primarily to the lowering of certain variable costs of manufacturing and the spreading of the plant’s fixed cost to the increased production volume.

Del-Tin Fiber’s 2001 production was impacted by a four-month shut-down of the plant due to weak market conditions, high natural gas prices, and to modify the plant’s heat energy system. Sales prices in 2002 decreased $19 per MSF due to a change in product mix after the shutdown to focus on improving product quality for relatively easier to produce thick board.

Interest Income/Expense

For 2003, interest expense increased $2.4 million from 2002 due primarily to additional long-term debt issued to redeem the Company’s $30 million of preferred stock in December 2002.

Income Taxes

The effective income tax rate for continuing operations was 36 percent, 36 percent, and 31 percent in 2003, 2002, and 2001, respectively. The effective rate increase in 2002 from 2001 was due primarily to the impact of recording a state tax benefit for operating loss carryforwards in 2001.

Income from Discontinued Operations

For 2001, sales of approximately 18,400 acres of farmland at a pretax gain of $13.4 million were recorded as the Company completed the disposal of all of its agriculture assets. (For additional information about the Company’s discontinued agriculture operations, refer to Note 2 to the consolidated financial statements.)

Liquidity and Capital Resources

Cash Flows and Capital Expenditures

Net cash provided by operating activities totaled $45 million for the year ended December 31, 2003, which compared to $32.5 million for 2002 and $41.2 million for 2001. Changes in operating working capital, other than cash and cash equivalents, provided cash of $.9 million in 2003, $1.5 million in 2002, and $2.9 million in 2001. 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.

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Capital expenditures required cash of $27.2 million in 2003, $24.2 million in 2002, and $63.8 million in 2001. Total capital expenditures, by segment, for the years ended December 31, 2003, 2002, and 2001 are presented in the following table.

Woodlands capital expenditures included timberland acquisitions of approximately 7,300 acres at a cost of $10.9 million in 2003, approximately 1,900 acres at a cost of $3.2 million in 2002, and approximately 28,000 acres at a cost of $42.2 million in 2001. (Purchase of timberland in 2001 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 and are included in capital expenditures for that year.) Reforestation site preparation and planting required expenditures of $1.3 million in 2003, $1.5 million in 2002, and $1.7 million in 2001, and were the result of expansion of the Company’s planting program due to recent acquisitions of timberland and to regeneration harvests.

During 2003, $1.3 million was expended to install a second log debarker at the Waldo Mill in order to increase production capacity. At the Ola Mill, $.6 million was expended to install a J-hook sorter system. In 2002 and 2001, $1.8 million and $2.1 million, respectively, was expended to complete a project to replace the Waldo Mill’s vertical saw assembly with a curve sawing gang. The project improved log recovery, increased hourly throughput capacity, and enabled further diversity of product mix. There were no significant capital projects during 2002 at the Company’s Ola Mill; however, $.9 million was expended during 2001 to complete payment of a project to replace the 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.

Capital expenditures for Real Estate operations related to the cost of residential lot development totaled $5.4 million in 2003, compared to $4.5 million in 2002 and $4.2 million in 2001. Infrastructure construction required $.5 million in 2002 and $.7 million in 2001, with no significant such expenditures in 2003. Construction of the new 18-hole golf course at Chenal Country Club, initiated in 2001, required expenditures of $.6 million in 2003, $3.8 million in 2002, and $4.8 million in 2001. Other expenditures were primarily for various amenity improvements.

Deltic had commitments of $4.8 million for capital projects in progress at December 31, 2003, including $.6 million for reforestation site preparation and planting and $3.9 million related to residential lot and commercial site development and amenity improvements at the Company’s real estate developments.

The net change in purchased stumpage inventory required cash of $1.2 million in 2003 and $1.8 million in 2002, but provided cash of $4.3 million in 2001. Advances to Del-Tin Fiber by the Company amounted to $9 million, $12.2 million, and $14.7 million in 2003, 2002, and 2001, respectively. 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. 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-

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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 fund account and subject to applicable income taxes. An additional $.4 million of similar proceeds was held by a trustee at the end of 2002; these funds were received from the trustee in the first quarter of 2003 and utilized to finance a portion of the $10.2 million of timberlands that were acquired during that period for which the Company had a significant portion committed at the end of 2002. The $4.6 million received for timberland sold during 2003 was held by a trustee at December 31, 2003, while the Company identified potential timberland to acquire in order to qualify these sales as a tax-deferred exchange. 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 $1.3 million in 2003, $1.1 million in 2002, and $.8 million in 2001.

During 2003, Deltic borrowed $36.5 million under its revolving credit facility and $.5 million under a short-term facility, with repayments of $37.6 million and $.5 million, respectively. In 2002, borrowings under available credit facilities provided $66.5 million, with repayments amounting to $64.5 million. 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.) During 2001, the Company borrowed $14.5 million, with repayments amounting to $18.3 million, and repayments of owner-financed debt required $.5 million.

Purchases of treasury stock required cash of $.4 million in 2003, $.7 million in 2002, and $1 million in 2001. The decrease in bank overdraft was $.9 million in 2003 and $1.4 million in 2001, bringing the overdraft to zero at the end of the respective years, but it increased $.9 million in 2002. For the three years ended December 31, 2003, cash required to pay common stock dividends totaled $3 million in each year. The Company paid dividends on its preferred stock of $2.3 million in 2002 and 2001; there were no such dividends in 2003 as the Company redeemed its preferred stock at the end of 2002. During 2003 and 2002, proceeds from stock option exercises amounted to $1.6 million and $1.2 million, respectively, compared to zero in 2001.

In 2003, 2002, and 2001, Deltic paid $.5 million, $.2 million, and $.5 million, respectively, related to the extension of its revolving credit facility in 2003, placement of the $30 million of senior notes during 2002, and the negotiated replacement of its revolving credit facility during 2001.

Financial Condition

Working capital at year-end totaled $7.1 million in 2003 and $2.1 million in 2002. Deltic working capital ratio at December 31, 2003, was 2 to 1, compared to 1.2 to 1 at the end of 2002. Cash and cash equivalents at the end of 2003 were $1.7 million compared to $1.1 million at the end of 2002. During 2003, total indebtedness of the Company decreased $1.1 million to $115.1 million at year-end. Deltic’s long-term debt to stockholders’ equity ratio was .675 to 1 at December 31, 2003, compared to .713 to 1 at year-end 2002.

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 $125 million, inclusive of a $50 million letter of credit feature. The agreement will expire on July 15, 2007. As of December 31, 2003, $80 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.)

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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, 2003, the Company had expended $2.1 million under this program, with the purchase of 96,206 shares at an average cost of $22.34 per share, of which 15,909 shares at an average cost of $23.73 were purchased during 2003. 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.

Off-Balance Sheet Arrangements, Contractual Obligations, and Commitments

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, in a series of one-year term commitments, to fund any operating working capital needs until the facility is able to consistently generate sufficient funds to meet its cash requirements.

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.)

Outlook

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.

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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, 2003. 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, 2003. Deltic held various financial instruments at December 31, 2003 and 2002, 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 the previous tabular summary of the Company’s other commercial commitment expirations and to Note 12 to the consolidated financial statements.)

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, 2003, were $4.6 million, $128.6 million, $16.5 million, and $.8 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 million and contractual guarantees of debt of $.3 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 2003 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.

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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 and Estimates

The Company has identified five 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. Additionally, these policies require significant assumptions and/or estimates on the part of management as it pertains to certain factors inherent in the policies. These policies, along with explanations of the key assumptions and/or estimates 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.)

The key factors involved in determining the Investment in Real Estate Held for Development and Sale are: (1) the treatment of the clubhouse and golf course at Chenal Country Club, the amenity around which the Chenal Valley development is centered, as an amenity rather than an operating fixed asset and (2) the management estimates required to estimate the future indirect development costs and sales values of the areas of Chenal Valley yet to be developed. Due to accounting for Chenal Country Club as an amenity, the cost of the clubhouse and golf course, including the estimated cost of planned future improvements, are charged against income as real estate is sold rather than depreciating this cost. This amenity treatment also records the initiation fees received from members joining the club as a reduction in the cost basis of the club rather than as net sales. In addition, the Company’s model for allocating the indirect cost to be expensed against each piece of real estate sold requires management to estimate the future indirect costs to be incurred for the entire development, primarily infrastructure costs and future improvements at Chenal Country Club (net of estimated future initiation fees to be received), as well as the potential market value of each tract of undeveloped property within the Chenal Valley development. In determining future indirect development costs, management relies on cost projections for its development plans provided by independent, professional engineering consultants. Appraisers are utilized to provide the potential market value for unsold acreage.

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For Deltic’s investment in Del-Tin Fiber, the key determinations by management are (1) the accounting treatment for this investment under the equity method of accounting rather than as a consolidated subsidiary since the joint venture is 50 percent owned by both owners and (2) the factors used in evaluating the impairment of the investment’s carrying value. Deltic management has determined that there is no control by either company due to having a Board of Managers with equal representation. As such, the assets and liabilities of Del-Tin Fiber are not included in the amounts reported on the Company’s balance sheet for any period. In evaluating the possibility of the existence of an impairment for the Company’s carrying value for its investment in Del-Tin Fiber under APB 18, management must estimate future net cash flows from the possible courses of action available for its investment, such as continuing to maintain or sell its investment, to determine both recoverability of the carrying amount and fair value of the investment. More specifically, management must determine the possible courses of action and estimate the probability of each potential action, as well as the related future net cash flows. Then, if estimated fair value is less than the carrying amount, management must determine if this impairment is other than temporary. If so, then an impairment write-down is required. (For additional information about the Company’s investment in Del-Tin Fiber, refer to Note 4 to the consolidated financial statements.)

The key components of the Timber and Timberlands policy are: (1) management’s decision to maintain separate timber cost pools for each legal entity within the Deltic consolidated group and (2) the required estimation of timber inventory volume, by species, for each of these companies in order to calculate the cost of fee timber harvested per ton. Management has elected to maintain a separate cost pool for the timber owned by each company, thus resulting in a different cost per ton for fee timber harvested for each. The mix of harvest by company for any period can significantly affect the amount of cost of fee timber harvested expense reported. Per-ton costs for 2003 ranged from $3.46 to $50.46 per ton for pine sawtimber. Had the Company opted to use a composite depletion rate, cost of pine sawtimber harvested would have been $2.3 million more in 2003, $1.3 million less in 2002, and $2.5 million less in 2001 ($1.5 million, $.8 million, $1.6 million, respectively, net of applicable income taxes) than as reported due to the mix of harvest by company during the year. In determining these rates, management must estimate the volume of timber existing on its timberlands. To estimate these fee timber inventories, the Company relies on its experienced forestry personnel and their use of statistical information and data obtained by actual physical measurements and other information gathering techniques. The cost of fee timber harvested recognized is impacted by the accuracy of this volume estimation. (For additional information about the Company’s timber and timberlands, refer to Note 5 to the consolidated financial statements.)

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Property, plant, and equipment assets are evaluated for possible impairment on a specific asset basis or in groups of similar assets, as applicable, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future net cash flows to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and depreciation ceases.

Management has also evaluated any asset or group of assets for which potential impairment might exist and has determined that there are none requiring an impairment write-down. This process requires management’s estimate of future cash flows generated by each asset or group of assets. For any instance where this evaluation process might indicate an impairment exists, the appropriate asset’s carrying values would be written down to fair value and the amount of the write-down would be charged against the results of continuing operations. (For additional information about the Company’s property, plant, and equipment, refer to Note 6 to the consolidated financial statements.)

The effect on net income/(loss) and earnings per share if the Company had applied the fair value recognition provisions of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards (“SFAS”) 123, Accounting for Stock-Based Compensation, for the years ended December 31 consisted of the following:

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For the pro forma net income calculation in the preceding table, the fair value of each option on the date of grant was estimated using the Black-Scholes option-pricing model and the following assumptions for awards in 2003, 2002, and 2001, respectively: dividend yields of 1.01 percent, 1.06 percent, and 1.06 percent; expected volatility of 32.79 percent, 31.19 percent, and 38.52 percent; risk-free interest rates of 4.86 percent, 4.37 percent, and 5.08 percent; and expected lives of five years. Using these assumptions, the weighted average grant-date fair value per share of options granted in 2003, 2002, and 2001 was $7.96, $9.26, and $9.05, respectively.

The key management decision factors for Stock-Based Compensation are: (1) the decision to account for stock-based compensation using the intrinsic value recognition and measurement principles of APB 25, Accounting for Stock Issued to Employees, or the fair value recognition and measurement principles of SFAS 123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for Stocked-Based Compensation – Transition and Disclosure, and (2) the determination of the exercise price for options granted. Currently, a company’s management can elect to adopt SFAS 123 or continue to use APB 25 for recognizing stock option expense in its financial statements. If continued use of APB 25 is elected, the income statement will generally reflect a lesser amount for stock-based compensation expense, and the potential impact of adopting SFAS 123 and SFAS 148 will only be disclosed on a pro forma basis in the financial statement footnotes. Under the Company’s stock incentive plan, option exercise price for options granted is equal to the fair market per share stock price on the date of the grant, which should result in no stock-based compensation expense for future options granted under the Company’s stock incentive plan. However, options granted in February 2002 were subject to shareholder approval at the Company’s annual stockholders’ meeting on April 25, 2002, the accounting measurement date for these options. As a result, these options had an intrinsic value of $3.46 per share due to an increase in the market price of the Company’s common stock between February and April, and the resulting stock-based compensation expense is being recognized over the vesting periods of these options. (For additional information about the Company’s stock-based compensation, refer to Note 15 to the consolidated financial statements.)

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 2003, 2002, and 2001, Deltic sold Del-Tin Fiber approximately $4.1 million, $3 million, and $1.9 million, respectively, of these residual by-products. (The increase for 2003 was due to Del-Tin Fiber increasing finished MDF production by 36 million square feet, or 38 percent, from 2002’s level.)

Impact of Recent Accounting Pronouncements

(For information regarding the impact of recent accounting pronouncements, refer to the related section in Note 1 to the consolidated financial statements.)

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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 2003 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 2004 is projected to decrease slightly from 2003’s level to 550,000 to 575,000 tons. The program to consider sales of timberland which has been identified as non-strategic or having a higher and better use will continue, with sales of 4,000 to 5,000 acres anticipated for 2004. Finished lumber production and resulting sales volumes are projected at 210 to 225 million feet for 2004; however, these volumes are dependent upon market conditions. With continued growth in west Little Rock, Arkansas, and the existing strong demand for residential lots in the Company’s Chenal Valley development, Deltic is developing approximately 250 lots for sale in 2004 and anticipates that closings for residential lots will be 200 to 240 lots for the year of 2004, barring declines in economic growth or residential construction activity.

The Company expects continued commercial acreage sales activity in 2004. The Company will continue to recognize equity in the financial results of Del-Tin Fiber, which are anticipated to be improved from 2003 although not to profitability.

The Company’s capital expenditure budget for the year of 2004 was prepared in the fall of 2003 and provides for expenditures totaling $28.3 million. The Woodlands capital budget of $6.9 million includes $5 million for timberland acquisitions, which will be dependent on the availability of acreage at prices that meet the Company’s criteria for timber stocking, growth potential, site index, and location. During 2004, various sawmill projects are expected to require $6.5 million, including $2.5 million for a kiln upgrade at the Ola Mill and $1.2 million for an edger addition at the Waldo Mill. Expenditures for residential lot development totaling $8.5 million are projected, depending on continuation of strong market conditions, to add about 250 lots to available inventory. Capital and other expenditures are under constant review, and these budget amounts may be adjusted to reflect changes in the Company’s estimated cash flows from operations, borrowings or repayments under credit facilities, or general economic conditions.

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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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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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2003 and 2002

(Thousands of dollars)

See accompanying notes to consolidated financial statements.

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Income

For the Years Ended December 31, 2003, 2002, and 2001

(Thousands of dollars, except per share amounts)