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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



FORM 10-K



(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2003



OR



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



Commission file number 1-12147



DELTIC TIMBER CORPORATION

(Exact name of registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 71-0795870                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                                         |  |           
|-------------------------------------------------------- |  | ----------
|210 East Elm Street, P. O. Box 7200, El Dorado, Arkansas |  | 71731-7200
|(Address of principal executive offices)                 |  | (Zip Code)



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



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



|                                                                  |  |                                          
|----------------------------------------------------------------- |  | -----------------------------------------
|Title of each class                                               |  | Name of each exchange on which registered
|Common Stock, $.01 Par Value                                      |  | New York Stock Exchange, Inc.            
|Series A Participating Cumulative Preferred Stock Purchase Rights |  | New York Stock Exchange, Inc.            



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.



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##### Table of Contents

TABLE OF CONTENTS - 2003 FORM 10-K REPORT



|           |  |                                                                                       |  |            
|---------- |  | ------------------------------------------------------------------------------------- |  | -----------
|           |  |                                                                                       |  | PageNumbers
|          
|PART I    
|           |  |                                                                                      
|Item 1.    |  | Business                                                                              |  | 3          
|           |  |                                                                                      
|Item 2.    |  | Properties                                                                            |  | 15         
|           |  |                                                                                      
|Item 3.    |  | Legal Proceedings                                                                     |  | 15         
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 15         
|          
|PART II   
|           |  |                                                                                      
|Item 5.    |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 17         
|           |  |                                                                                      
|Item 6.    |  | Selected Financial Data                                                               |  | 18         
|           |  |                                                                                      
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19         
|           |  |                                                                                      
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 37         
|           |  |                                                                                      
|Item 8.    |  | Financial Statements and Supplementary Data                                           |  | 38         
|           |  |                                                                                      
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 74         
|           |  |                                                                                      
|Item 9A.   |  | Controls and Procedures                                                               |  | 74         
|          
|PART III  
|           |  |                                                                                      
|Item 10.   |  | Directors and Executive Officers of the Registrant                                    |  | 75         
|           |  |                                                                                      
|Item 11.   |  | Executive Compensation                                                                |  | 75         
|           |  |                                                                                      
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 75         
|           |  |                                                                                      
|Item 13.   |  | Certain Relationships and Related Transactions                                        |  | 75         
|           |  |                                                                                      
|Item 14.   |  | Principal Accountant Fees and Services                                                |  | 75         
|          
|PART IV   
|           |  |                                                                                      
|Item 15.   |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 76         
|           |  |                                                                                      
|Signatures |  |                                                                                       |  | 79         



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PART I



|Item 1. | Business
|------- | --------



Introduction



Deltic
Timber Corporation (Deltic or the Company) is a natural resources company engaged primarily in the growing and harvesting of timber 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:



|                |  |        
|--------------- |  | -------
|                |  | Acres  
|Pine forest     |  | 234,000
|Pine plantation |  | 150,000
|Hardwood forest |  | 30,000 
|Other           |  | 20,000 
|                |  |        
|Total           |  | 434,000
|                |  |        



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:



|                |  |                      
|--------------- |  | ---------------------
|                |  | EstimatedVolume(Tons)
|Pine timber     |  |                      
|Sawtimber       |  | 11,136,000           
|Pulpwood        |  | 6,033,000            
|Hardwood timber |  |                      
|Sawtimber       |  | 983,000              
|Pulpwood        |  | 1,201,000            



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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##### Table of Contents

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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##### Table of Contents

|Item 2. | Properties
|------- | ----------



The Companys properties, primarily located in Arkansas and north Louisiana, consist principally of fee timber and timberlands, purchased stumpage
inventory, two sawmills, and land held for residential and commercial development and sale. As of December 31, 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:



|                                          |  |   |        
|----------------------------------------- |  | - | -------
|(Thousands of dollars)                    |  |   |        
|Timberlands                               |  | $ | 78,438 
|Fee timber and logging facilities         |  |   | 193,780
|Purchased stumpage inventory              |  |   | 8,688  
|Real estate held for development and sale |  |   | 40,539 
|Land and land improvements                |  |   | 4,131  
|Buildings and structures                  |  |   | 5,273  
|Machinery and equipment                   |  |   | 70,520 
|                                          |  |   |        
|                                          |  | $ | 401,369
|                                          |  |   |        



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.)



|Item 3. | Legal Proceedings
|------- | -----------------



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



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



None.



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##### Table of Contents

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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##### Table of Contents

PART II



|Item 5. | Market for Registrants Common Equity and Related Stockholder Matters.
|------- | ----------------------------------------------------------------------



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



|               |  |               |       |                           |       |        |       |  |      
|-------------- |  | ------------- | ----- | ------------------------- | ----- | ------ | ----- |  | -----
|               |  | Sales Prices1 |       | Dividend per Common Share
|               |  | High          |       | Low                       |       | Close2 |      
|2003           |  |               |       |                           |       |        |       |  |      
|First Quarter  |  | $             | 28.86 |                           | 23.35 |        | 23.90 |  | .0625
|Second Quarter |  | $             | 28.65 |                           | 23.85 |        | 28.45 |  | .0625
|Third Quarter  |  | $             | 33.70 |                           | 27.70 |        | 28.92 |  | .0625
|Fourth Quarter |  | $             | 31.34 |                           | 27.96 |        | 30.40 |  | .0625
|2002           |  |               |       |                           |       |        |       |  |      
|First Quarter  |  | $             | 30.63 |                           | 28.00 |        | 30.25 |  | .0625
|Second Quarter |  | $             | 34.95 |                           | 29.75 |        | 34.48 |  | .0625
|Third Quarter  |  | $             | 35.20 |                           | 21.98 |        | 21.98 |  | .0625
|Fourth Quarter |  | $             | 29.35 |                           | 22.00 |        | 26.70 |  | .0625



| | 1 | Daily closing price.
| | - | --------------------



| | 2 | At period end.
| | - | --------------



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.



|                                                           |  |                                                                                             |  |                                                                                   |       |                                                                                                                                     |          
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan Category                                              |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants, or rights(a.) |  | Weighted averageexercise price ofall
outstandingoptions, warrants,or rights, (b.) |       | Number of securitiesremaining availablefor future issuanceunder equitycompensation
plans[excluding securitiesincluded in (a.)] (c.)
|Equity compensation plans approved by security holders     |  | 552,572                                                                                     |  | $                                                                                 | 26.09 |                                                                                                                                     | 1,510,875
|Equity compensation plans not approved by security holders |  |                                                                                            |  |                                                                                   |      |                                                                                                                                     |         
|                                                           |  |                                                                                             |  |                                                                                   |       |                                                                                                                                     |          
|                                                           |  | 552,572                                                                                     |  | $                                                                                 | 26.09 |                                                                                                                                     | 1,510,875
|                                                           |  |                                                                                             |  |                                                                                   |       |                                                                                                                                     |          



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##### Table of Contents

|Item 6. | Selected Financial Data
|------- | -----------------------



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



|                                                 |  |      |           |   |       |           |   |      |           |   |      |           |   |      |           |  
|------------------------------------------------ |  | ---- | --------- | - | ----- | --------- | - | ---- | --------- | - | ---- | --------- | - | ---- | --------- | -
|(Thousands of dollars, except per share amounts) |  | 2003 |           |   | 2002* |           |   | 2001 |           |   | 2000 |           |   | 1999 |          
|Results of Operations for the Year               |  |      |           |   |       |           |   |      |           |   |      |           |   |      |           |  
|Net sales                                        |  | $    | 134,915   |   |       | 104,512   |   |      | 106,011   |   |      | 109,531   |   |      | 125,010   |  
|Operating income/(loss)                          |  | $    | 24,640    |   |       | 10,697    |   |      | 15,824    |   |      | 18,114    |   |      | 29,244    |  
|Income/(loss) from continuing operations         |  | $    | 8,703     |   |       | (13,639   | ) |      | 1,623     |   |      | 2,701     |   |      | 10,771    |  
|Net income/(loss)                                |  | $    | 8,703     |   |       | (13,639   | ) |      | 9,980     |   |      | 13,557    |   |      | 10,920    |  
|Comprehensive income/(loss)                      |  | $    | 8,579     |   |       | (13,639   | ) |      | 9,980     |   |      | 13,557    |   |      | 10,920    |  
|Earnings per common share                        |  |      |           |   |       |           |   |      |           |   |      |           |   |      |           |  
|Basic                                            |  |      |           |   |       |           |   |      |           |   |      |           |   |      |           |  
|Continuing operations                            |  | $    | .73       |   |       | (1.33     | ) |      | (.05      | ) |      | .04       |   |      | .68       |  
|Net income/(loss)                                |  | $    | .73       |   |       | (1.33     | ) |      | .65       |   |      | .93       |   |      | .69       |  
|Assuming dilution                                |  |      |           |   |       |           |   |      |           |   |      |           |   |      |           |  
|Continuing operations                            |  | $    | .73       |   |       | (1.33     | ) |      | (.05      | ) |      | .04       |   |      | .68       |  
|Net income/(loss)                                |  | $    | .73       |   |       | (1.33     | ) |      | .65       |   |      | .93       |   |      | .69       |  
|Cash dividends declared per common share         |  | $    | .25       |   |       | .25       |   |      | .25       |   |      | .25       |   |      | .25       |  
|Net cash provided/(required) by                  |  |      |           |   |       |           |   |      |           |   |      |           |   |      |           |  
|Operating activities                             |  | $    | 44,992    |   |       | 32,452    |   |      | 41,238    |   |      | 42,919    |   |      | 36,842    |  
|Investing activities                             |  | $    | (40,085   | ) |       | (35,278   | ) |      | (25,390   | ) |      | (63,634   | ) |      | (32,183   | )
|Financing activities                             |  | $    | (4,277    | ) |       | (2,239    | ) |      | (12,438   | ) |      | 18,645    |   |      | (8,037    | )
|Percentage return on                             |  |      |           |   |       |           |   |      |           |   |      |           |   |      |           |  
|Average stockholders equity                     |  |      | 5.3       |   |       | (7.6      | ) |      | 5.5       |   |      | 7.7       |   |      | 5.8       |  
|Average borrowed and invested capital            |  |      | 5.4       |   |       | (3.2      | ) |      | 5.3       |   |      | 6.9       |   |      | 6.1       |  
|Average total assets                             |  |      | 2.8       |   |       | (4.2      | ) |      | 3.0       |   |      | 4.8       |   |      | 3.9       |  
|Capital Expenditures for the Year                |  |      |           |   |       |           |   |      |           |   |      |           |   |      |           |  
|Woodlands                                        |  | $    | 12,408    |   |       | 5,175     |   |      | 44,432    |   |      | 24,975    |   |      | 8,541     |  
|Mills                                            |  |      | 3,405     |   |       | 3,571     |   |      | 5,861     |   |      | 8,386     |   |      | 7,949     |  
|Real Estate                                      |  |      | 11,198    |   |       | 15,378    |   |      | 13,514    |   |      | 9,667     |   |      | 11,475    |  
|Corporate                                        |  |      | 211       |   |       | 113       |   |      | 150       |   |      | 320       |   |      | 124       |  
|Discontinued agriculture operations              |  |      |          |   |       |          |   |      |          |   |      | 53        |   |      | 527       |  
|                                                 |  |      |           |   |       |           |   |      |           |   |      |           |   |      |           |  
|                                                 |  | $    | 27,222    |   |       | 24,237    |   |      | 63,957    |   |      | 43,401    |   |      | 28,616    |  
|                                                 |  |      |           |   |       |           |   |      |           |   |      |           |   |      |           |  
|Financial Condition at Year-End                  |  |      |           |   |       |           |   |      |           |   |      |           |   |      |           |  
|Working capital                                  |  | $    | 7,134     |   |       | 2,125     |   |      | 13,015    |   |      | 10,086    |   |      | 17,569    |  
|Current ratio                                    |  |      | 2.01 to 1 |   |       | 1.2 to 1  |   |      | 2.8 to 1  |   |      | 2.4 to 1  |   |      | 4.6 to 1  |  
|Total assets                                     |  | $    | 314,310   |   |       | 310,546   |   |      | 328,380   |   |      | 322,633   |   |      | 277,898   |  
|Long-term debt                                   |  | $    | 115,056   |   |       | 116,120   |   |      | 84,190    |   |      | 87,410    |   |      | 55,570    |  
|Redeemable preferred stock                       |  | $    |          |   |       |          |   |      | 30,000    |   |      | 30,000    |   |      | 30,000    |  
|Stockholders equity                             |  | $    | 170,234   |   |       | 162,962   |   |      | 180,799   |   |      | 176,834   |   |      | 178,408   |  
|Long-term debt to stockholders equity ratio     |  |      | .676 to 1 |   |       | .713 to 1 |   |      | .466 to 1 |   |      | .494 to 1 |   |      | .311 to 1 |  



|* | Includes the write-off of the Companys investment in Del-Tin Fiber of $18,723,000, $11,440,000 net of related deferred income taxes of $7,283,000.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



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.



|                                                               |  |                          |       |   |      |       |   |      |       |  
|-------------------------------------------------------------- |  | ------------------------ | ----- | - | ---- | ----- | - | ---- | ----- | -
|                                                               |  | Years Ended December 31, |      
|(Millions of dollars, except per share amounts)                |  | 2003                     |       |   | 2002 |       |   | 2001 |      
|Net sales                                                      |  |                          |       |   |      |       |   |      |       |  
|Woodlands                                                      |  | $                        | 38.2  |   |      | 37.0  |   |      | 38.3  |  
|Mills                                                          |  |                          | 79.1  |   |      | 70.4  |   |      | 57.4  |  
|Real Estate                                                    |  |                          | 33.8  |   |      | 15.3  |   |      | 25.0  |  
|Eliminations                                                   |  |                          | (16.2 | ) |      | (18.2 | ) |      | (14.7 | )
|                                                               |  |                          |       |   |      |       |   |      |       |  
|Net sales                                                      |  | $                        | 134.9 |   |      | 104.5 |   |      | 106.0 |  
|                                                               |  |                          |       |   |      |       |   |      |       |  
|Operating income/(loss) and net income/(loss)                  |  |                          |       |   |      |       |   |      |       |  
|Woodlands                                                      |  | $                        | 24.8  |   |      | 22.5  |   |      | 22.3  |  
|Mills                                                          |  |                          | (4.9  | ) |      | (6.4  | ) |      | (7.1  | )
|Real Estate                                                    |  |                          | 13.1  |   |      | 2.0   |   |      | 7.4   |  
|Corporate                                                      |  |                          | (8.4  | ) |      | (6.8  | ) |      | (6.4  | )
|Eliminations                                                   |  |                          |      |   |      | (.6   | ) |      | (.4   | )
|                                                               |  |                          |       |   |      |       |   |      |       |  
|Operating income                                               |  |                          | 24.6  |   |      | 10.7  |   |      | 15.8  |  
|Equity in loss of and write-off of investment in Del-Tin Fiber |  |                          | (4.7  | ) |      | (28.2 | ) |      | (9.1  | )
|Interest income                                                |  |                          | .5    |   |      | .3    |   |      | .9    |  
|Interest and other debt expense                                |  |                          | (6.9  | ) |      | (4.5  | ) |      | (5.7  | )
|Other income/(expense)                                         |  |                          | .2    |   |      | .4    |   |      | .4    |  
|Income taxes                                                   |  |                          | (5.0  | ) |      | 7.7   |   |      | (.7   | )
|                                                               |  |                          |       |   |      |       |   |      |       |  
|Income/(loss) from continuing operations                       |  |                          | 8.7   |   |      | (13.6 | ) |      | 1.6   |  
|Income/(loss) from discontinued operations, net                |  |                          |      |   |      |      |   |      | 8.4   |  
|                                                               |  |                          |       |   |      |       |   |      |       |  
|Net income/(loss)                                              |  | $                        | 8.7   |   |      | (13.6 | ) |      | 10.0  |  
|                                                               |  |                          |       |   |      |       |   |      |       |  
|Earnings per common share*                                     |  |                          |       |   |      |       |   |      |       |  
|Continuing operations                                          |  | $                        | .73   |   |      | (1.33 | ) |      | (.05  | )
|Discontinued operations                                        |  |                          |      |   |      |      |   |      | .70   |  
|                                                               |  |                          |       |   |      |       |   |      |       |  
|Net income/(loss)                                              |  | $                        | .73   |   |      | (1.33 | ) |      | .65   |  
|                                                               |  |                          |       |   |      |       |   |      |       |  



|* | Amounts for 2001 and 2002 were after dividends for preferred stock that was redeemed in December 2002.
|- | ------------------------------------------------------------------------------------------------------



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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.



|                                 |  |      |       |      |       |      |      
|-------------------------------- |  | ---- | ----- | ---- | ----- | ---- | -----
|                                 |  | 2003 |       | 2002 |       | 2001
|Net sales (millions of dollars)  |  |      |       |      |       |      |      
|Pine sawtimber                   |  | $    | 24.8  |      | 29.6  |      | 26.4 
|Pine pulpwood                    |  |      | 1.9   |      | 1.5   |      | 1.4  
|Hardwood sawtimber               |  |      | 1.3   |      | .5    |      | .4   
|Hardwood pulpwood                |  |      | .6    |      | .4    |      | .7   
|Sales volume (thousands of tons) |  |      |       |      |       |      |      
|Pine sawtimber                   |  |      | 614   |      | 714   |      | 673  
|Pine pulpwood                    |  |      | 306   |      | 250   |      | 289  
|Hardwood sawtimber               |  |      | 25    |      | 12    |      | 13   
|Hardwood pulpwood                |  |      | 114   |      | 86    |      | 114  
|Sales price (per ton)            |  |      |       |      |       |      |      
|Pine sawtimber                   |  | $    | 40    |      | 41    |      | 39   
|Pine pulpwood                    |  |      | 6     |      | 6     |      | 5    
|Hardwood sawtimber               |  |      | 51    |      | 41    |      | 32   
|Hardwood pulpwood                |  |      | 6     |      | 5     |      | 7    
|Timberland                       |  |      |       |      |       |      |      
|Net sales (millions of dollars)  |  | $    | 8.1   |      | 3.4   |      | 7.8  
|Sales volume (acres)             |  |      | 4,130 |      | 3,418 |      | 3,315
|Sales price (per acre)           |  | $    | 2,000 |      | 1,000 |      | 2,400



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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.



|                                |  |      |      |      |      |      |     
|------------------------------- |  | ---- | ---- | ---- | ---- | ---- | ----
|                                |  | 2003 |      | 2002 |      | 2001
|Net sales (millions of dollars) |  |      |      |      |      |      |     
|Lumber                          |  | $    | 68.2 |      | 59.5 |      | 48.5
|Residual products               |  |      | 9.7  |      | 9.4  |      | 7.9 
|Lumber                          |  |      |      |      |      |      |     
|Finished production (MMBF)      |  |      | 215  |      | 203  |      | 164 
|Sales volume (MMBF)             |  |      | 220  |      | 199  |      | 158 
|Sales price (per MBF)           |  | $    | 310  |      | 298  |      | 306 



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.



|                                           |  |      |      |      |     |      |     
|------------------------------------------ |  | ---- | ---- | ---- | --- | ---- | ----
|                                           |  | 2003 |      | 2002 |     | 2001
|Net sales (millions of dollars)            |  |      |      |      |     |      |     
|Residential lots                           |  | $    | 15.2 |      | 9.6 |      | 16.9
|Commercial sites                           |  |      | 12.6 |      | .1  |      | 2.3 
|Undeveloped acreage                        |  |      |     |      | .2  |      | .3  
|Sales volume                               |  |      |      |      |     |      |     
|Residential lots                           |  |      | 196  |      | 141 |      | 198 
|Commercial acres                           |  |      | 72   |      | 1   |      | 14  
|Undeveloped acres                          |  |      |     |      | 22  |      | 40  
|Average sales price (thousands of dollars) |  |      |      |      |     |      |     
|Residential lots                           |  | $    | 78   |      | 68  |      | 85  
|Commercial acres                           |  |      | 175  |      | 218 |      | 161 
|Undeveloped acres                          |  |      |     |      | 10  |      | 7   



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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##### Table of Contents

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.



|                                |  |      |       |      |      |      |     
|------------------------------- |  | ---- | ----- | ---- | ---- | ---- | ----
|                                |  | 2003 |       | 2002 |      | 2001
|Net sales (millions of dollars) |  | $    | 48.7  |      | 31.3 |      | 16.7
|Finished production (MMSF)      |  |      | 132.7 |      | 96.7 |      | 52.0
|Board sales (MMSF)              |  |      | 131.2 |      | 97.7 |      | 49.3
|Sales price (per MSF)           |  | $    | 339   |      | 320  |      | 339 



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.



|                            |  |      |      |      |      |      |      |  
|--------------------------- |  | ---- | ---- | ---- | ---- | ---- | ---- | -
|                            |  | 2003 |      | 2002 |      | 2001 |     
|(Millions of dollars)       |  |      |      |      |      |      |     
|Woodlands                   |  | $    | 12.4 |      | 5.2  |      | 44.4 |  
|Mills                       |  |      | 3.4  |      | 3.5  |      | 5.9  |  
|Real Estate                 |  |      | 11.2 |      | 15.4 |      | 13.5 |  
|Corporate                   |  |      | .2   |      | .1   |      | .2   |  
|                            |  |      |      |      |      |      |      |  
|Total capital expenditures  |  |      | 27.2 |      | 24.2 |      | 64.0 |  
|Owner-financed expenditures |  |      |     |      |     |      | (.2  | )
|                            |  |      |      |      |      |      |      |  
|Expenditures requiring cash |  | $    | 27.2 |      | 24.2 |      | 63.8 |  
|                            |  |      |      |      |      |      |      |  



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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##### Table of Contents

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.)



|                                                       |  |       |       |            |    |             |      |             |      |           |     
|------------------------------------------------------ |  | ----- | ----- | ---------- | -- | ----------- | ---- | ----------- | ---- | --------- | ----
|                                                       |  | Total |       | During2004 |    | 2005to 2006 |      | 2007to 2008 |      | After2008
|(Millions of dollars)                                  |  |       |       |            |    |             |      |             |      |          
|Contractual cash payment obligations                   |  |       |       |            |    |             |      |             |      |           |     
|Real estate development infrastructure                 |  | $     | 1.7   |            | .5 |             | 1.2  |             |     |           |    
|Timber cutting agreements                              |  |       | .2    |            | .1 |             | .1   |             |     |           |    
|Long-term debt                                         |  |       | 115.1 |            | .1 |             |     |             | 85.0 |           | 30.0
|                                                       |  |       |       |            |    |             |      |             |      |           |     
|                                                       |  | $     | 117.0 |            | .7 |             | 1.3  |             | 85.0 |           | 30.0
|                                                       |  |       |       |            |    |             |      |             |      |           |     
|Other commercial commitment expirations                |  |       |       |            |    |             |      |             |      |           |     
|Del-Tin Fiber contingent equity contribution agreement |  | $     | 17.5  |            |   |             | 17.5 |             |     |           |    
|Del-Tin Fiber production support agreement             |  |       | 13.7  |            |   |             | 13.7 |             |     |           |    
|Letters of credit                                      |  |       | .8    |            | .4 |             | .3   |             | .1   |           |    
|                                                       |  |       |       |            |    |             |      |             |      |           |     
|                                                       |  | $     | 32.0  |            | .4 |             | 31.5 |             | .1   |           |    
|                                                       |  |       |       |            |    |             |      |             |      |           |     



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.)



| | 1) | Investment in Real Estate Held for Development and Sale  Real estate held for development and sale is stated at the lower of cost or net realizable value, and
includes direct costs of land and land development and indirect costs, including amenities. These costs are allocated to individual lots or acreage sold based on relative sales value. Direct costs are allocated on a specific neighborhood basis,
while indirect costs for the Companys three development areas  Chenal Valley, Chenal Downs, and Red Oak Ridge  are allocated to neighborhoods over the entire respective development area based on relative retail values.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



| | 2) | Investment in Del-Tin Fiber  Investment in Del-Tin Fiber L.L.C. (Del-Tin Fiber), a 50 percent-owned limited liability company, is carried
at cost and is adjusted for the Companys proportionate share of its undistributed earnings or losses. The Companys equity-method-basis carrying value for its investment in Del-Tin Fiber is evaluated for possible impairment, as applicable
under the requirements of Accounting Principles Board Opinion (APB) 18. This evaluation as of December 31, 2002, based on the intent of the Companys Board of Directors to exit the business, resulted in a determination that the
Companys investment was impaired as of December 31, 2002, and the carrying amount of the investment was written off, to zero, for the 2002 Consolidated
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | Balance Sheet. On December 11, 2003, the Companys Board of Directors revised its intent in regard to selling Deltics interest in the joint
venture, and the resulting evaluation of fair value for the related investment indicated that fair value exceeded carrying value at December 31, 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.)



| | 3) | Timber and Timberlands  Timber and timberlands, which includes purchased stumpage inventory and logging facilities, is stated at acquisition cost less cost of fee
timber harvested and accumulated depreciation of logging facilities. The cost of fee timber harvested is based on the volume of timber harvested in relation to the estimated volume of timber recoverable. Logging facilities, which consist primarily
of roads constructed and other land improvements, are depreciated using the straight-line method over a ten-year estimated life. The Companys professional foresters estimate its fee timber inventory using statistical information and data
obtained from physical measurements and other information gathering techniques. The cost of timber and timberland purchased and reforestation costs are capitalized. Fee timber carrying costs are expensed as incurred.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.)



| | 4) | Property, Plant, and Equipment  Property, plant, and equipment is stated at cost less accumulated depreciation. Depreciation of buildings, equipment,
and other depreciable assets is primarily determined using the straight-line method. Expenditures that substantially improve and/or increase the useful life of facilities or equipment are capitalized. Maintenance and repair costs are
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | expensed as incurred. Gains and losses on disposals or retirements are included in income as they occur.
| | --------------------------------------------------------------------------------------------------------



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.)



| | 5) | Stock-Based Compensation  At December 31, 2003, Deltic had two stock-based compensation plans for which the Company applies the recognition and measurement principles
of APB 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for those plans. Stock-based employee compensation expense is accrued for the intrinsic value, if any, of stock options or restricted stock granted over
the applicable vesting periods using the straight-line method. Options granted by the Company have an exercise price equal to the market value of the underlying common stock on the date of grant. As of November 2001, the Company eliminated certain
option exercise procedures, resulting in a change to fixed-plan accounting treatment for all options. Prior to that date, the Company was required to apply variable plan accounting standards which required adjustment of the cost of options granted
for changes in the market value per share of the Companys common stock. (For additional information, see Note 15  Incentive Plans.)
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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:



|                                                                                                                                                                            |  |      |       |   |      |         |   |      |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | ------- | - | ---- | ----- | -
|                                                                                                                                                                            |  | 2003 |       |   | 2002 |         |   | 2001 |      
|(Thousands of dollars, except per share amounts)                                                                                                                            |  |      |       |   |      |         |   |      |      
|Net income/(loss), as reported                                                                                                                                              |  | $    | 8,703 |   |      | (13,639 | ) |      | 9,980 |  
|Plus total stock-based compensation expense determined under the intrinsic value method for awards, net of related tax effects, included in
the determination of net income |  |      | 220   |   |      | 431     |   |      | 402   |  
|Less pro forma total stock-based compensation expense determined under the fair value method for all awards, net of related tax
effects                                     |  |      | (769  | ) |      | (937    | ) |      | (785  | )
|                                                                                                                                                                            |  |      |       |   |      |         |   |      |       |  
|Pro forma net income/(loss)                                                                                                                                                 |  | $    | 8,154 |   |      | (14,145 | ) |      | 9,597 |  
|                                                                                                                                                                            |  |      |       |   |      |         |   |      |       |  



34



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|                                                 |  |      |     |      |       |   |      |    
|------------------------------------------------ |  | ---- | --- | ---- | ----- | - | ---- | ---
|                                                 |  | 2003 |     | 2002 |       |   | 2001
|(Thousands of dollars, except per share amounts) |  |      |     |      |       |   |     
|Basic earnings per share                         |  |      |     |      |       |   |      |    
|As reported                                      |  | $    | .73 |      | (1.33 | ) |      | .65
|Pro forma                                        |  |      | .68 |      | (1.38 | ) |      | .62
|Dilutive earnings per share                      |  |      |     |      |       |   |      |    
|As reported                                      |  | $    | .73 |      | (1.33 | ) |      | .65
|Pro forma                                        |  |      | .68 |      | (1.38 | ) |      | .61



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.)



35



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##### Table of Contents

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.



36



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##### Table of Contents

|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------



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



37



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##### Table of Contents

|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------



DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2003 and 2002

---

(Thousands of dollars)



|                                                                                 |  |      |         |   |      |         |  
|-------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | ------- | -
|                                                                                 |  | 2003 |         |   | 2002 |        
|Assets                                                                           |  |      |         |   |      |         |  
|Current assets                                                                   |  |      |         |   |      |         |  
|Cash and cash equivalents                                                        |  | $    | 1,687   |   |      | 1,057   |  
|Trade accounts receivable  net                                                  |  |      | 4,243   |   |      | 3,230   |  
|Other receivables                                                                |  |      | 1,041   |   |      | 2,321   |  
|Inventories                                                                      |  |      | 5,778   |   |      | 6,257   |  
|Prepaid expenses and other current assets                                        |  |      | 1,461   |   |      | 1,607   |  
|                                                                                 |  |      |         |   |      |         |  
|Total current assets                                                             |  |      | 14,210  |   |      | 14,472  |  
|Investment in real estate held for development and sale                          |  |      | 40,539  |   |      | 42,551  |  
|Other investments and noncurrent receivables                                     |  |      | 6,660   |   |      | 2,558   |  
|Timber and timberlands  net                                                     |  |      | 215,040 |   |      | 209,317 |  
|Property, plant, and equipment  net                                             |  |      | 36,882  |   |      | 39,572  |  
|Deferred charges and other assets                                                |  |      | 979     |   |      | 2,076   |  
|                                                                                 |  |      |         |   |      |         |  
|Total assets                                                                     |  | $    | 314,310 |   |      | 310,546 |  
|                                                                                 |  |      |         |   |      |         |  
|Liabilities and Stockholders Equity                                             |  |      |         |   |      |         |  
|Current liabilities                                                              |  |      |         |   |      |         |  
|Current maturities of long-term debt                                             |  | $    | 64      |   |      | 70      |  
|Trade accounts payable                                                           |  |      | 2,772   |   |      | 3,316   |  
|Accrued taxes other than income taxes                                            |  |      | 1,246   |   |      | 1,194   |  
|Bank overdraft                                                                   |  |      |        |   |      | 913     |  
|Income taxes payable                                                             |  |      | 151     |   |      |        |  
|Deferred revenues and other accrued liabilities                                  |  |      | 2,843   |   |      | 6,854   |  
|                                                                                 |  |      |         |   |      |         |  
|Total current liabilities                                                        |  |      | 7,076   |   |      | 12,347  |  
|Long-term debt                                                                   |  |      | 115,056 |   |      | 116,120 |  
|Deferred tax liabilities  net                                                   |  |      | 12,559  |   |      | 11,955  |  
|Other noncurrent liabilities                                                     |  |      | 9,385   |   |      | 7,162   |  
|Stockholders equity                                                             |  |      |         |   |      |         |  
|Cumulative preferred stock - $.01 par, authorized 20,000,000 shares, none issued |  |      |        |   |      |        |  
|Common stock - $.01 par, authorized 50,000,000 shares, 12,813,879 shares issued  |  |      | 128     |   |      | 128     |  
|Capital in excess of par value                                                   |  |      | 69,459  |   |      | 69,075  |  
|Retained earnings                                                                |  |      | 119,888 |   |      | 114,165 |  
|Unamortized restricted stock awards                                              |  |      | (14     | ) |      | (133    | )
|Treasury stock                                                                   |  |      | (19,103 | ) |      | (20,273 | )
|Accumulated other comprehensive income                                           |  |      | (124    | ) |      |        |  
|                                                                                 |  |      |         |   |      |         |  
|Total stockholders equity                                                       |  |      | 170,234 |   |      | 162,962 |  
|                                                                                 |  |      |         |   |      |         |  
|Total liabilities and stockholders equity                                       |  | $    | 314,310 |   |      | 310,546 |  
|                                                                                 |  |      |         |   |      |         |  



See
accompanying notes to consolidated financial statements.



38



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##### Table of Contents

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)



|                                                                                     |  |      |         |   |      |         |   |      |         |  
|------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | ------- | - | ---- | ------- | -
|                                                                                     |  | 2003 |         |   | 2002 |         |   | 2001 |        
|Net sales                                                                            |  | $    | 134,915 |   |      | 104,512 |   |      | 106,011 |  
|                                                                                     |  |      |         |   |      |         |   |      |         |  
|Costs and expenses                                                                   |  |      |         |   |      |         |   |      |         |  
|Cost of sales                                                                        |  |      | 87,596  |   |      | 70,979  |   |      | 68,125  |  
|Depreciation, amortization, and cost of fee timber harvested                         |  |      | 13,345  |   |      | 15,224  |   |      | 14,991  |  
|General and administrative expenses                                                  |  |      | 9,334   |   |      | 7,612   |   |      | 7,071   |  
|                                                                                     |  |      |         |   |      |         |   |      |         |  
|Total costs and expenses                                                             |  |      | 110,275 |   |      | 93,815  |   |      | 90,187  |  
|                                                                                     |  |      |         |   |      |         |   |      |         |  
|Operating income                                                                     |  |      | 24,640  |   |      | 10,697  |   |      | 15,824  |  
|Equity in loss of and write-off of investment in Del-Tin Fiber                       |  |      | (4,729  | ) |      | (28,217 | ) |      | (9,132  | )
|Interest income                                                                      |  |      | 476     |   |      | 284     |   |      | 946     |  
|Interest and other debt expense                                                      |  |      | (6,861  | ) |      | (4,558  | ) |      | (5,725  | )
|Other income/(expense)                                                               |  |      | 161     |   |      | 433     |   |      | 438     |  
|                                                                                     |  |      |         |   |      |         |   |      |         |  
|Income/(loss) from continuing operations before income taxes                         |  |      | 13,687  |   |      | (21,361 | ) |      | 2,351   |  
|Income taxes                                                                         |  |      | (4,984  | ) |      | 7,722   |   |      | (728    | )
|                                                                                     |  |      |         |   |      |         |   |      |         |  
|Income/(loss) from continuing operations                                             |  |      | 8,703   |   |      | (13,639 | ) |      | 1,623   |  
|Gain on disposal of discontinued agriculture segment operations, net of income taxes |  |      |        |   |      |        |   |      | 8,357   |  
|                                                                                     |  |      |         |   |      |         |   |      |         |  
|Net income/(loss)                                                                    |  | $    | 8,703   |   |      | (13,639 | ) |      | 9,980   |  
|                                                                                     |  |      |         |   |      |         |   |      |         |  
|Earnings per common share                                                            |  |      |         |   |      |         |   |      |         |  
|Basic                                                                                |  |      |         |   |      |         |   |      |         |  
|Continuing operations                                                                |  | $    | .73     |   |      | (1.33   | ) |      | (.05    | )
|Discontinued operations                                                              |  |      |        |   |      |        |   |      | .70     |  
|                                                                                     |  |      |         |   |      |         |   |      |         |  
|Net income/(loss)                                                                    |  | $    | .73     |   |      | (1.33   | ) |      | .65     |  
|                                                                                     |  |      |         |   |      |         |   |      |         |  
|Assuming dilution                                                                    |  |      |         |   |      |         |   |      |         |  
|Continuing operations                                                                |  | $    | .73     |   |      | (1.33   | ) |      | (.05    | )
|Discontinued operations                                                              |  |      |        |   |      |        |   |      | .70     |  
|                                                                                     |  |      |         |   |      |         |   |      |         |  
|Net income/(loss)                                                                    |  | $    | .73     |   |      | (1.33   | ) |      | .65     |  
|                                                                                     |  |      |         |   |      |         |   |      |         |  
|Dividends declared per common share                                                  |  | $    | .25     |   |      | .25     |   |      | .25     |  
|                                                                                     |  |      |         |   |      |         |   |      |         |  
|Average common shares outstanding (thousands)                                        |  |      | 11,924  |   |      | 11,919  |   |      | 11,896  |  
|                                                                                     |  |      |         |   |      |         |   |      |         |  



See
accompanying notes to consolidated financial statements.



39



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##### Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

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

---

(Thousands of dollars)



|                                                                                                   |  |      |         |   |      |         |   |      |         |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | ------- | - | ---- | ------- | -
|                                                                                                   |  | 2003 |         |   | 2002 |         |   | 2001 |        
|Operating activities                                                                               |  |      |         |   |      |         |   |      |         |  
|Net income/(loss)                                                                                  |  | $    | 8,703   |   |      | (13,639 | ) |      | 9,980   |  
|Adjustments to reconcile net income/(loss) to net cash provided/(required) by operating activities |  |      |         |   |      |         |   |      |         |  
|Depreciation, amortization, and cost of fee timber harvested                                       |  |      | 13,345  |   |      | 15,224  |   |      | 14,991  |  
|Deferred income taxes                                                                              |  |      | 674     |   |      | (7,714  | ) |      | 6,655   |  
|Gain from disposal of agriculture segment assets                                                   |  |      |        |   |      |        |   |      | (14,454 | )
|Real estate costs recovered upon sale                                                              |  |      | 11,385  |   |      | 5,456   |   |      | 9,577   |  
|Timberland costs recovered upon sale                                                               |  |      | 1,084   |   |      | 921     |   |      | 1,027   |  
|Equity in loss of and write-off of investment in Del-Tin Fiber                                     |  |      | 4,729   |   |      | 28,217  |   |      | 9,132   |  
|Net increase/(decrease) in provisions for pension and other postretirement benefits                |  |      | 3,146   |   |      | 1,387   |   |      | 1,001   |  
|(Increase)/decrease in operating working capital other than cash and cash equivalents              |  |      | 942     |   |      | 1,532   |   |      | 2,866   |  
|Other - net                                                                                        |  |      | 984     |   |      | 1,068   |   |      | 463     |  
|                                                                                                   |  |      |         |   |      |         |   |      |         |  
|Net cash provided/(required) by operating activities, including discontinued operations            |  |      | 44,992  |   |      | 32,452  |   |      | 41,238  |  
|                                                                                                   |  |      |         |   |      |         |   |      |         |  
|Investing activities                                                                               |  |      |         |   |      |         |   |      |         |  
|Capital expenditures requiring cash                                                                |  |      | (27,222 | ) |      | (24,237 | ) |      | (63,781 | )
|Net change in purchased stumpage inventory                                                         |  |      | (1,200  | ) |      | (1,823  | ) |      | 4,321   |  
|Advances to Del-Tin Fiber                                                                          |  |      | (8,957  | ) |      | (12,219 | ) |      | (14,701 | )
|Proceeds from disposal of agriculture segment assets                                               |  |      |        |   |      |        |   |      | 18,079  |  
|Increase/(decrease) in farmland sale contract deposits                                             |  |      |        |   |      |        |   |      | (1,455  | )
|(Increase)/decrease in funds held by trustee                                                       |  |      | (4,136  | ) |      | 1,789   |   |      | 14,082  |  
|Receipts of/(additions to) noncurrent receivables                                                  |  |      |        |   |      |        |   |      | 17,105  |  
|Other  net                                                                                        |  |      | 1,430   |   |      | 1,212   |   |      | 960     |  
|                                                                                                   |  |      |         |   |      |         |   |      |         |  
|Net cash provided/(required) by investing activities, including discontinued operations            |  |      | (40,085 | ) |      | (35,278 | ) |      | (25,390 | )
|                                                                                                   |  |      |         |   |      |         |   |      |         |  
|Financing activities                                                                               |  |      |         |   |      |         |   |      |         |  
|Proceeds from borrowings                                                                           |  |      | 37,039  |   |      | 96,450  |   |      | 14,533  |  
|Repayments of notes payable and long-term debt                                                     |  |      | (38,109 | ) |      | (64,524 | ) |      | (18,815 | )
|Redemption of preferred stock                                                                      |  |      |        |   |      | (30,000 | ) |      |        |  
|Treasury stock purchases                                                                           |  |      | (377    | ) |      | (746    | ) |      | (1,026  | )
|Increase/(decrease) in bank overdraft                                                              |  |      | (913    | ) |      | 913     |   |      | (1,384  | )
|Preferred stock dividends paid                                                                     |  |      |        |   |      | (2,344  | ) |      | (2,262  | )
|Common stock dividends paid                                                                        |  |      | (2,980  | ) |      | (2,981  | ) |      | (2,974  | )
|Proceeds from stock option exercises                                                               |  |      | 1,572   |   |      | 1,161   |   |      |        |  
|Other - net                                                                                        |  |      | (509    | ) |      | (168    | ) |      | (510    | )
|                                                                                                   |  |      |         |   |      |         |   |      |         |  
|Net cash provided/(required) by financing activities, including discontinued operations            |  |      | (4,277  | ) |      | (2,239  | ) |      | (12,438 | )
|                                                                                                   |  |      |         |   |      |         |   |      |         |  
|Net increase/(decrease) in cash and cash equivalents                                               |  |      | 630     |   |      | (5,065  | ) |      | 3,410   |  
|Cash and cash equivalents at beginning of year                                                     |  |      | 1,057   |   |      | 6,122   |   |      | 2,712   |  
|                                                                                                   |  |      |         |   |      |         |   |      |         |  
|Cash and cash equivalents at end of year                                                           |  | $    | 1,687   |   |      | 1,057   |   |      | 6,122   |  
|                                                                                                   |  |      |         |   |      |         |   |      |         |  



See
accompanying notes to consolidated financial statements.



40



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##### Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Stockholders Equity

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

---

(Thousands of dollars)



|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | ------- | - | ---- | ------- | -
|                                                                                                                                                                                                                                |  | 2003 |         |   | 2002 |         |   | 2001 |        
|Cumulative preferred stock  $.01 par, authorized 20,000,000 shares; zero, zero, and 600,000 shares issued as redeemable preferred stock
at end of 2003, 2002, and 2001, respectively (See Note 9  Redeemable Preferred Stock) |  | $    |        |   |      |        |   |      |        |  
|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  
|Common stock  $.01 par, authorized 50,000,000 shares, 12,813,879 shares issued at end of each year                                                                                                                             |  |      | 128     |   |      | 128     |   |      | 128     |  
|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  
|Capital in excess of par value                                                                                                                                                                                                  |  |      |         |   |      |         |   |      |         |  
|Balance at beginning of year                                                                                                                                                                                                    |  |      | 69,075  |   |      | 68,766  |   |      | 68,757  |  
|Exercise of stock options                                                                                                                                                                                                       |  |      | 384     |   |      | 309     |   |      | 9       |  
|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  
|Balance at end of year                                                                                                                                                                                                          |  |      | 69,459  |   |      | 69,075  |   |      | 68,766  |  
|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  
|Retained earnings                                                                                                                                                                                                               |  |      |         |   |      |         |   |      |         |  
|Balance at beginning of year                                                                                                                                                                                                    |  |      | 114,165 |   |      | 133,034 |   |      | 128,290 |  
|Net income/(loss)                                                                                                                                                                                                               |  |      | 8,703   |   |      | (13,639 | ) |      | 9,980   |  
|Preferred stock dividends accrued                                                                                                                                                                                               |  |      |        |   |      | (2,249  | ) |      | (2,262  | )
|Common stock dividends declared, $.25 per share                                                                                                                                                                                 |  |      | (2,980  | ) |      | (2,981  | ) |      | (2,974  | )
|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  
|Balance at end of year                                                                                                                                                                                                          |  |      | 119,888 |   |      | 114,165 |   |      | 133,034 |  
|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  
|Unamortized restricted stock awards                                                                                                                                                                                             |  |      |         |   |      |         |   |      |         |  
|Balance at beginning of year                                                                                                                                                                                                    |  |      | (133    | ) |      | (264    | ) |      | (472    | )
|Amortization to expense                                                                                                                                                                                                         |  |      | 119     |   |      | 131     |   |      | 208     |  
|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  
|Balance at end of year                                                                                                                                                                                                          |  |      | (14     | ) |      | (133    | ) |      | (264    | )
|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  
|Treasury stock                                                                                                                                                                                                                  |  |      |         |   |      |         |   |      |         |  
|Balance at beginning of year  898,175, 925,725, and 878,556 shares, respectively                                                                                                                                               |  |      | (20,273 | ) |      | (20,865 | ) |      | (19,869 | )
|Shares purchased  15,909 shares in 2003, 31,800 shares in 2002, and 48,500 shares in 2001                                                                                                                                      |  |      | (377    | ) |      | (746    | ) |      | (1,026  | )
|Shares issued for incentive plans  68,484 shares in 2003, 59,350 shares in 2002, and 1,331 shares in 2001                                                                                                                      |  |      | 1,547   |   |      | 1,338   |   |      | 30      |  
|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  
|Balance at end of year  845,600, 898,175, and 925,725 shares, respectively, at cost                                                                                                                                            |  |      | (19,103 | ) |      | (20,273 | ) |      | (20,865 | )
|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  
|Accumulated other comprehensive income                                                                                                                                                                                          |  |      |         |   |      |         |   |      |         |  
|Balance at beginning of year                                                                                                                                                                                                    |  |      |        |   |      |        |   |      |        |  
|Minimum pension liability adjustment, net of income taxes                                                                                                                                                                       |  |      | (124    | ) |      |        |   |      |        |  
|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  
|Balance at end of year                                                                                                                                                                                                          |  |      | (124    | ) |      |        |   |      |        |  
|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  
|Total stockholders equity                                                                                                                                                                                                      |  | $    | 170,234 |   |      | 162,962 |   |      | 180,799 |  
|                                                                                                                                                                                                                                |  |      |         |   |      |         |   |      |         |  



See
accompanying notes to consolidated financial statements.



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##### Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

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

---

(Thousands of dollars)



|                                     |  |      |       |   |      |         |   |      |      
|------------------------------------ |  | ---- | ----- | - | ---- | ------- | - | ---- | -----
|                                     |  | 2003 |       |   | 2002 |         |   | 2001
|Net income/(loss)                    |  | $    | 8,703 |   |      | (13,639 | ) |      | 9,980
|                                     |  |      |       |   |      |         |   |      |      
|Other comprehensive income/(loss)    |  |      |       |   |      |         |   |      |      
|Minimum pension liability adjustment |  |      | (190  | ) |      |        |   |      |     
|Income taxes                         |  |      | 66    |   |      |        |   |      |     
|                                     |  |      |       |   |      |         |   |      |      
|Total other comprehensive income     |  |      | (124  | ) |      |        |   |      |     
|                                     |  |      |       |   |      |         |   |      |      
|Comprehensive income/(loss)          |  | $    | 8,579 |   |      | (13,639 | ) |      | 9,980
|                                     |  |      |       |   |      |         |   |      |      



See
accompanying notes to consolidated financial statements.



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##### Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 1  Significant Accounting Policies



Principles of Consolidation  The consolidated financial
statements of Deltic Timber Corporation (Deltic or the Company) include the accounts of Deltic and all majority-owned subsidiaries after elimination of significant intercompany transactions and accounts.



Use of Estimates  In the preparation of the Companys
financial statements in conformity with accounting principles generally accepted in the United States of America, management has made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities. Actual results may differ from those estimates.



Cash Equivalents  Cash equivalents include U.S. government securities that have a maturity of three months or less from the date of purchase.



Allowance for Doubtful Accounts  The Company provides an allowance for doubtful accounts based on a review of
the specific receivables outstanding. At December 31, 2003 and 2002, the balance in the allowance account was $107,000 and $88,000, respectively.



Inventories  Inventories of logs, lumber, and supplies are stated at the lower of cost or market, primarily using the average cost method.
Log costs include harvest and transportation cost as appropriate. Lumber costs include materials, labor, and production overhead. (For additional information, see Note 3  Inventories.)



Investment in Real Estate Held for Development and Sale  Real
estate held for development and sale is stated at the lower of cost or net realizable value, and includes direct costs of land and land development and indirect costs, including amenities. These costs are allocated to individual lots or acreage sold
based on relative sales value. Direct costs are allocated on a specific neighborhood basis, while indirect costs for the Companys three development areas  Chenal Valley, Chenal Downs, and Red Oak Ridge  are allocated to
neighborhoods over the entire respective development area based on relative retail values.



Investment in Del-Tin Fiber  Investment in Del-Tin Fiber L.L.C. (Del-Tin Fiber), a 50 percent-owned limited liability company, is carried at cost and is adjusted for the Companys
proportionate share of its undistributed earnings or losses. The Companys equity-method-basis carrying value for its investment in Del-Tin Fiber is evaluated for possible impairment, as applicable under the requirements of Accounting
Principles Board Opinion (APB) 18. This evaluation as of December 31, 2002, based on the intent of the Companys Board of Directors to exit the business, resulted in a determination that the Companys investment was impaired as
of December 31, 2002, and the carrying amount of the investment was written off, to zero, for the 2002 Consolidated Balance Sheet. On December 11, 2003, the Companys Board of Directors revised its intent in regard to selling Deltics
interest in the joint venture, and the resulting evaluation of fair value for the related investment indicated that fair value exceeded carrying value at December 31, 2003. (For additional information, see Note 4  Investment in Del-Tin Fiber.)



Timber and Timberlands  Timber and timberlands,
which includes purchased stumpage inventory and logging facilities, is stated at acquisition cost less cost of fee timber harvested and accumulated depreciation of logging facilities and includes no estimated future reforestation cost. The cost of
fee timber harvested is based on the volume of timber harvested in relation to the estimated volume of timber recoverable. Logging facilities, which consist primarily of roads constructed and other land improvements, are depreciated using the
straight-line method over a ten-year estimated life. The Company estimates its fee timber inventory using statistical information and data obtained from physical measurements and other information gathering techniques. The cost of timber and
timberland purchased and reforestation costs are capitalized. Fee timber carrying costs are expensed as incurred.



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##### Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 1  Significant Accounting Policies (cont.)



Property, Plant, and Equipment  Property, plant, and equipment is stated at cost less
accumulated depreciation. Depreciation of buildings, equipment, and other depreciable assets is primarily determined using the straight-line method. Expenditures that substantially improve and/or increase the useful life of facilities or equipment
are capitalized. Maintenance and repair costs are expensed as incurred. Gains and losses on disposals or retirements are included in income as they occur.



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.



Revenue Recognition  Revenue from the sale of lumber and wood by-products is recorded at the time of shipment. Revenue from the sale of
timber-cutting rights to third parties is recorded when legal title passes to the purchaser, which is generally upon delivery of a legally executed timber deed and receipt of payment for the timber. Revenue from intersegment timber sales is recorded
when the timber is harvested; such intersegment sales, which are generally made at prices which approximate market, are eliminated in the consolidated financial statements. Revenue from timberland and real estate sales is recorded when the sale is
closed and legal title is transferred, which is generally at the time the purchaser executes the real estate closing documents and makes payment to the title company handling the closing.



Income Taxes  The Company uses the asset and liability method
of accounting for income taxes. Under this method, the provision for income taxes includes amounts currently payable and amounts deferred as tax assets and liabilities, based on differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities, and is measured using the enacted tax rates that are assumed will be in effect when the differences reverse. Deferred tax assets are reduced by a valuation allowance which is established when it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.



Stock-Based Compensation  At December 31, 2003, Deltic had
two stock-based compensation plans for which the Company applies the recognition and measurement principles of APB 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for those plans. Stock-based employee
compensation expense is accrued for the intrinsic value, if any, of stock options or restricted stock granted over the applicable vesting periods using the straight-line method. Options granted by the Company have an exercise price equal to the
market value of the underlying common stock on the date of grant. As of November 2001, the Company eliminated certain option exercise procedures, resulting in a change to fixed-plan accounting treatment for all options. Prior to that date, the
Company was required to apply variable plan accounting standards which required adjustment of the cost of options granted for changes in the market value per share of the Companys common stock. (For additional information, see Note 15 
Incentive Plans.)



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##### Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 1  Significant Accounting Policies (cont.)



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:



|                                                                                                                                                                            |  |      |       |   |      |         |   |      |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | ------- | - | ---- | ----- | -
|(Thousands of dollars, except per share amounts)                                                                                                                            |  | 2003 |       |   | 2002 |         |   | 2001 |      
|Net income/(loss), as reported                                                                                                                                              |  | $    | 8,703 |   |      | (13,639 | ) |      | 9,980 |  
|Plus total stock-based compensation expense determined under the intrinsic value method for awards, net of related tax effects, included in
the determination of net income |  |      | 220   |   |      | 431     |   |      | 402   |  
|Less pro forma total stock-based compensation expense determined under the fair value method for all awards, net of related tax
effects                                     |  |      | (769  | ) |      | (937    | ) |      | (785  | )
|                                                                                                                                                                            |  |      |       |   |      |         |   |      |       |  
|Pro forma net income/(loss)                                                                                                                                                 |  | $    | 8,154 |   |      | (14,145 | ) |      | 9,597 |  
|                                                                                                                                                                            |  |      |       |   |      |         |   |      |       |  
|Basic earnings per share                                                                                                                                                    |  |      |       |   |      |         |   |      |       |  
|As reported                                                                                                                                                                 |  | $    | .73   |   |      | (1.33   | ) |      | .65   |  
|Pro forma                                                                                                                                                                   |  |      | .68   |   |      | (1.38   | ) |      | .62   |  
|Dilutive earnings per share                                                                                                                                                 |  |      |       |   |      |         |   |      |       |  
|As reported                                                                                                                                                                 |  | $    | .73   |   |      | (1.33   | ) |      | .65   |  
|Pro forma                                                                                                                                                                   |  |      | .68   |   |      | (1.38   | ) |      | .61   |  



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.



Pensions and Other Postretirement Benefits  The Company sponsors both a qualified and a nonqualified, noncontributory, defined benefit
retirement plan that covers substantially all employees. Benefits are based on years of service and final career-average-pay formulas as defined by the plans. The qualified plan is funded to accumulate sufficient assets to provide for accrued
benefits. The nonqualified plan, a supplemental executive plan, is not funded; the Company pays any benefits due under this plan on a monthly basis.



The Company also sponsors a defined benefit health care plan and a life insurance benefit plan for substantially all retired employees. The Company
measures the costs of its obligations for these plans based on its best estimate. The net periodic costs are recognized as employees render the services necessary to earn these postretirement benefits.



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##### Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 1  Significant Accounting Policies (cont.)



Advertising Costs  Advertising costs, primarily related to marketing efforts for the
Companys real estate developments, are expensed as incurred. These costs amounted to $638,000 in 2003, $792,000 in 2002, and $725,000 in 2001 and are reflected in Cost of Sales on the Consolidated Statements of Income.



Capitalized Interest  The Company capitalizes interest for
qualifying assets constructed or otherwise produced for which interest on directly associated debt was incurred. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of those assets.



Capital Expenditures  Capital expenditures include additions
to Investment in Real Estate Held for Development and Sale; Timber and Timberlands; and Property, Plant, and Equipment.



Net Change in Purchased Stumpage Inventory  Purchased stumpage inventory consists of timber-cutting rights purchased from third parties
specifically for use in the Companys sawmills. Depending on the timing of acquisition and usage of this acquired stumpage inventory, the net change in inventory can either be a source or use of funds in the Companys Consolidated
Statements of Cash Flows.



Earnings per Common Share
 Earnings per share (EPS) amounts presented are calculated under the provisions of the SFAS 128, Earnings per Share. Basic earnings per share is computed based on earnings available to common shareholders [net income/(loss) less
accrued preferred dividends] and the weighted average number of common shares outstanding. The earnings per share assuming dilution amounts presented are computed based on earnings available to common shareholders and the weighted average number of
common shares outstanding, including shares assumed to be issued under the Companys stock option plans. (For a reconciliation of amounts used in per share computations, see Note 17  Earnings per Share.)



Impact of Recent Accounting Pronouncements  In August 2001, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and associated retirement costs and is effective for financial statements issued for fiscal years beginning after June 15, 2002. Adoption of SFAS 143 did not have an effect on the
Companys financial position, results of operations, or cash flows.



In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and
measured initially at fair value only when the liability is incurred, and is effective for exit or disposal activities that are initiated after December 31, 2002. The Company has not initiated any such exit or disposal activities in 2003; therefore,
adoption of SFAS 146 has had no impact on the Companys financial statements.



In November 2002, the FASB issued Financial Accounting Standards Board Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. It clarified that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The recognition and measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company has issued no such guarantees in 2003.



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##### Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 1  Significant Accounting Policies (cont.)



In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation  Transition
and Disclosure. SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require more prominent disclosures about the method of accounting for stock-based compensation and the effect of the method used on reported results in both annual and interim financial statements. The
Company currently applies the accounting measurement provisions of APB 25 to account for stock-based compensation and has not adopted the measurement provisions of SFAS 123, as amended by SFAS 148; however, it has adopted the disclosure requirements
of both SFAS 123 and SFAS 148.



In January 2003, the FASB
issued FIN 46, Consolidation of Variable Interest Entities. This interpretation addresses consolidation of certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation provisions of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and
in the first quarter of the fiscal year beginning after June 15, 2003, for variable interest entities acquired before February 1, 2003. The Company has not created or obtained an interest in any such entities since January 31, 2003, and the
statement is not expected to have an impact in fiscal year 2004 as a result of the Companys evaluation of its investment in Del-Tin Fiber under the provisions of FIN 46. In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under SFAS 133, Accounting for Derivatives and Hedging Activities. This statement
(1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (2) clarifies when a derivative contains a financing component, and (3) amends the definition of an underlying to
conform to FIN 45. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, with all provisions applied prospectively. The Company has no derivative instruments and is not currently engaged in hedging activities,
accordingly, adoption of this statement is not expected to have a material impact on the Companys financial statements.



In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify an instrument that is within its scope as a liability. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As of December 31, 2003, the Company had no financial instruments
within the scope of SFAS 150.



In December 2003, the FASB
issued SFAS 132 (revised 2003), Employer Disclosures about Pensions and Other Postretirement Benefits. SFAS 132 (revised 2003) revises disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or
recognition of those plans. It requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans and is effective for financial
statements with fiscal years ending after December 15, 2003. (For additional information regarding these disclosures, see Note 14  Employee and Retiree Benefit Plans.)



47



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##### Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 1  Significant Accounting Policies (cont.)



In January 2004, the FASB issued a FASB Staff Position regarding SFAS 106, Employers Accounting
for Postretirement Benefits Other than Pensions, (FSP FAS 106-1), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which allowed companies to recognize or defer
recognizing the effects of the prescription-drug provisions of the new Medicare Act in their 2003 financial statements. Since Deltic had a September 30, 2003 measurement date for its benefit plans, the recognition or election to defer recognition
requirement will be effective for its first quarter 2004 financial statements, and it is not expected to have a material impact on the Companys financial statements. The Financial Accounting Standards Board has not issued final guidance on
accounting for the provisions of the Medicare Act. Therefore, if the Company elects to record estimated benefits beginning in the first quarter of 2004, these benefits could be changed when final authoritative accounting guidance is issued in the
future.



Note 2  Discontinued Agriculture Segment



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 pine timberland, in a tax-deferred exchange. All 38,800 net acres formerly deemed to be agriculture lands, as well as all related agriculture
operational assets, had been sold by year-end 2001. As a result of the sales transactions completed during 2001, the Company realized a pretax gain on disposal of agriculture segment assets of $13,453,000 (after related non-cash expenses of
$1,001,000).



Total net sales of the discontinued agriculture
segment for 2001, excluding asset sales proceeds, were $276,000. The gain on disposal of discontinued agriculture segment operations was $13,663,000 before income taxes, consisting of the $13,453,000 gain on sales of assets and $210,000 income from
operations since the measurement date. The net gain of $8,357,000, after related income taxes amounting to $5,306,000, is reported on the Companys 2001 Consolidated Statement of Income.



Since the Company disposed of the agriculture segment in a tax-deferred
exchange, all proceeds from the farmland sales were deposited with a qualified intermediary. In addition, Deltic also sold approximately 5,200 net acres of non-strategic Louisiana hardwood timberland during the third and fourth quarters of 2000,
which were also replaced with pine timberland in a tax-deferred exchange. These combined proceeds for 2000, $16,317,000 after deducting amounts expended during 2000 to purchase replacement pine timberland, were held by the intermediary, as trustee,
at December 31, 2000. These funds, in addition to similar proceeds received in 2001, were used during 2001 to acquire pine timberland designated as replacement property, with capital expenditures totaling $55,890,000.



Note 3  Inventories



Inventories at December 31 consisted of the following:



|                       |  |      |       |      |      
|---------------------- |  | ---- | ----- | ---- | -----
|(Thousands of dollars) |  | 2003 |       | 2002
|Logs                   |  | $    | 1,741 |      | 1,313
|Lumber                 |  |      | 3,604 |      | 4,630
|Materials and supplies |  |      | 433   |      | 314  
|                       |  |      |       |      |      
|                       |  | $    | 5,778 |      | 6,257
|                       |  |      |       |      |      



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##### Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 3  Inventories (cont.)



For both financial and income tax purposes the Company utilizes the lower of cost or market basis for
determining inventory carrying values. Lumber inventory amounts at December 31, 2003 and 2002, are stated at lower of cost or net realizable value.



Note 4  Investment in Del-Tin Fiber



Deltic owns 50 percent of the membership of Del-Tin Fiber, which completed construction and commenced production operations of a medium density fiberboard
(MDF) plant near El Dorado, Arkansas, during 1998.



On April 25, 2002, Deltic announced that Banc One Capital Markets, Inc. had been retained as financial advisor to assist in the evaluation of strategic alternatives for the Companys investment in Del-Tin Fiber. Subsequently, Deltic
announced that following a review of these strategic alternatives, it was determined that the MDF business did not represent a growth area for the Company and that it 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 equity method investee, as required by APB 18, 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, and the carrying amount of such investment was written off, to zero, for the
Companys 2002 Consolidated Balance Sheet. The write-off, amounting to $18,723,000, was included in the 2002 fourth quarter operating results of the Company.



Due to the Companys commitment to fund its share 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 continued to recognize its share of Del-Tin Fibers operating losses to the extent of these advances
during 2003. For the year, Deltics advances to the facility approximated its equity share of losses of the plant and amounted to $4,729,000. 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 improve operating and financial results of the plant. Due to this decision, Deltics evaluation of impairment as of December 31, 2003, was primarily
based upon the estimated future net cash flows from Del-Tin Fibers operations over the remaining life of the plant. Considering the Companys revised intent, the resulting estimated fair value of the Companys investment exceeded the
investments carrying value, which was zero as of December 31, 2003. The Company will continue to record its equity share of the operating results of the facility.



In performing the respective impairment evaluations, the Companys management made a number of estimates and
assumptions related to future operating results for Del-Tin Fiber, the sale of its ownership interest, the expected selling price for its investment if sold, and the ability to refinance the joint-ventures long-term debt. It is reasonably
possible that a change in these estimates and assumptions might occur, which could have a material impact on the Companys future financial statements. The management of Del-Tin Fiber has performed evaluations of possible impairment of the
long-lived assets of the plant in accordance with SFAS 121 and/or SFAS 144, as applicable. To-date, these analyses have indicated that no impairment exists at the Del-Tin Fiber level.



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 4  Investment in Del-Tin Fiber (cont.)



Del-Tin Fiber has its own credit facility, totaling $89,000,000 under which each owner has agreed to
a contingent equity contribution agreement with Del-Tin Fiber and the group of banks from whom the project financing was obtained. Under this agreement, both owners have contractually agreed to a contingent equity agreement which requires them to
fund any deficiency in contributions to either Del-Tin Fibers bond sinking fund or debt service reserve up to a cumulative total of $17,500,000 per owner. Del-Tin Fibers project financing agreement did not require sinking fund
contributions until the first quarter of 2001. Sinking fund deposits were $6,019,000 in 2001, $7,676,000 in 2002, and $8,956,000 in 2003, and are scheduled to be $10,457,000 in 2004 and $55,892,000 in 2005. In addition to the required sinking fund
deposits, Del-Tin Fiber has made deposits into debt service reserve funds that may be withdrawn solely to pay debt service to the extent sufficient funds are not available in the facilitys operating accounts. The total amount in these debt
service reserve funds, including interest accrued on deposited amounts, at December 31, 2003, was $3,521,000. The final sinking fund deposit would be reduced by the amount in debt service reserve funds and the amount of interest earned on the
accumulated balance of sinking fund deposits. To date, the owners have voluntarily funded all required sinking fund deposits, and thus have not reduced their respective contingent equity contribution agreement obligation, in order to obtain annual
renewals of the letters of credit supporting bonds issued to finance the majority of the facilitys initial construction cost. 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 of Del-Tin Fiber have
also pledged their respective membership interest in the joint venture as collateral under the project financing agreement. Both have also agreed to fund any operating working capital needs until the facility is able to consistently generate
sufficient funds to meet its cash requirements.



These
contingent obligations were not reduced as a result of the Companys write-off of the carrying value of its investment in Del-Tin Fiber as of December 31, 2002. Due to the probable requirement for Deltic to advance to Del-Tin Fiber amounts
equal to its half of the facilitys 2003 quarterly sinking fund obligation, based on the plants 2003 cash flow projections at December 31, 2002, the Company recorded a current contingent liability, in accordance with SFAS 5, Accounting
for Contingencies, to reflect this amount. This liability, in the amount of $4,478,000, was included in Deferred Revenues and Other Accrued Liabilities in the Companys 2002 Consolidated Balance Sheet and paid during 2003. No additional
liability was estimated to be required for such payments after 2003 due to projected improvement in Del-Tin Fibers cash flows and to the Companys intent to have exited the business or to have refinanced the joint-ventures long-term
debt by the end of 2003. No such liability was recorded as of December 31, 2003. The maximum potential amount of future payments that could be required of the Company under current contractual guarantees is limited to the $17,500,000 committed under
the contingent equity agreement. However, with the Company currently funding its share of Del-Tin Fibers sinking fund contribution on a voluntary basis, potential future payments are estimated at approximately $31,210,000 if the Company is not
able to refinance the facilitys long-term debt by its scheduled maturity date. These payments consist of the Companys share of remaining sinking fund payments currently required of Del-Tin Fiber, including the $17,500,000 contingent
equity, but exclude any future operating working capital needs of Del-Tin Fiber for which an amount cannot be reasonably estimated due to recent improvements in the plants production ability.



Under the operating agreement, Del-Tin Fibers employees operate the
plant. Deltic has committed to provide a portion of the plants fiber and wood fuel supply at market prices. During 2003, 2002, and 2001, Deltic sold Del-Tin Fiber approximately $4,099,000, $3,018,000, and $1,924,000, respectively, of these
lumber manufacturing by-products. As of December 31, 2003 and 2002, the Company had a receivable from Del-Tin Fiber of $78,000 and $85,000, respectively.



50



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##### Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 4  Investment in Del-Tin Fiber (cont.)



Del-Tin Fibers financial position at year-end 2003 and 2002 and results of operations for years of 2003 and 2002 consisted of the following:



|                                                                              |  |      |         |   |      |         |  
|----------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | ------- | -
|(Thousands of dollars)                                                        |  | 2003 |         |   | 2002 |        
|Condensed Balance Sheet Information                                           |  |      |         |   |      |         |  
|Current assets                                                                |  | $    | 7,330   |   |      | 5,874   |  
|Debt service reserve funds                                                    |  |      | 3,521   |   |      | 3,485   |  
|Bond sinking funds                                                            |  |      | 23,059  |   |      | 13,950  |  
|Property, plant, and equipment  net                                          |  |      | 95,325  |   |      | 98,230  |  
|Other noncurrent assets                                                       |  |      | 491     |   |      | 736     |  
|                                                                              |  |      |         |   |      |         |  
|Total assets                                                                  |  | $    | 129,726 |   |      | 122,275 |  
|                                                                              |  |      |         |   |      |         |  
|Current liabilities                                                           |  | $    | 3,462   |   |      | 4,407   |  
|Long-term debt                                                                |  |      | 89,000  |   |      | 89,000  |  
|Other noncurrent liabilities                                                  |  |      |        |   |      | 3       |  
|Members capital/(deficit)                                                    |  |      | 37,264  |   |      | 28,865  |  
|                                                                              |  |      |         |   |      |         |  
|Total liabilities, members capital/(deficit), and other comprehensive income |  | $    | 129,726 |   |      | 122,275 |  
|                                                                              |  |      |         |   |      |         |  
|Condensed Income Statement Information                                        |  |      |         |   |      |         |  
|Net sales                                                                     |  | $    | 48,743  |   |      | 34,133  |  
|                                                                              |  |      |         |   |      |         |  
|Costs and expenses                                                            |  |      |         |   |      |         |  
|Cost of sales                                                                 |  |      | 47,114  |   |      | 42,949  |  
|Depreciation                                                                  |  |      | 5,260   |   |      | 3,894   |  
|General and administrative expenses                                           |  |      | 2,045   |   |      | 1,630   |  
|Other expenses                                                                |  |      | 530     |   |      | 690     |  
|                                                                              |  |      |         |   |      |         |  
|Total costs and expenses                                                      |  |      | 54,949  |   |      | 49,163  |  
|                                                                              |  |      |         |   |      |         |  
|Operating income/(loss)                                                       |  |      | (6,206  | ) |      | (15,030 | )
|Interest income                                                               |  |      | 184     |   |      | 145     |  
|Interest and other debt expense                                               |  |      | (3,733  | ) |      | (4,105  | )
|                                                                              |  |      |         |   |      |         |  
|Net income/(loss)                                                             |  |      | (9,755  | ) |      | (18,990 | )
|Other comprehensive income/(loss)                                             |  |      |        |   |      | 360     |  
|                                                                              |  |      |         |   |      |         |  
|Comprehensive income/(loss)                                                   |  | $    | (9,755  | ) |      | (18,630 | )
|                                                                              |  |      |         |   |      |         |  



At December 31, 2003
and 2002, the Companys share of the underlying net assets of Del-Tin Fiber exceeded its investment by $18,632,000 and $14,433,000, respectively. The excess relates primarily to the Companys write-off of its carrying amount for its
investment in Del-Tin Fiber as of December 31, 2002, and to interest received by the Company from Del-Tin Fiber prior to plant start-up, which was capitalized by Deltic as a reduction of its investment and was being amortized into income using the
straight-line method over a 60-month period. (Del-Tin capitalized the interest paid to the Company into its property, plant, and equipment accounts, and it is being depreciated into the facilitys results of operations.)



Prior to the 2002 write-off of its investment in Del-Tin Fiber, the Company
accounted for its investment in Del-Tin Fiber under the equity method. During 2003, the Company expensed amounts related to the funding of operating deficits. Effective December 11, 2003, as a result of the Companys intent to not sell its
investment in Del-Tin Fiber, Deltic resumed accounting for the investment using the equity method.



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 4  Investment in Del-Tin Fiber (cont.)



Accordingly, the investment in Del-Tin Fiber is carried at cost, adjusted for the Companys
proportionate share of undistributed earnings or losses. Cumulative net losses for the facility have amounted to $96,068,000, $48,034,000 net to the Company. As a result, no earnings have been available for distribution to the owners. Contributions
to Del-Tin Fiber by the Company as of December 31, 2003, have amounted to $62,437,000.



Note 5  Timber and Timberlands



Timber
and timberlands at December 31 consisted of the following:



|                                                                          |  |      |         |   |      |         |  
|------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | ------- | -
|(Thousands of dollars)                                                    |  | 2003 |         |   | 2002 |        
|Purchased stumpage inventory                                              |  | $    | 8,688   |   |      | 7,488   |  
|Timberlands                                                               |  |      | 78,438  |   |      | 76,772  |  
|Fee timber                                                                |  |      | 192,007 |   |      | 182,906 |  
|Logging facilities                                                        |  |      | 1,773   |   |      | 1,782   |  
|                                                                          |  |      |         |   |      |         |  
|                                                                          |  |      | 280,906 |   |      | 268,948 |  
|Less accumulated cost of fee timber harvested and facilities depreciation |  |      | (65,866 | ) |      | (59,631 | )
|                                                                          |  |      |         |   |      |         |  
|                                                                          |  | $    | 215,040 |   |      | 209,317 |  
|                                                                          |  |      |         |   |      |         |  



Cost of fee timber
harvested amounted to $6,608,000 in 2003, $8,426,000 in 2002, and $8,697,000 in 2001. Depreciation of logging facilities was $25,000, $30,000, and $37,000 for the years 2003, 2002, and 2001, respectively.



Note 6  Property, Plant, and Equipment



Property, plant, and equipment at December 31 consisted of the following:



|                              |  |                      |  |      |         |   |      |         |  
|----------------------------- |  | -------------------- |  | ---- | ------- | - | ---- | ------- | -
|(Thousands of dollars)        |  | Range ofUseful Lives |  | 2003 |         |   | 2002 |        
|Land                          |  | N/A                  |  | $    | 125     |   |      | 125     |  
|Land improvements             |  | 10-20 years          |  |      | 4,006   |   |      | 4,070   |  
|Buildings and structures      |  | 10-20 years          |  |      | 5,273   |   |      | 4,801   |  
|Machinery and equipment       |  | 3-15 years           |  |      | 70,520  |   |      | 76,847  |  
|                              |  |                      |  |      |         |   |      |         |  
|                              |  |                      |  |      | 79,924  |   |      | 85,843  |  
|Less accumulated depreciation |  |                      |  |      | (43,042 | ) |      | (46,271 | )
|                              |  |                      |  |      |         |   |      |         |  
|                              |  |                      |  | $    | 36,882  |   |      | 39,572  |  
|                              |  |                      |  |      |         |   |      |         |  



Depreciation of
property, plant, and equipment charged to operations was $6,712,000, $6,768,000, and $6,257,000 in 2003, 2002, and 2001, respectively.



Gains/(losses) on disposals or retirements of assets, exclusive of disposition of agricultural assets, included in income were a loss of $284,000 in 2003
and gains of $15,000 in 2002 and $57,000 in 2001.



52



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 7  Credit Facilities



On September 30, 2003, the Company entered into an agreement with SunTrust Bank and other domestic banks which provides an
unsecured, committed revolving credit facility totaling $125,000,000, inclusive of a $50,000,000 letter of credit feature. The agreement will expire July 15, 2007, and replaced the Companys former facility, which totaled $105,000,000, that was
scheduled to expire July 15, 2004. As of December 31, 2003 and 2002, $80,000,000 and $59,000,000 was available in excess of all borrowings outstanding under or supported by the respective facilities. Borrowings under the current agreement bear
interest at a base rate or an adjusted Eurodollar rate plus an applicable margin, depending upon the type of loan the Company executes. The applicable margin component of the interest rate varies with the type of loan and the Companys total
debt to EBITDA ratio. Borrowings outstanding at December 31, 2003 and 2002, amounted to $45,000,000 and $46,000,000, respectively. Fees associated with the current revolving credit facility include a commitment fee of .25 to .4 percent per annum on
the unused portion of the committed amount. The agreement contains restrictive covenants, including a minimum consolidated net worth of the sum of $155,000,000, plus 50% of cumulative consolidated net income from July 1, 2003, and a maximum leverage
ratio of .6 to 1.



The Company may also borrow up to
$1,000,000 under a short-term credit facility with BancorpSouth. The agreement expires December 15, 2004, with renewal annually. The amount available to the Company under this facility is reduced by any borrowings by Deltic. As of December 31, 2003
and 2002, Deltic had no borrowings outstanding under this line of credit, resulting in $1,000,000 available to the Company. Borrowings bear interest based upon the New York Prime. Deltic also has an agreement with BancorpSouth which provides a
$2,000,000 letter of credit facility. This agreement expires December 15, 2004, with renewal annually. Amounts available to the Company under the facility are reduced by any letters of credit issued on behalf of the Company. Outstanding letters of
credit as of December 31, 2003 and 2002, were $344,000 and $786,000, respectively, resulting in $1,656,000 and $1,214,000, respectively, available to Deltic.



In addition, Deltic has an agreement with Regions Bank which provides a $1,000,000 letter of credit facility. The agreement is renewable annually.
Amounts available to Deltic under the facility are reduced by any letters of credit issued on behalf of the Company. Outstanding letters of credit totaled $480,000 as of December 31, 2003 and December 31, 2002, leaving $520,000 available to the
Company at the end of both years. (For additional information regarding these financial instruments, see Note 12  Fair Value of Financial Instruments.)



Note 8  Indebtedness



The Companys indebtedness at December 31 consisted of the following:



|                                           |  |      |         |   |      |         |  
|------------------------------------------ |  | ---- | ------- | - | ---- | ------- | -
|(Thousands of dollars)                     |  | 2003 |         |   | 2002 |        
|Notes payable, 2.7%*, due 2007             |  | $    | 45,000  |   |      | 46,000  |  
|Senior notes payable, 6.7%, due 2008       |  |      | 40,000  |   |      | 40,000  |  
|Senior notes payable, 6.01%, due 2008-2012 |  |      | 30,000  |   |      | 30,000  |  
|Other notes payable, 5%*, due 2004-2006    |  |      | 120     |   |      | 190     |  
|                                           |  |      |         |   |      |         |  
|                                           |  |      | 115,120 |   |      | 116,190 |  
|Less: Current maturities of long-term debt |  |      | (64     | ) |      | (70     | )
|                                           |  |      |         |   |      |         |  
|Long-term debt at December 31              |  | $    | 115,056 |   |      | 116,120 |  
|                                           |  |      |         |   |      |         |  



* Weighted average
interest rate at December 31, 2003.



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 8  Indebtedness (cont.)



The $45,000,000 of notes payable designated as due in 2007 represents the outstanding balance under
the Companys revolving credit facility agreement with SunTrust Bank and a group of other domestic banks. The agreement will expire on July 15, 2007. The Company incurred costs of $476,000 related to the securing of this facility, which was
deferred and is being amortized as additional interest expense over the term of the agreement.



During 1998, the Company successfully completed negotiation of the private placement of $40,000,000 of senior notes with Pacific Coast Farm Credit, a
division of American AgCredit. These unsecured notes have a fixed stated interest rate of 6.7 percent and mature on December 18, 2008. No installment payments are required, but the terms allow for prepayments at the option of the Company. The
agreement contains certain restrictive financial covenants, including a minimum consolidated tangible net worth of the sum of $135,000,000, plus 25 percent of cumulative consolidated adjusted net income from October 1, 1998, and a maximum funded
debt/capitalization ratio of .6 to 1. The Company incurred $226,000 of costs related to the issuance of these notes, which was deferred and is being amortized as additional interest expense over the term of the underlying debt. In anticipation of
issuance of these notes, the Company entered into and settled an interest rate hedge contract. Upon settlement of this contract in December 1998, the Company paid $1,081,000, which was deferred and is being amortized as other debt expense over the
term of the underlying debt, resulting in an effective interest rate for these notes of approximately 6.9 percent.



On December 20, 2002, Deltic successfully completed the private placement of $30,000,000 of senior notes with Metropolitan Life and a group of other
domestic insurance companies. These unsecured notes have a fixed stated interest rate of 6.01 percent and mature on December 20, 2012. Semiannual installments of $3,333,333, or such lesser amount as shall be outstanding, are required beginning on
December 20, 2008. The note terms allow for prepayment at the option of the Company in an amount of not less than five percent of the principal amount outstanding at the time of any prepayment. The agreement contains certain restrictive financial
covenants, including a minimum consolidated tangible net worth of the sum of $148,299,000, plus 25 percent of cumulative consolidated adjusted net income from October 1, 2002, and a maximum consolidated debt to consolidated net capitalization ratio
of .6 to 1. The Company incurred $179,000 of costs related to the issuance of these notes, which was deferred and is being amortized as additional interest expense over the term of the underlying debt.



The scheduled maturities of long-term debt for the next five years are
$64,000 in 2004, $32,000 in 2005, $24,000 in 2006, $45,000,000 in 2007, and $43,333,333 in 2008. (For additional information regarding financial instruments, see Note 7  Credit Facilities and Note 12  Fair Value of Financial
Instruments.)



Note 9  Redeemable Preferred Stock



During 1997, the Company issued 600,000 shares of its authorized preferred
stock having a par value of $.01 per share. Redemption of these shares, designated by the Company as Cumulative Mandatory Redeemable Preferred Stock, 7.54% Series, was mandatory on December 31, 2002, and the Company redeemed these shares as required
utilizing proceeds from privately placed long term notes. These redeemable preferred shares had no voting rights, at any time, during the period for which they were outstanding.



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 10  Income Taxes



The components of income tax expense/(benefit) related to income/(loss) from continuing operations for the years ended
December 31, 2003, 2002, and 2001, consisted of the following:



|                       |  |      |       |      |        |   |      |       |  
|---------------------- |  | ---- | ----- | ---- | ------ | - | ---- | ----- | -
|(Thousands of dollars) |  | 2003 |       | 2002 |        |   | 2001 |      
|Federal                |  |      |       |      |        |   |      |       |  
|Current                |  | $    | 4,270 |      | (420   | ) |      | (901  | )
|Deferred               |  |      | 466   |      | (6,689 | ) |      | 1,788 |  
|                       |  |      |       |      |        |   |      |       |  
|                       |  |      | 4,736 |      | (7,109 | ) |      | 887   |  
|State                  |  |      |       |      |        |   |      |       |  
|Current                |  |      | 40    |      | 412    |   |      | 301   |  
|Deferred               |  |      | 208   |      | (1,025 | ) |      | (460  | )
|                       |  |      |       |      |        |   |      |       |  
|Total                  |  | $    | 4,984 |      | (7,722 | ) |      | 728   |  
|                       |  |      |       |      |        |   |      |       |  



A reconciliation of
the U.S. statutory income tax rate to the Companys effective rates on income/(loss) from continuing operations before income taxes consisted of the following:



|                                                      |  |      |   |  |      |    |  |      |  
|----------------------------------------------------- |  | ---- | - |  | ---- | -- |  | ---- | -
|                                                      |  | 2003 |   |  | 2002 |    |  | 2001 |  
|Statutory income tax rate                             |  | 35   | % |  | (35  | )% |  | 35   | %
|State income taxes, net of federal income tax benefit |  | 2    |   |  | (1   | )  |  | (4   | )
|Other                                                 |  | (1   | ) |  |     |    |  |     |  
|                                                      |  |      |   |  |      |    |  |      |  
|Effective income tax rate                             |  | 36   | % |  | (36  | )% |  | 31   | %
|                                                      |  |      |   |  |      |    |  |      |  



An analysis of the
Companys deferred tax assets and deferred tax liabilities at December 31, 2003 and 2002, showing the tax effects of significant temporary differences, consisted of the following:



|                                                        |  |      |         |   |      |         |  
|------------------------------------------------------- |  | ---- | ------- | - | ---- | ------- | -
|(Thousands of dollars)                                  |  | 2003 |         |   | 2002 |        
|Deferred tax assets                                     |  |      |         |   |      |         |  
|Investment in real estate held for development and sale |  | $    | 12,665  |   |      | 10,856  |  
|State NOL carryforward                                  |  |      | 5,238   |   |      | 4,839   |  
|Postretirement and other employee benefits              |  |      | 3,144   |   |      | 1,844   |  
|AMT credit carryforward                                 |  |      | 384     |   |      | 372     |  
|Other deferred tax assets                               |  |      | 616     |   |      | 593     |  
|                                                        |  |      |         |   |      |         |  
|Total deferred tax assets                               |  |      | 22,047  |   |      | 18,504  |  
|Less valuation allowance                                |  |      | (2,911  | ) |      | (2,142  | )
|                                                        |  |      |         |   |      |         |  
|Total deferred tax assets  net                         |  |      | 19,136  |   |      | 16,362  |  
|                                                        |  |      |         |   |      |         |  
|Deferred tax liabilities                                |  |      |         |   |      |         |  
|Investment in Del-Tin Fiber                             |  |      | (3,634  | ) |      | (2,856  | )
|Timber and timberlands                                  |  |      | (19,801 | ) |      | (18,578 | )
|Property, plant, and equipment                          |  |      | (7,328  | ) |      | (5,998  | )
|Other deferred tax liabilities                          |  |      | (251    | ) |      | (200    | )
|                                                        |  |      |         |   |      |         |  
|Total deferred tax liabilities                          |  |      | (31,014 | ) |      | (27,632 | )
|                                                        |  |      |         |   |      |         |  
|Net deferred tax assets/(liabilities)                   |  | $    | (11,878 | ) |      | (11,270 | )
|                                                        |  |      |         |   |      |         |  



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##### Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 10  Income Taxes (cont.)



Net long-term deferred tax liabilities were $12,559,000 at December 31, 2003, and $11,955,000 at
December 31, 2002. In addition, short-term deferred tax assets of $681,000 at December 31, 2003, and $685,000 at December 31, 2002, are included in the Consolidated Balance Sheets in Prepaid Expenses and Other Current Assets for the respective
years.



As of December 31, 2003 and 2002, the Company had
valuation allowances of $2,911,000 and $2,142,000, respectively, to reduce its deferred tax assets to estimated realizable value. The valuation allowances relate to the deferred tax assets arising from state tax loss carryforwards. The net changes
in the valuation allowances during 2003 and 2002 were increases of $769,000 and $1,185,000, respectively, and were principally due to the potential expiration of net operating losses for state tax purposes.



In assessing the realizability of deferred tax assets, Deltics
management considers whether it is more likely than not that some portion or all of the Companys total deferred tax assets will not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this
assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the temporary differences are anticipated to reverse, management believes it is more likely than not that the Company
will realize the benefits of its deferred tax assets, net of the valuation allowance, at December 31, 2003, as reductions of future taxable income or by utilizing available tax planning strategies. However, the amount of the net deferred tax assets
considered realizable could be adjusted in the future if estimates of taxable income are revised.



At December 31, 2003, the Company had operating loss carryforwards for state tax purposes of approximately $87,299,000. Of this amount, $1,402,000 expires
in 2004, $34,162,000 expires in 2005, $21,696,000 expires in 2006, $23,817,000 expires in 2007, and $6,208,000 expires in 2008. An additional $14,000 will expire if not utilized as expected upon the filing of Deltics 2003 Arkansas state income
tax return. The Company had an expected federal tax refund of $1,556,000 at December 31, 2002, reflected in the 2002 Consolidated Balance Sheets in Other Receivables; no such receivable existed as of December 31, 2003.



The Company was part of the consolidated income tax return of its former
parent, Murphy Oil Corporation (Murphy Oil), for periods prior to its spin-off on January 1, 1997. Under the terms of a tax sharing agreement between the Company and Murphy Oil which governs tax matters for this period, Murphy Oil
personnel handle the administration of any tax disputes. During 2003, Murphy Oil closed the audit of its returns for 1992 -1994 and Deltic paid Murphy Oil $325,000 in additional taxes which resulted in additional deferred tax assets related to its
investment in real estate held for development and sale. Therefore, such settlement had no material impact on total income tax expense/(benefit). With this settlement, all tax years under the tax sharing agreement are now closed, and the Company
anticipates no further adjustments relating to returns filed during those years.



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 11  Stockholders Rights Plan



The Company has a Stockholders Rights Plan, which provides for each eligible common shareholder to receive a dividend of one
preferred stock purchase right (Right) for each outstanding share of the Companys common stock held. The Rights will expire on December 31, 2006, unless earlier exchanged or redeemed. The Rights will detach from the common stock
and become exercisable: (1) following a specified period of time after the date of the first public announcement that a person or group of affiliated or associated persons (Acquiring Person), other than certain persons, has become the
beneficial owner of 15 percent or more of the Companys common stock or (2) following a specified amount of time of the commencement of a tender or exchange offer by any Acquiring Person, other than certain persons, which would, if consummated,
result in such persons becoming the beneficial owner of 15 percent or more of the Companys common stock. In either case, the detachment of the Rights from the common stock is subject to extension by a majority of the directors of the Company.
The Rights have certain antitakeover effects and will cause substantial dilution to any Acquiring Person that attempts to acquire the Company without conditioning the offer on a substantial number of Rights being acquired. The Rights are not
intended to prevent a takeover, but rather are designed to enhance the ability of the Board of Directors of the Company to negotiate with an acquiror on behalf of all the shareholders. Other terms of the Rights are set forth in, and the foregoing
description is qualified in its entirety by, the Rights Agreement between the Company and Harris Trust and Savings Bank, as Rights Agent.



Note 12  Fair Value of Financial Instruments



The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at December 31, 2003 and 2002.
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The table excludes financial instruments included in current assets and liabilities, except the
current portion of noncurrent notes receivable and current maturities of long-term debt, all of which have fair values approximating carrying values.



|                                             |  |                |          |   |                     |          |   |                |          |   |                     |          |  
|-------------------------------------------- |  | -------------- | -------- | - | ------------------- | -------- | - | -------------- | -------- | - | ------------------- | -------- | -
|                                             |  | 2003           |          |   | 2002                |         
|(Thousands of dollars)                       |  | CarryingAmount |          |   | EstimatedFair Value |          |   | CarryingAmount |          |   | EstimatedFair Value |         
|Financial assets                             |  |                |          |   |                     |          |   |                |          |   |                     |          |  
|Funds held by trustee                        |  | $              | 4,583    |   |                     | 4,583    |   |                | 447      |   |                     | 447      |  
|Notes receivable                             |  | $              | 110      |   |                     | 143      |   |                | 21       |   |                     | 21       |  
|Financial liabilities                        |  |                |          |   |                     |          |   |                |          |   |                     |          |  
|Long-term debt, including current maturities |  | $              | (115,120 | ) |                     | (128,584 | ) |                | (116,190 | ) |                     | (118,053 | )
|Off-balance sheet exposures                  |  |                |          |   |                     |          |   |                |          |   |                     |          |  
|Guarantees                                   |  | $              |         |   |                     | (16,461  | ) |                |         |   |                     | (15,538  | )
|Letters of credit                            |  | $              |         |   |                     | (824     | ) |                |         |   |                     | (1,266   | )



Funds held by
trustee  The carrying amount approximates its fair value.



Notes receivable, including current portion, and long-term debt, including current maturities  The fair value is estimated based on current rates at which the Company could borrow funds with similar remaining maturities.



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 12  Fair Value of Financial Instruments (cont.)



Guarantees  The fair value is based on the estimated cost to settle these obligations by
discounting the estimated future cash flows based on current rates at which the Company could borrow funds with similar remaining maturities.



Letters of credit  The fair value is based on the estimated cost to settle these obligations.



Note 13  Concentration of Credit Risks



Financial instruments which potentially subject the Company to credit risk
are trade accounts receivable. These receivables normally arise from the sale of wood products and real estate. Concentration of credit with respect to these trade accounts receivable is limited due to the large number of customers comprising the
Companys customer base. No single customer accounted for a significant amount of the Companys sales of wood products or real estate in 2003, 2002, or 2001. At December 31, 2003 and 2002, there were no significant accounts receivable from
a single customer.



Note 14  Employee and Retiree Benefit Plans



The Company has both funded and unfunded noncontributory
defined benefit retirement plans that cover the majority of its employees. The plans provide defined benefits based on years of service and final average salary. Deltic also has other postretirement benefit plans covering substantially all of its
employees. The health care plan is contributory with participants contributions adjusted as needed; the life insurance plan is noncontributory. The Company uses a September 30 measurement date for its plans.



|                                          |  |                 |        |   |                             |        |   |      |       |   |      |       |  
|----------------------------------------- |  | --------------- | ------ | - | --------------------------- | ------ | - | ---- | ----- | - | ---- | ----- | -
|                                          |  | RetirementPlans |        |   | OtherPostretirementBenefits |       
|(Thousands of dollars)                    |  | 2003            |        |   | 2002                        |        |   | 2003 |       |   | 2002 |      
|Change in projected benefit obligation    |  |                 |        |   |                             |        |   |      |       |   |      |       |  
|Benefit obligation at January 1           |  | $               | 15,485 |   |                             | 12,077 |   |      | 7,930 |   |      | 6,028 |  
|Service cost                              |  |                 | 771    |   |                             | 658    |   |      | 384   |   |      | 292   |  
|Interest cost                             |  |                 | 1,001  |   |                             | 883    |   |      | 552   |   |      | 413   |  
|Participant contributions                 |  |                 |       |   |                             |       |   |      | 33    |   |      | 38    |  
|Actuarial (gain)/loss                     |  |                 | 634    |   |                             | 2,046  |   |      | 562   |   |      | 1,307 |  
|Curtailments1                             |  |                 | (6     | ) |                             |       |   |      | (58   | ) |      |      |  
|Special termination benefits2             |  |                 | 916    |   |                             |       |   |      | 156   |   |      |      |  
|Benefits paid                             |  |                 | (239   | ) |                             | (179   | ) |      | (217  | ) |      | (148  | )
|                                          |  |                 |        |   |                             |        |   |      |       |   |      |       |  
|Benefit obligation at December 31         |  | $               | 18,562 |   |                             | 15,485 |   |      | 9,342 |   |      | 7,930 |  
|                                          |  |                 |        |   |                             |        |   |      |       |   |      |       |  
|Change in plan assets                     |  |                 |        |   |                             |        |   |      |       |   |      |       |  
|Fair value of plan assets at January 1    |  | $               | 11,594 |   |                             | 12,162 |   |      |      |   |      |      |  
|Actual return on plan assets              |  |                 | 1,052  |   |                             | (421   | ) |      |      |   |      |      |  
|Employer contributions                    |  |                 |       |   |                             |       |   |      | 184   |   |      | 110   |  
|Participant contributions                 |  |                 |       |   |                             |       |   |      | 33    |   |      | 38    |  
|Benefits paid                             |  |                 | (202   | ) |                             | (147   | ) |      | (217  | ) |      | (148  | )
|                                          |  |                 |        |   |                             |        |   |      |       |   |      |       |  
|Fair value of plan assets at December 313 |  | $               | 12,444 |   |                             | 11,594 |   |      |      |   |      |      |  
|                                          |  |                 |        |   |                             |        |   |      |       |   |      |       |  



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 14  Employee and Retiree Benefit Plans (cont.)



|                                                   |  |                 |        |   |                             |        |   |      |        |   |      |        |  
|-------------------------------------------------- |  | --------------- | ------ | - | --------------------------- | ------ | - | ---- | ------ | - | ---- | ------ | -
|                                                   |  | RetirementPlans |        |   | OtherPostretirementBenefits |       
|(Thousands of dollars)                             |  | 2003            |        |   | 2002                        |        |   | 2003 |        |   | 2002 |       
|Reconciliation of funded status of plans           |  |                 |        |   |                             |        |   |      |        |   |      |        |  
|Funded status of plans                             |  | $               | (6,118 | ) |                             | (3,891 | ) |      | (9,342 | ) |      | (7,930 | )
|Unrecognized actuarial (gain)/loss                 |  |                 | 4,129  |   |                             | 3,841  |   |      | 3,275  |   |      | 2,951  |  
|Unrecognized net asset from transition to SFAS 874 |  |                 |       |   |                             | (35    | ) |      |       |   |      |       |  
|Unrecognized prior service cost                    |  |                 | 360    |   |                             | 433    |   |      |       |   |      |       |  
|Contributions                                      |  |                 | 31     |   |                             | 5      |   |      |       |   |      |       |  
|                                                   |  |                 |        |   |                             |        |   |      |        |   |      |        |  
|Prepaid/(accrued) benefit cost5                    |  | $               | (1,598 | ) |                             | 353    |   |      | (6,067 | ) |      | (4,979 | )
|                                                   |  |                 |        |   |                             |        |   |      |        |   |      |        |  
|Assumptions                                        |  |                 |        |   |                             |        |   |      |        |   |      |        |  
|Weighted average discount rate                     |  |                 | 6.25   | % |                             | 6.50   | % |      | 6.25   | % |      | 6.50   | %
|Rate of compensation increase                      |  |                 | 4.60   | % |                             | 4.60   | % |      | N/A    |   |      | N/A    |  



|1 | Reflects impact of the severance of one shift at one of the Companys two sawmills.
|- | -----------------------------------------------------------------------------------



|2 | Reflects impact of enhanced retirement benefits granted to certain employees upon retirement.
|- | ---------------------------------------------------------------------------------------------



|3 | Primarily includes listed stocks and bonds, government securities, and U.S. agency bonds.
|- | -----------------------------------------------------------------------------------------



|4 | Amount was amortized over a period of 15 years.
|- | -----------------------------------------------



|5 | Included in the Consolidated Balance Sheets in Deferred Charges and Other Assets/Other Noncurrent Liabilities.
|- | --------------------------------------------------------------------------------------------------------------



Components of net periodic retirement expense and other postretirement benefits expense
consisted of the following:



|                                                                  |  |      |       |   |      |        |   |      |        |  
|----------------------------------------------------------------- |  | ---- | ----- | - | ---- | ------ | - | ---- | ------ | -
|(Thousands of dollars)                                            |  | 2003 |       |   | 2002 |        |   | 2001 |       
|Retirement plans                                                  |  |      |       |   |      |        |   |      |        |  
|Service cost                                                      |  | $    | 771   |   |      | 658    |   |      | 589    |  
|Interest cost                                                     |  |      | 1,001 |   |      | 883    |   |      | 776    |  
|Expected return on plan assets                                    |  |      | (878  | ) |      | (1,027 | ) |      | (1,070 | )
|Amortization of prior service cost                                |  |      | 53    |   |      | 53     |   |      | 53     |  
|Amortization of transitional asset                                |  |      | (35   | ) |      | (49    | ) |      | (49    | )
|Recognized actuarial (gain)/loss                                  |  |      | 165   |   |      | 16     |   |      | (23    | )
|                                                                  |  |      |       |   |      |        |   |      |        |  
|Net periodic benefit cost                                         |  |      | 1,077 |   |      | 534    |   |      | 276    |  
|Additional expense recognized due to curtailments                 |  |      | 21    |   |      |       |   |      |       |  
|Additional expense recognized due to special termination benefits |  |      | 916   |   |      |       |   |      |       |  
|                                                                  |  |      |       |   |      |        |   |      |        |  
|Net retirement expense                                            |  | $    | 2,014 |   |      | 534    |   |      | 276    |  
|                                                                  |  |      |       |   |      |        |   |      |        |  
|Other postretirement benefits                                     |  |      |       |   |      |        |   |      |        |  
|Service cost                                                      |  | $    | 384   |   |      | 292    |   |      | 263    |  
|Interest cost                                                     |  |      | 552   |   |      | 413    |   |      | 397    |  
|Recognized actuarial (gain)/loss                                  |  |      | 180   |   |      | 52     |   |      | 60     |  
|Special termination benefits                                      |  |      | 156   |   |      |       |   |      |       |  
|                                                                  |  |      |       |   |      |        |   |      |        |  
|Other postretirement benefits expense                             |  | $    | 1,272 |   |      | 757    |   |      | 720    |  
|                                                                  |  |      |       |   |      |        |   |      |        |  



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 14  Employee and Retiree Benefit Plans (cont.)



|                                                 |  |      |   |  |      |   |  |      |  
|------------------------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                                                 |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Assumptions                                      |  |      |   |  |      |   |  |      |  
|Weighted average discount rate                   |  | 6.50 | % |  | 7.25 | % |  | 7.50 | %
|Expected long-term rate of return on plan assets |  | 7.50 | % |  | 8.50 | % |  | 8.50 | %
|Rate of compensation increase                    |  | 4.60 | % |  | 4.60 | % |  | 4.60 | %



To develop the
expected long-term rate of return on asset assumption, the Company considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset
classes in which the portfolio is invested, and the expectations for future returns of each asset class. The expected return for each asset class was then weighted, based on the target asset association, to develop the expected long-term rate of
return on asset assumption for the portfolio. The returns were adjusted to account for plan expenses. This resulted in the selection of the 7.50% assumption.



Retirement Plans  The accumulated benefit obligations for the Companys retirement plans were $13,951,000 and $10,681,000 at December
31, 2003, and 2002, respectively. For the Companys qualified plan, the projected benefit obligation (PBO) exceeded the fair value of plan assets by $4,080,000 and $2,909,000 at December 31, 2003 and 2002, respectively; however, the
fair value of plan assets exceeded the accumulated benefit obligation (ABO) at year-end by $237,000 and $1,525,000, respectively. Therefore, no recognition of a minimum pension liability was required for the qualified plan. The Company
does not fund its nonqualified plan; therefore, this plan has no assets. At year-end 2003 and 2002, the PBO for this nonqualified plan was $2,038,000 and $983,000, respectively. The Company recorded an actuarial determined liability, related to this
nonqualified plan, in the amount of $1,524,000 at December 31, 2003, and $710,000 at December 31, 2002, which is reflected in the Consolidated Balance Sheets in Other Noncurrent Liabilities. As of December 31, 2003, the ABO for the nonqualified plan
exceeded the actuarial liability by $190,000. As a result, the Company has recorded the appropriate additional minimum pension liability for this amount, which is reflected in the 2003 Consolidated Balance Sheet in Other Noncurrent Liabilities.



The weighted average asset allocation for the Companys
qualified retirement plan at December 31, 2003 and 2002, by asset category, consisted of the following:



|                  |  |                  |   |  |      |   |  |      |  
|----------------- |  | ---------------- | - |  | ---- | - |  | ---- | -
|                  |  | TargetAllocation |   |  | 2003 |   |  | 2002 |  
|Equity securities |  | 40-65            | % |  | 51   | % |  | 41   | %
|Debt securities   |  | 40-60            | % |  | 47   | % |  | 54   | %
|Cash equivalents  |  | 0-15             | % |  | 2    | % |  | 5    | %
|                  |  |                  |   |  |      |   |  |      |  
|                  |  |                  |   |  | 100  | % |  | 100  | %
|                  |  |                  |   |  |      |   |  |      |  



Equity securities
generally consist of common stocks. Investment in debt securities are limited to U.S. government securities, high quality corporate bonds, and mortgage-backed securities. Cash equivalents are limited to U.S. government obligations.



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 14  Employee and Retiree Benefit Plans (cont.)



The primary investment goals are: (1) preservation of principle, (2) investment in a balanced
portfolio, and (3) growth of assets to exceed inflation. To meet these goals, the Companys Investment Committee has adopted the above target asset allocation ranges as outlined in the investment policy for the retirement plan. These ranges
allow for flexibility to meet investment goals without exposing the plans assets to excessive risk.



The current funding status of the qualified retirement plans is not expected to require the Company to make any contribution during 2004; however, Deltic
does expect to contribute $123,000 to fund benefits to be paid from its nonqualified retirement plan.



Other Postretirement Benefits  The Company sponsors a plan that provides comprehensive health care benefits (supplementing Medicare benefits
for those eligible) and life insurance benefits for retired employees. Costs are accrued for this plan during the service lives of covered employees. Retirees contribute a portion of the self-funded cost of health care benefits; the Company
contributes the remainder. The Company pays premiums for life insurance coverage, arranged through an insurance company. The health care plan is funded on a pay-as-you-go basis. The Company retains the right to modify or terminate the benefits
and/or cost sharing provisions. Deltic expects to contribute $358,000 to its other postretirement benefit plans in 2004.



In determining the benefit obligation for health care at December 31, 2003, health care inflation cost was assumed to increase at an annual rate of ten
percent in 2003, decreasing one percent per year to five percent in 2008 and thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage-point increase in the assumed
health care cost trend would increase the aggregate service and interest cost components of periodic benefit cost for 2003 by $92,000 and the benefit obligation by $798,000, while a one percentage-point decrease in the assumed rate would decrease
the 2003 cost components by $82,000 and the benefit obligation by $734,000.



Thrift Plan  Employees of the Company may participate in its thrift plan by allotting up to a specific percentage of their base pay. The Company matches contributions at a stated percentage of each
employees allotment, based on length of participation in the plan. Company contributions to this plan were $311,000 in 2003, $290,000 in 2002, and $275,000 in 2001.



Note 15  Incentive Plans



Stock Incentive Plan



On April 25, 2002, the Companys shareholders approved the Deltic Timber Corporation 2002 Stock Incentive Plan (the 2002 Plan). The 2002
Plan replaced the 1996 Stock Incentive Plan (the 1996 Plan), which was terminated. At December 31, 2003, remaining outstanding options under the 1996 Plan totaled 263,947 shares, of which 208,847 shares were exercisable. No further
awards will be made under the 1996 Plan, and the unexercisable outstanding options will be fully vested by the end of the first quarter of 2004. Outstanding options under the 1996 Plan will expire from 2006 to 2011 if not exercised and have an
average exercise price of $24.66 based on the fair market value at date of grant.



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 15  Incentive Plans (cont.)



The 2002 Plan permits annual awards of shares of the Companys common stock to executives, other
key employees, and directors. Under the plan, the Executive Compensation Committee (the Committee) is authorized to grant: (1) stock options; (2) restricted stock and restricted stock units; (3) performance units; and (4) other
stock-based awards, including stock appreciation rights and rights to dividends and dividend equivalents. The number of shares available for issuance under the 2002 Plan is 1,800,000 shares unless adjustment is determined necessary by the Committee
as the result of dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of common stock, or other corporate transaction in
order to prevent dilution or enlargement of benefits or potential benefits intended to be made available. At December 31, 2003, 1,510,875 of these 1,800,000 shares were available for award under the 2002 Plan. No participant in the 2002 Plan may
receive options and stock appreciation rights in any calendar year that relates to more than 50,000 shares, and the maximum number of shares which may be awarded as restricted stock and restricted stock units or other stock-based awards is 180,000
shares. The Company applies the intrinsic value method of APB 25 to account for stock-based compensation, accruing costs of any stock options and restricted stock over the respective vesting/performance periods. The cost of stock-based compensation
is reflected in General and Administrative Expenses on the Consolidated Statements of Income and amounted to $339,000 in 2003, $664,000 in 2002, and $618,000 in 2001. (For additional information regarding the Companys stock-based compensation,
including the effect on net income/(loss) and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123, see Note 1  Significant Accounting Policies.)



Stock Options  For each option granted under the 2002 Plan, the
Committee fixes the option price at not less than fair market value on the date of the grant and the option term, not to exceed 10 years from date of grant. (Options granted in 2002 were awarded in February 2002 subject to shareholder approval in
April. As a result of an increase in the market value of the Companys common stock from the grant date to the approval date, these options have an intrinsic value of $3.46 per share. The resulting fixed stocked-based compensation cost is being
accrued over the vesting period for these options.) Replacement options granted due to the spin-off from Murphy Oil were for ten years from original grant date and nonqualified. New options granted in 1997 and 1998 were for ten years and primarily
incentive. Options granted since 1998 have been for ten years and nonqualified. All options have an option price not less than the market value on the grant date, with a range in option prices of $9.90 to $29.295 per share. For options granted in
1997, exclusive of replacement options, half could be exercised or surrendered after two years and the remainder after three years. For options granted from 1998 through 2001, half could be exercised or surrendered after one year and the remainder
after three years. During 2002 and 2003, the Company granted options for 162,250 shares and 129,750 shares, respectively. For 122,250 shares and 121,750 shares granted in 2002 and 2003, respectively, half may be exercised or surrendered after one
year and the remainder after three years, and the remaining 40,000 shares and 8,000 shares, respectively, awarded to nonemployee directors at an option price of $29.295 in 2002 and $24.31 in 2003, were vested immediately when awarded.



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 15  Incentive Plans (cont.)



Changes in options outstanding, including replacement options, consisted of the following:



|                                 |  |                 |   |  |                      |       
|-------------------------------- |  | --------------- | - |  | -------------------- | ------
|                                 |  | NumberofOptions |   |  | AverageExercisePrice
|Outstanding at December 31, 2000 |  | 281,705         |   |  | $                    | 23.40 
|Granted                          |  | 112,700         |   |  | $                    | 23.88 
|Surrendered/exercised            |  | (1,750          | ) |  |                      | N/A   
|Forfeited/expired                |  | (500            | ) |  |                      | N/A   
|                                 |  |                 |   |  |                      |       
|Outstanding at December 31, 2001 |  | 392,155         |   |  | $                    | 23.58 
|Granted                          |  | 162,250         |   |  | $                    | 29.295
|Surrendered/exercised            |  | (59,350         | ) |  |                      | N/A   
|Forfeited/expired                |  | (2,125          | ) |  |                      | N/A   
|                                 |  |                 |   |  |                      |       
|Outstanding at December 31, 2002 |  | 492,930         |   |  | $                    | 25.94 
|Granted                          |  | 129,750         |   |  | $                    | 25.02 
|Surrendered/exercised            |  | (67,608         | ) |  |                      | N/A   
|Forfeited/expired                |  | (2,500          | ) |  |                      | N/A   
|                                 |  |                 |   |  |                      |       
|Outstanding at December 31, 2003 |  | 552,572         |   |  | $                    | 26.09 
|                                 |  |                 |   |  |                      |       
|Exercisable at December 31, 2001 |  | 212,580         |   |  | $                    | 23.45 
|Exercisable at December 31, 2002 |  | 282,955         |   |  | $                    | 25.36 
|Exercisable at December 31, 2003 |  | 316,972         |   |  | $                    | 26.25 



Additional
information about stock options outstanding at December 31, 2003, consisted of the following:



|                         |  |                     |  |                     |  |                      |       |                 |         |                      |   |      
|------------------------ |  | ------------------- |  | ------------------- |  | -------------------- | ----- | --------------- | ------- | -------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable
|Range of Exercise Prices |  | NumberofOptions     |  | AverageLife inYears |  | AverageExercisePrice |       | NumberofOptions |         | AverageExercisePrice
|$22.0625$24.9700        |  | 312,726             |  | 7.0                 |  | $                    | 24.02 |                 | 159,126 |                      | $ | 23.89
|$25.2500$29.2950        |  | 239,846             |  | 7.2                 |  |                      | 28.78 |                 | 157,846 |                      |   | 28.63
|                         |  |                     |  |                     |  |                      |       |                 |         |                      |   |      
|                         |  | 552,572             |  | 7.0                 |  |                      | 26.09 |                 | 316,972 |                      |   | 26.25
|                         |  |                     |  |                     |  |                      |       |                 |         |                      |   |      



Restricted Stock
and Restricted Stock Units  The Committee may award restricted stock and restricted stock units to selected employees, with conditions to vesting for each grant established by the Committee. During the vesting period, the grantee may vote
and receive dividends on the shares, but shares are subject to transfer restrictions and are all, or partially, forfeited if a grantee terminates, depending on the reason.



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 15  Incentive Plans (cont.)



Changes in shares of restricted stock outstanding consisted of the following:



|                             |  |        |  |         |   |  |       
|---------------------------- |  | ------ |  | ------- | - |  | ------
|                             |  | 2003   |  | 2002    |   |  | 2001  
|Balance at beginning of year |  | 20,750 |  | 34,094  |   |  | 34,094
|Granted                      |  |       |  |        |   |  |      
|Forfeited                    |  |       |  |        |   |  |      
|Awarded                      |  |       |  | (13,344 | ) |  |      
|                             |  |        |  |         |   |  |       
|Balance at end of year       |  | 20,750 |  | 20,750  |   |  | 34,094
|                             |  |        |  |         |   |  |       



Unearned compensation
was charged for the market value of the granted restricted shares, and it is shown as a reduction of stockholders equity in the Consolidated Balance Sheets as Unamortized Restricted Stock Awards, which is being amortized to expense over the
respective four-year restricted period.



Performance
Units  Performance units granted under the 2002 Plan may be denominated in cash, common shares, other securities, other awards allowed under the 2002 Plan, or other property and shall confer on the holder thereof rights valued as
determined by the Committee and payable to, or exercisable by, the holder, in whole or in part, upon achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the 2002 Plan, the
performance goals to be achieved during any performance period, the length of any performance period, the amount of any performance unit granted, and any payment or transfer to be made pursuant to any performance unit shall be determined by the
Committee. No performance units have been granted.



Other
Stock-based Awards  The Committee may also grant other awards, including but not limited to, stock appreciation rights and rights to dividends and dividend equivalents that are denominated, or payable in, valued in whole or in part by
reference to, or otherwise based on or related to shares of the Companys common stock, including securities convertible in its common stock, as deemed by the Committee to be consistent with the purpose of the 2002 Plan. No such other
stock-based awards have been granted.



Incentive
Compensation Plan



Cash Awards  The Company
has an Incentive Compensation Plan that provides for annual cash awards to officers and key employees based on actual results for a year compared to objectives established by the Executive Compensation Committee, which administers the Plan, at the
beginning of that year. Provisions for cash incentive awards of $703,000, $358,000, and $405,000 were recorded in 2003, 2002, and 2001, respectively.



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 16  Supplemental Cash Flows Disclosures



Income taxes paid, net of refunds, were $2,538,000 in 2003. During 2002 and
2001, net refunds of $1,096,000 and $4,734,000, respectively, were received. Interest paid was $6,425,000, $4,171,000, and $5,475,000 in 2003, 2002, and 2001, respectively. No interest was capitalized in 2003, 2002, or 2001.



Noncash investing and financing activities excluded from the Consolidated
Statements of Cash Flows were a non-cash accrual recorded as of December 31, 2002, for the contingent liability related to the 2003 sinking fund deposits of Del-Tin Fiber that were more likely than not to be required from the Company, in the amount
of $4,478,000, and assumptions of owner-financed debt during 2001, in the amount of $176,000. (For additional information regarding the contingent liability, see Note 4  Investment in Del-Tin Fiber and Note 18  Commitments and
Contingencies.)



(Increases)/decreases in operating working
capital other than cash and cash equivalents, for each of the three years ended December 31 consisted of the following:



|                                                |  |      |        |   |      |       |   |      |       |  
|----------------------------------------------- |  | ---- | ------ | - | ---- | ----- | - | ---- | ----- | -
|(Thousands of dollars)                          |  | 2003 |        |   | 2002 |       |   | 2001 |      
|Trade accounts receivable                       |  | $    | (1,013 | ) |      | 1,090 |   |      | (499  | )
|Other receivables                               |  |      | 1,293  |   |      | 1,367 |   |      | 2,777 |  
|Inventories                                     |  |      | 478    |   |      | (692  | ) |      | (438  | )
|Prepaid expenses and other current assets       |  |      | 295    |   |      | (180  | ) |      | (672  | )
|Trade accounts payable                          |  |      | (544   | ) |      | (208  | ) |      | 573   |  
|Deferred revenues and other accrued liabilities |  |      | 433    |   |      | 155   |   |      | 1,125 |  
|                                                |  |      |        |   |      |       |   |      |       |  
|                                                |  | $    | 942    |   |      | 1,532 |   |      | 2,866 |  
|                                                |  |      |        |   |      |       |   |      |       |  



Note 17  Earnings per Share



The amounts used in computing earnings per share and the
effect on income and weighted average number of shares outstanding of dilutive potential common stock consisted of the following:



|                                                                                                           |  |      |        |      |         |   |      |        |  
|---------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | ------- | - | ---- | ------ | -
|(Thousands of dollars, except per share amounts)                                                           |  | 2003 |        | 2002 |         |   | 2001 |       
|Income/(loss) from continuing operations                                                                   |  | $    | 8,703  |      | (13,639 | ) |      | 1,623  |  
|Less preferred dividends declared                                                                          |  |      |       |      | (2,249  | ) |      | (2,262 | )
|                                                                                                           |  |      |        |      |         |   |      |        |  
|Earnings from continuing operations available to common shareholders                                       |  |      | 8,703  |      | (15,888 | ) |      | (639   | )
|Discontinued operations, net                                                                               |  |      |       |      |        |   |      | 8,357  |  
|                                                                                                           |  |      |        |      |         |   |      |        |  
|Earnings available to common shareholders                                                                  |  | $    | 8,703  |      | (15,888 | ) |      | 7,718  |  
|                                                                                                           |  |      |        |      |         |   |      |        |  
|Weighted average number of common shares used in basic EPS                                                 |  |      | 11,924 |      | 11,919  |   |      | 11,896 |  
|Effect of dilutive stock options*                                                                          |  |      | 31     |      |        |   |      |       |  
|                                                                                                           |  |      |        |      |         |   |      |        |  
|Weighted average number of common shares and dilutive potential common stock used in EPS assuming dilution |  |      | 11,955 |      | 11,919  |   |      | 11,896 |  
|                                                                                                           |  |      |        |      |         |   |      |        |  



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 17  Earnings per Share (cont.)



|                                                 |  |      |     |      |       |   |      |      |  
|------------------------------------------------ |  | ---- | --- | ---- | ----- | - | ---- | ---- | -
|(Thousands of dollars, except per share amounts) |  | 2003 |     | 2002 |       |   | 2001 |     
|Earnings per common share                        |  |      |     |      |       |   |      |      |  
|Basic                                            |  |      |     |      |       |   |      |      |  
|Continuing operations                            |  | $    | .73 |      | (1.33 | ) |      | (.05 | )
|Discontinued operations                          |  |      |    |      |      |   |      | .70  |  
|                                                 |  |      |     |      |       |   |      |      |  
|Net income/(loss)                                |  | $    | .73 |      | (1.33 | ) |      | .65  |  
|                                                 |  |      |     |      |       |   |      |      |  
|Assuming dilution                                |  |      |     |      |       |   |      |      |  
|Continuing operations                            |  | $    | .73 |      | (1.33 | ) |      | (.05 | )
|Discontinued operations                          |  |      |    |      |      |   |      | .70  |  
|                                                 |  |      |     |      |       |   |      |      |  
|Net income/(loss)                                |  | $    | .73 |      | (1.33 | ) |      | .65  |  
|                                                 |  |      |     |      |       |   |      |      |  



| | * | Additional potential common shares from stock options outstanding for 2002 and 2001, amounting to 39,000 and 33,000, respectively, were excluded from the calculation of diluted
earnings per share since they would result in antidilution due to the loss from continuing operations available to common shareholders.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Note 18  Commitments and Contingencies



Commitments  Commitments for capital expenditures at December 31, 2003, were approximately $590,000 for timber and timberlands; $435,000 for
property, plant, and equipment; and $3,730,000 for investment in real estate held for development and sale.



Contingencies  The Company has various contingencies related to its investment in Del-Tin Fiber and has either recorded such contingencies
into its financial statements or disclosed the conditions of the contingency as required by SFAS 5, Accounting for Contingencies. (For the details of these contingencies, see Note 4  Investment in Del-Tin Fiber.) The Company is also involved
in litigation incidental to its business from time to time. Currently, there are no material legal proceedings outstanding.



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 19  Business Segments



The Companys four reporting segments consist of Deltics three operating business units and its corporate
function. Each reporting entity has a separate management team and infrastructure that offers different products and/or services.



Woodlands operations manage the Companys Southern Pine timberlands located primarily in Arkansas and north Louisiana and derive revenue from the
harvest of timber from the timberlands, in accordance with its harvest plans, and either sells timber to third parties in the domestic market or to the Companys Mills segment for conversion into lumber. In addition, this segment may, from time
to time, identify and sell a portion of its timberland holdings that is either non-strategic to future timberland management activities or has appreciated, due primarily to location, to a level that exceeds its value as a timber-growing asset. This
segment also generates revenue from the leasing of hunting, oil and gas, and other rights on its timberlands.



The Mills segment consists of Deltics two sawmills which convert timber, purchased from third parties or the Companys Woodlands segment, into
lumber. These mills produce a variety of products, including dimension lumber, boards, timbers, decking, and secondary manufacturing products, such as finger-jointed studs. These products are sold primarily to wholesale distributors, lumber
treaters, and truss manufacturers in the South and Midwest and used in residential construction, roof trusses and laminated beams.



Real Estate operations, which currently include three separate real estate developments, add value to former timberland by developing it into upscale,
planned residential and commercial developments. These developments, each of which is centered around a core amenity, are being developed in stages. To-date, real estate sales have consisted primarily of residential lots sold to builders or
individuals, commercial site sales, and sales of undeveloped acreage. In addition, this segment currently leases retail and office space to third parties in a retail center constructed by the Company, and held for sale, in one of its developments.
This segment also manages: (1) a real estate brokerage subsidiary which currently generates commission revenue by reselling existing homesites in one of the Company developments and (2) a country club operation, Chenal Country Club, Inc., around
which the Companys Chenal Valley development is centered. This club operation derives its revenues from membership services, food and beverage sales, and membership dues.



Corporate operations consist primarily of senior 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 accounting policies of the reportable segments are the same as those
described in Note 1 Significant Accounting Policies. The Company evaluates the performance of its segments based on operating income before results of Del-Tin Fiber, an equity method investee; interest income and expense; other nonoperating
income or expense; and income taxes. Intersegment revenues consist primarily of timber sales from the Woodlands segment to the Mills operations.



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 19  Business Segments (cont.)



Information about the Companys business segments consisted of the following:



|                                                               |  |      |         |   |      |         |   |      |         |  
|-------------------------------------------------------------- |  | ---- | ------- | - | ---- | ------- | - | ---- | ------- | -
|(Thousands of dollars)                                         |  | 2003 |         |   | 2002 |         |   | 2001 |        
|Net sales                                                      |  |      |         |   |      |         |   |      |         |  
|Woodlands                                                      |  | $    | 38,210  |   |      | 36,964  |   |      | 38,309  |  
|Mills                                                          |  |      | 79,141  |   |      | 70,386  |   |      | 57,382  |  
|Real Estate                                                    |  |      | 33,771  |   |      | 15,343  |   |      | 25,020  |  
|Eliminations1                                                  |  |      | (16,207 | ) |      | (18,181 | ) |      | (14,700 | )
|                                                               |  |      |         |   |      |         |   |      |         |  
|                                                               |  | $    | 134,915 |   |      | 104,512 |   |      | 106,011 |  
|                                                               |  |      |         |   |      |         |   |      |         |  
|Income/(loss) from continuing operations before income taxes   |  |      |         |   |      |         |   |      |         |  
|Operating income                                               |  |      |         |   |      |         |   |      |         |  
|Woodlands                                                      |  | $    | 24,778  |   |      | 22,449  |   |      | 22,321  |  
|Mills                                                          |  |      | (4,847  | ) |      | (6,370  | ) |      | (7,101  | )
|Real Estate                                                    |  |      | 13,103  |   |      | 2,004   |   |      | 7,392   |  
|Corporate                                                      |  |      | (8,412  | ) |      | (6,792  | ) |      | (6,372  | )
|Eliminations                                                   |  |      | 18      |   |      | (594    | ) |      | (416    | )
|                                                               |  |      |         |   |      |         |   |      |         |  
|Operating income                                               |  |      | 24,640  |   |      | 10,697  |   |      | 15,824  |  
|Equity in loss of and write-off of investment in Del-Tin Fiber |  |      | (4,729  | ) |      | (28,217 | ) |      | (9,132  | )
|Interest income                                                |  |      | 476     |   |      | 284     |   |      | 946     |  
|Interest and other debt expense                                |  |      | (6,861  | ) |      | (4,558  | ) |      | (5,725  | )
|Other income/(expense)                                         |  |      | 161     |   |      | 433     |   |      | 438     |  
|                                                               |  |      |         |   |      |         |   |      |         |  
|                                                               |  | $    | 13,687  |   |      | (21,361 | ) |      | 2,351   |  
|                                                               |  |      |         |   |      |         |   |      |         |  
|Total assets at year-end                                       |  |      |         |   |      |         |   |      |         |  
|Woodlands                                                      |  | $    | 207,899 |   |      | 202,473 |   |      | 208,114 |  
|Mills                                                          |  |      | 48,330  |   |      | 50,541  |   |      | 50,099  |  
|Real Estate                                                    |  |      | 43,931  |   |      | 46,100  |   |      | 37,925  |  
|Corporate2, 3                                                  |  |      | 14,150  |   |      | 11,432  |   |      | 32,242  |  
|                                                               |  |      |         |   |      |         |   |      |         |  
|                                                               |  | $    | 314,310 |   |      | 310,546 |   |      | 328,380 |  
|                                                               |  |      |         |   |      |         |   |      |         |  
|Depreciation, amortization, and cost of fee timber harvested   |  |      |         |   |      |         |   |      |         |  
|Woodlands                                                      |  | $    | 6,996   |   |      | 8,786   |   |      | 9,038   |  
|Mills                                                          |  |      | 5,710   |   |      | 5,840   |   |      | 5,441   |  
|Real Estate                                                    |  |      | 543     |   |      | 454     |   |      | 365     |  
|Corporate                                                      |  |      | 96      |   |      | 144     |   |      | 147     |  
|                                                               |  |      |         |   |      |         |   |      |         |  
|                                                               |  | $    | 13,345  |   |      | 15,224  |   |      | 14,991  |  
|                                                               |  |      |         |   |      |         |   |      |         |  
|Capital expenditures                                           |  |      |         |   |      |         |   |      |         |  
|Woodlands                                                      |  | $    | 12,408  |   |      | 5,175   |   |      | 44,432  |  
|Mills                                                          |  |      | 3,405   |   |      | 3,571   |   |      | 5,861   |  
|Real Estate                                                    |  |      | 11,198  |   |      | 15,378  |   |      | 13,514  |  
|Corporate                                                      |  |      | 211     |   |      | 113     |   |      | 150     |  
|                                                               |  |      |         |   |      |         |   |      |         |  
|                                                               |  | $    | 27,222  |   |      | 24,237  |   |      | 63,957  |  
|                                                               |  |      |         |   |      |         |   |      |         |  



|1 | Primarily intersegment sales of timber from Woodlands to Mills.
|- | ---------------------------------------------------------------



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 19  Business Segments (cont.)



|2 | Includes investment in Del-Tin Fiber, an equity method investee, of zero, zero (after write-off of impaired investment carrying value), and $11,600,000 at December
31, 2003, 2002, and 2001, respectively. (For additional information regarding Del-Tin Fiber, see Note 4  Investment in Del-Tin Fiber.)
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3 | Includes balance of farmland/timberland sales proceeds held by trustee of $4,583,000 as of December 31, 2003, $447,000 as of December 31, 2002, and $2,236,000 as of
December 31, 2001.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003



Note 20  Financial Results by Quarter (Unaudited)



(Thousands of dollars, except per share amounts)



|                              |  |               |        |                |        |   |               |        |   |                 |         |   |      |         |  
|----------------------------- |  | ------------- | ------ | -------------- | ------ | - | ------------- | ------ | - | --------------- | ------- | - | ---- | ------- | -
|                              |  | 2003          |       
|                              |  | First Quarter |        | Second Quarter |        |   | Third Quarter |        |   | Fourth Quarter1 |         |   | Year |        
|Net sales                     |  | $             | 32,429 |                | 34,960 |   |               | 30,730 |   |                 | 36,796  |   |      | 134,915 |  
|Gross profit                  |  |               | 7,339  |                | 8,038  |   |               | 5,280  |   |                 | 13,317  |   |      | 33,974  |  
|Operating income              |  |               | 5,439  |                | 6,114  |   |               | 3,418  |   |                 | 9,669   |   |      | 24,640  |  
|Net income/(loss)             |  |               | 1,214  |                | 2,417  |   |               | 334    |   |                 | 4,738   |   |      | 8,703   |  
|Earnings per common share     |  |               |        |                |        |   |               |        |   |                 |         |   |      |         |  
|Basic                         |  | $             | .10    |                | .20    |   |               | .03    |   |                 | .40     |   |      | .73     |  
|Assuming dilution             |  | $             | .10    |                | .20    |   |               | .03    |   |                 | .39     |   |      | .73     |  
|Dividends per common share    |  | $             | .0625  |                | .0625  |   |               | .0625  |   |                 | .0625   |   |      | .25     |  
|Market price per common share |  |               |        |                |        |   |               |        |   |                 |         |   |      |         |  
|High                          |  | $             | 28.86  |                | 28.65  |   |               | 33.70  |   |                 | 31.34   |   |      | 33.70   |  
|Low                           |  |               | 23.35  |                | 23.85  |   |               | 27.70  |   |                 | 27.96   |   |      | 23.35   |  
|Close, at period-end          |  |               | 23.90  |                | 28.45  |   |               | 28.92  |   |                 | 30.40   |   |      | 30.40   |  
|                              | 
|                              |  | 2002          |       
|                              |  | First Quarter |        | Second Quarter |        |   | Third Quarter |        |   | Fourth Quarter2 |         |   | Year |        
|Net sales                     |  | $             | 27,095 |                | 28,106 |   |               | 25,565 |   |                 | 23,746  |   |      | 104,512 |  
|Gross profit                  |  |               | 6,784  |                | 6,142  |   |               | 3,501  |   |                 | 1,882   |   |      | 18,309  |  
|Operating income              |  |               | 4,737  |                | 4,024  |   |               | 1,669  |   |                 | 267     |   |      | 10,697  |  
|Net income/(loss)             |  |               | 821    |                | (10    | ) |               | (992   | ) |                 | (13,458 | ) |      | (13,639 | )
|Earnings per common share     |  |               |        |                |        |   |               |        |   |                 |         |   |      |         |  
|Basic                         |  | $             | .02    |                | (.05   | ) |               | (.13   | ) |                 | (1.18   | ) |      | (1.33   | )
|Assuming dilution             |  |               | .02    |                | (.05   | ) |               | (.13   | ) |                 | (1.18   | ) |      | (1.33   | )
|Dividends per common share    |  | $             | .0625  |                | .0625  |   |               | .0625  |   |                 | .0625   |   |      | .25     |  
|Market price per common share |  |               |        |                |        |   |               |        |   |                 |         |   |      |         |  
|High                          |  | $             | 30.63  |                | 34.95  |   |               | 35.20  |   |                 | 29.35   |   |      | 35.20   |  
|Low                           |  |               | 28.00  |                | 29.75  |   |               | 21.98  |   |                 | 22.00   |   |      | 21.98   |  
|Close, at period-end          |  |               | 30.25  |                | 34.48  |   |               | 21.98  |   |                 | 26.70   |   |      | 26.70   |  



|1 | Includes the impact of enhanced retirement benefits granted to certain employees upon retirement amounting to $916,000, $575,000 net of related income taxes of
$341,000.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 | Includes the write-off of the Companys investment in Del-Tin Fiber of $18,723,000, $11,440,000 net of related deferred income taxes of $7,283,000.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------



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REPORT OF MANAGEMENT



The Shareholders

Deltic Timber Corporation:



The management of Deltic Timber Corporation has prepared and is responsible
for the Companys consolidated financial statements. The statements are prepared in conformity with accounting principles generally accepted in the United States of America, appropriate in the circumstances. In preparing the financial
statements, management has, when necessary, made judgments and estimates with consideration given to materiality.



The Company has established and maintains a disclosure control system and related policies and procedures designed to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known. In addition, the Company maintains internal control systems and related policies and procedures designed to provide reasonable assurance that assets are safeguarded against loss or
unauthorized use, that the accounting records accurately reflect business transactions, and that the transactions are in accordance with managements authorization. The design, monitoring, and revision of the systems of internal control
involve, among other things, our judgment with respect to the relative cost and expected benefits of specific control measures. The Company also maintains an internal auditing function which monitors the effectiveness of the controls, while
independently and systematically evaluating and formally reporting on the adequacy and effectiveness of components of the system.



The Companys consolidated financial statements have been audited by KPMG LLP, independent certified public accountants, who have expressed their opinion with
respect to the fairness of the consolidated financial statements in conformity with generally accepted accounting principles. Their audit was conducted in accordance with auditing standards generally accepted in the United States of America, which
include the consideration of the Companys internal controls to the extent necessary to form an independent opinion on the consolidated financial statements prepared by management. The Audit Committee of the Board of Directors (the Audit
Committee) appoints the independent auditors; ratification of the appointment is solicited annually from the shareholders.



The Audit Committee is composed of directors who are not officers or employees of the Company and who have been determined by the Companys Board of Directors to
meet applicable independence standards under the Securities Exchange Act of 1934. The Audit Committee meets periodically with the certified public accountants, the Companys internal auditor, and representatives of management to review the
Companys internal controls, the quality of its financial reporting, the scope and results of audits, and the independence of the external auditors. The Companys internal auditor and KPMG LLP have unrestricted access to the Audit
Committee, without managements presence, to discuss audit findings and other financial matters.



/s/ Clefton D. Vaughan



Clefton D. Vaughan

Vice President and Chief Financial Officer

February 6, 2004



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INDEPENDENT AUDITORS REPORT



The Board
of Directors

Deltic Timber Corporation:



We have audited the accompanying consolidated balance sheets of Deltic Timber Corporation and Subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of income, comprehensive income, stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2003. The consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Deltic Timber Corporation and Subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2003, in conformity with accounting principles generally accepted in the United States of America.



/s/ KPMG LLP



KPMG LLP

Shreveport, Louisiana

February 6, 2004



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AUDIT COMMITTEE CHAIRMANS LETTER



The Shareholders

Deltic Timber Corporation:



The Audit Committee
of the Board of Directors (the Committee) is responsible for providing independent oversight of the Companys accounting functions and internal controls. The members of the Committee are elected by the Board of Directors. The
Committee consists of five outside directors and operates under a written charter approved by the Board of Directors. (A copy of the Committees charter is included as an exhibit to the proxy statement for the Companys 2004 Annual Meeting
of Stockholders.) The Committee met six times during 2003.



The Committee also
oversees the financial reporting process on behalf of the Board of Directors. As part of this responsibility, the Committee assessed the independence of the Companys external auditors, utilizing written disclosures received from such auditors
as required by the provisions adopted by the Independence Standards Board, and recommended to the Board of Directors, subject to shareholder approval, the selection of the Companys external auditors. The Committee discussed the overall scope
and specific plans for audit services with the Companys internal auditor and with KPMG LLP, the Companys external auditors. The Committee reviewed and discussed the quarterly financial statements prior to the filing of the Companys
Form 10-Qs. In addition, the Committee also reviewed and discussed the Companys audited consolidated financial statements and adequacy of the Companys internal controls and discussed with KPMG LLP the matters required by Statements
on Auditing Standards 61, Communication with Audit Committees. The Committee also met with the internal auditor and KPMG LLP to discuss the results of their respective audits, their consideration of the Companys internal controls, and the
overall quality of the Companys financial reporting. The meetings were also designed to facilitate any private communication with the Committee, without management present, desired by the internal auditor or KPMG LLP.



Based upon these reviews and discussions, the Committee approved the accompanying audited
financial statements for inclusion in the annual report on Form 10-K filed with the Securities and Exchange Commission.



/s/ John C. Shealy



John C. Shealy

Chairman, Audit Committee

March 3, 2004



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|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|------- | -------------------------------------------------------------------------------------



None



|Item 9A. | Controls and Procedures.
|-------- | ------------------------



Deltic Timber Corporation (the Company) carried out an evaluation of the effectiveness of the design and operation of its disclosure controls
and procedures as defined in Rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934. Such evaluation was under the supervision, and with the participation, of the Companys senior management, including the Chief Executive
Officer (CEO) and the Chief Financial Officer (CFO). Based on this evaluation, the Companys CEO and CFO have concluded that the Companys disclosure controls and procedures were effective as of December 31, 2003,
in timely alerting them to material information required to be included in any reports that the Company files or submits under the Securities Exchange Act of 1934, as amended. In addition, such controls have been deemed to be effective in ensuring
that the required information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.



There were no significant changes during the quarter in internal controls over financial reporting or in any other factors
that could significantly affect those internal controls. The Company has not identified any significant deficiency or material weakness in its internal controls, and therefore, no corrective actions were taken.



74



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PART III



|Item 10. | Directors and Executive Officers of the Registrant.
|-------- | ---------------------------------------------------



The sections entitled Nominees For Election as Directors, Directors Whose Term of Office Continue, and Committees of the
Board of Directors appearing in the Registrants proxy statement for the annual meeting of shareholders to be held on April 22, 2004, sets forth certain information with respect to the directors of the registrant, including directors who
serve on the Companys Audit Committee and who have been designated an Audit Committee financial expert, and is incorporated herein by reference. Certain information with respect to persons who are or may be deemed to be executive officers of
the Registrant is set forth under the caption Executive Officers of the Registrant in Part I of this report.



The sections entitled Procedures for Stockholder Nominations and Proposals and Corporate Governance appearing in the
Registrants proxy statement for the annual meeting of stockholders to be held April 22, 2004 sets forth certain information respectively in regards to applicable procedures for stockholders to submit director nominations and proposals and the
Companys Code of Business Conduct and Ethics and is incorporated herein by reference.



|Item 11. | Executive Compensation
|-------- | ----------------------



Information required by this Item will be contained in the Registrants proxy statement for the annual meeting of stockholders to be held on April
22, 2004, to be filed not later than 120 days following the end of the Registrants fiscal year ended December 31, 2003, which will set forth certain information with respect to executive compensation of the Registrant and is incorporated
herein by reference.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management
|-------- | --------------------------------------------------------------



Information required by this Item will be contained in the Registrants proxy statement for the annual meeting of stockholders to be held on April
22, 2004, to be filed not later than 120 days following the end of the Registrants fiscal year ended December 31, 2003, which will set forth certain information with respect to security ownership of certain beneficial owners and management of
the Registrant and is incorporated herein by reference.



|Item 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------



Information required by this Item will be contained in the Registrants proxy statement for the annual meeting of stockholders to be held on April
22, 2004, to be filed not later than 120 days following the end of the Registrants fiscal year ended December 31, 2003, which will set forth certain information with respect to certain relationships and related transactions of the Registrant
and is incorporated herein by reference.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------



Information required by this Item will be contained in the Registrants proxy statement for the annual meeting to be held on April 22, 2004, to be
filed not later than 120 days following the end of the Registrants fiscal year ended December 31, 2003, which will set forth certain information with respect to principal account fees and services and is incorporated herein by reference.



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PART IV



|Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
|-------- | -----------------------------------------------------------------



| | a. | Financial Statements, Schedules and Exhibits.
| | -- | ---------------------------------------------



| | 1. | Consolidated Financial Statements.
| | -- | ----------------------------------



|                                                                                                             |  |   
|------------------------------------------------------------------------------------------------------------ |  | --
|                                                                                                             | 
|Consolidated Balance Sheets - December 31, 2003 and 2002.                                                    |  | 38
|                                                                                                             | 
|Consolidated Statements of Income for the Years Ended December 31, 2003, 2002, and 2001.                     |  | 39
|                                                                                                             | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002, and 2001.                 |  | 40
|                                                                                                             | 
|Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2003, 2002, and 2001.       |  | 41
|                                                                                                             | 
|Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2003, 2002, and 2001.       |  | 42
|                                                                                                             | 
|Notes to Consolidated Financial Statements, including Consolidated Quarterly Income Information (unaudited). |  | 43
|                                                                                                             | 
|Independent Auditors Report on Consolidated Financial Statements.                                           |  | 72



| | 2. | Financial Statement Schedules.
| | -- | ------------------------------



Financial Statements of Del-Tin Fiber L.L.C., an affiliate accounted for by the equity method, which constituted a significant subsidiary for the years
ended January 3, 2004 and December 28, 2002.



All other
financial statement schedules are omitted because either they are not applicable or the required information is included in the consolidated financial statements or notes thereto.



| | 3. | Exhibits.
| | -- | ---------



|    |  |                                                                                                                                                                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 
|3   |  | Articles of Incorporation and Bylaws.                                                                                                                                                                                                                         
|    | 
|3.1 |  | Amended and Restated Certificate of Incorporation of Deltic Timber Corporation as of December 17, 1996 (incorporated by reference to Exhibit 3.1 to Registrants Annual Report on Form
10-K for the year ended December 31, 1996).                            
|    | 
|3.2 |  | Amended and Restated Bylaws of Deltic Timber Corporation (incorporated by reference to Exhibit 3.2 to Registrants Annual Report on Form 10-K for the year ended December 31,
1996).                                                                          
|    | 
|4   |  | Instruments Defining the Rights of Security Holders.                                                                                                                                                                                                          
|    | 
|4.1 |  | Rights Agreement dated as of December 11, 1996, between Deltic Timber Corporation and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 4 to
Registrants Annual Report on Form 10-K for the year ended December 31, 1996).



76



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|      |  |                                                                                                                                                                                                                                                                  
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10    |  | Material contracts.                                                                                                                                                                                                                                              
|      | 
|10.1  |  | Deltic Timber Corporation 2002 Stock Incentive Plan (incorporated by reference to Appendix A to Registrants definitive Proxy Statement related to the Annual Meeting of Stockholders on
April 25, 2002).                                                        
|      | 
|10.2  |  | Distribution Agreement (incorporated by reference to Exhibit 10.2 to Registrants Annual Report on Form 10-K for the year ended December 31, 1996).                                                                                                              
|      | 
|10.3  |  | Tax Sharing Agreement (incorporated by reference to Exhibit 10.3 to Registrants Annual Report on Form 10-K for the year ended December 31, 1996).                                                                                                               
|      | 
|10.4  |  | Credit facility dated December 19, 1996 (incorporated by reference to Exhibit 10.4 to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30,
1997).                                                                                      
|      | 
|10.5  |  | Certificate of Designation of the Cumulative Redeemable Preferred Stock, 7.54% Series ($.01 Par Value), of Deltic Timber Corporation (incorporated by reference to Exhibit 10.5 to
Registrants Annual Report on Form 10-K for the year ended December 31, 1997).
|      | 
|10.6  |  | Fiber Supply Agreement dated February 21, 1995, with Del-Tin Fiber L.L.C. (incorporated by reference to Exhibit 10.2 to Registrants Registration of Securities Report on Form
10).                                                                              
|      | 
|10.7  |  | Note Purchase Agreement dated December 18, 1998 (incorporated by reference to Exhibit 10.7 to Registrants Annual Report on Form 10-K for the year ended December 31,
1998).                                                                                     
|      | 
|10.8  |  | Selective Sections of Del-Tin Fiber L.L.C.s Project Credit Agreement dated November 23, 1998 (incorporated by reference to Exhibit 10.8 to Registrants Annual Report on Form 10-K
for the year ended December 31, 1998).                                       
|      | 
|10.9  |  | Revolving Credit Agreement dated June 20, 2001 (incorporated by reference to Exhibit 10.9 to Registrants Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.)                                                                                    
|      | 
|10.10 |  | Note Purchase Agreement dated December 20, 2002, (incorporated by reference to Exhibit 10.10 to Registrants Annual Report on Form 10-K for the year ended December 31,
2002).                                                                                   
|      | 
|10.11 |  | First Amended and Restated Revolving Credit Agreement dated September 30, 2003 (incorporated by reference to Exhibit 10.11 to Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003).                                              
|      | 
|21    |  | Subsidiaries of the Registrant, included elsewhere herein.                                                                                                                                                                                                       
|      | 
|23    |  | Independent Auditors Consents.                                                                                                                                                                                                                                  
|      | 
|23.1  |  | Independent auditors consent related to report on financial statements of Deltic Timber Corporation, included elsewhere herein.                                                                                                                                 
|      | 
|23.2  |  | Independent auditors consent related to report on financial statements of Del-Tin Fiber L.L.C., included elsewhere herein.                                                                                                                                      



77



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|     |  |                                                                                                                                                                                                                                          
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|31.1 |  | Chief Executive Officer Certification Required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         
|     | 
|31.2 |  | Chief Financial Officer Certification Required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         
|     | 
|32   |  | Certification Required by Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                 
|     | 
|99   |  | Form 11-K, Annual Report for the fiscal year ended December 31, 2003, covering Thrift Plan of Deltic Timber Corporation. To be filed as an amendment of this Annual Report on Form 10-K, not
later than 180 days after December 31, 2003.



Exhibits other than
those listed above have been omitted since they either are not required or are not applicable.



| | b. | Reports on Form 8-K.
| | -- | --------------------



|         |  |                                                                                                                                                                                    
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 5.  |  | Other Events  Press release announcing Deltics Board has determined to discontinue efforts to sell investment in Del-Tin Fiber (filing date 12/12/03).                           
|         | 
|Item 12. |  | Regulation FD Disclosure. Results of Operations and Financial Condition  Press release announcing Deltics financial results for the third quarter of 2003 (filing date
10/29/03).



78



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                          |  |                          |  |  |  |       |  |               
|------------------------- |  | ------------------------ |  |  |  | ----- |  | --------------
|DELTIC TIMBER CORPORATION |  |                          |  | 
|                          |  |                          |  | 
|By:                       |  | /s/ Ray C. Dillon        |  |  |  | Date: |  | March 11, 2004
|                          |  |                          |  |  |  |       |  |               
|                          |  | Ray C. Dillon, President |  |  |  |       |  |               



Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below on March 11, 2004 by the following persons on behalf of the registrant and in the capacities indicated.



| |  |                                                                                                 |  |  |  |  |  |                                                                                                                          
| |  | ----------------------------------------------------------------------------------------------- |  |  |  |  |  | -------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                 |  | 
| |  | /s/ Robert C. Nolan                                                                             |  |  |  |  |  | /s/ J. Thurston Roach                                                                                                    
| |  |                                                                                                 |  | 
| |  | Robert C. Nolan, Chairman and Director                                                          |  |  |  |  |  | J. Thurston Roach, Director                                                                                              
| |  |                                                                                                 |  |  |  |  |  |                                                                                                                          
| |  |                                                                                                 |  | 
| |  | /s/ Ray C. Dillon                                                                               |  |  |  |  |  | /s/ O. H. Darling, Jr.                                                                                                   
| |  |                                                                                                 |  | 
| |  | Ray C. Dillon, President and Chief Executive Officer and Director (Principal Executive Officer) |  |  |  |  |  | O. H. Darling, Jr., Director                                                                                             
| |  |                                                                                                 |  |  |  |  |  |                                                                                                                          
| |  |                                                                                                 |  | 
| |  | /s/ R. Madison Murphy                                                                           |  |  |  |  |  | /s/ John C. Shealy                                                                                                       
| |  |                                                                                                 |  | 
| |  | R. Madison Murphy, Director                                                                     |  |  |  |  |  | John C. Shealy, Director                                                                                                 
| |  |                                                                                                 |  |  |  |  |  |                                                                                                                          
| |  |                                                                                                 |  | 
| |  | /s/ R. Hunter Pierson, Jr.                                                                      |  |  |  |  |  | /s/ Clefton D. Vaughan                                                                                                   
| |  |                                                                                                 |  | 
| |  | R. Hunter Pierson, Jr., Director                                                                |  |  |  |  |  | Clefton D. Vaughan, Vice President, Finance and Administration, and Chief Financial Officer (Principal Financial Officer)
| |  |                                                                                                 |  |  |  |  |  |                                                                                                                          
| |  |                                                                                                 |  | 
| |  | /s/ Christoph Keller, III                                                                       |  |  |  |  |  | /s/ Emily R. Evers                                                                                                       
| |  |                                                                                                 |  | 
| |  | Christoph Keller, III, Director                                                                 |  |  |  |  |  | Emily R. Evers, Controller (Principal Accounting Officer)                                                                
| |  |                                                                                                 |  |  |  |  |  |                                                                                                                          
| |  |                                                                                                 |  | 
| |  | /s/ Alex R. Lieblong                                                                            |  |  |  |  |  |                                                                                                                          
| |  |                                                                                                 |  |  |  | 
| |  | Alex R. Lieblong, Director                                                                      |  |  |  |  |  |                                                                                                                          



79



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FINANCIAL STATEMENT SCHEDULE

PURSUANT TO ITEM 14(a)2



DEL-TIN FIBER L.L.C.



Financial Statements



January 3, 2004 and December 28, 2002



(With Independent Auditors Report Thereon)





---

##### Table of Contents

Independent Auditors Report



The Board of Managers

Del-Tin Fiber L.L.C.:



We have audited the
accompanying balance sheets of Del-Tin Fiber L.L.C. as of January 3, 2004 and December 28, 2002, and the related statements of operations and other comprehensive income/(loss), cash flows, and members capital for each of the fiscal years in
the three-year period ended January 3, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.



In our
opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Del-Tin Fiber L.L.C. as of January 3, 2004 and December 28, 2002, and the results of its operations and its cash flows for each
of the fiscal years in the three-year period ended January 3, 2004, in conformity with accounting principles generally accepted in the United States of America.



Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information included in Schedule 1 is
presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in the audits of the basic financial statements and, accordingly,
we express no opinion on it.



KPMG LLP

Shreveport, Louisiana

January 29, 2004



2



---

##### Table of Contents

DEL-TIN FIBER L.L.C.

Balance Sheets

At year-end 2003 and 2002



|                                          |  |      |             |      |   |            
|----------------------------------------- |  | ---- | ----------- | ---- | - | -----------
|                                          |  | 2003 |             | 2002
|Assets                                    |  |      |             |      |   |            
|Current assets                            |  |      |             |      |   |            
|Cash and cash equivalents                 |  | $    | 615,634     |      | $ | 13,757     
|Accounts receivable, Temple-Inland        |  |      | 2,434,371   |      |   | 1,918,590  
|Other receivables                         |  |      | 26,569      |      |   | 37,853     
|Inventories                               |  |      | 3,641,388   |      |   | 3,295,580  
|Prepaid expenses and other current assets |  |      | 612,363     |      |   | 608,422    
|                                          |  |      |             |      |   |            
|Total current assets                      |  |      | 7,330,325   |      |   | 5,874,202  
|Debt service reserve funds                |  |      | 3,520,663   |      |   | 3,484,835  
|Bond sinking fund                         |  |      | 23,059,443  |      |   | 13,949,997 
|Property, plant, and equipment - net      |  |      | 95,325,176  |      |   | 98,230,020 
|Deferred debt costs - net                 |  |      | 490,813     |      |   | 736,220    
|                                          |  |      |             |      |   |            
|Total assets                              |  | $    | 129,726,420 |      | $ | 122,275,274
|                                          |  |      |             |      |   |            
|Liabilities and Members Capital          |  |      |             |      |   |            
|Current liabilities                       |  |      |             |      |   |            
|Bank overdraft                            |  | $    |            |      | $ | 1,534,997  
|Accounts payable                          |  |      | 1,588,823   |      |   | 1,277,784  
|Accrued expenses                          |  |      | 1,873,372   |      |   | 1,593,672  
|                                          |  |      |             |      |   |            
|Total current liabilities                 |  |      | 3,462,195   |      |   | 4,406,453  
|Long-term debt                            |  |      | 89,000,000  |      |   | 89,000,000 
|Other noncurrent liabilities              |  |      |            |      |   | 3,431      
|                                          |  |      |             |      |   |            
|Total liabilities                         |  |      | 92,462,195  |      |   | 93,409,884 
|Members capital                          |  |      | 37,264,225  |      |   | 28,865,390 
|                                          |  |      |             |      |   |            
|Total liabilities and members capital    |  | $    | 129,726,420 |      | $ | 122,275,274
|                                          |  |      |             |      |   |            



See
accompanying notes to financial statements.



3



---

##### Table of Contents

DEL-TIN FIBER L.L.C.

Statements of Operations and Other Comprehensive Income/(Loss)

For the years 2003, 2002, and 2001



|                                              |  |      |            |   |      |   |             |      |  |   |             |  
|--------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                              |  | 2003 |            |   | 2002 |   |             | 2001 | 
|Net sales                                     |  | $    | 48,742,748 |   |      | $ | 34,132,836  |      |  | $ | 18,136,968  |  
|                                              |  |      |            |   |      |   |             |      |  |   |             |  
|Costs and expenses                            |  |      |            |   |      |   |             |      |  |   |             |  
|Cost of sales                                 |  |      | 47,113,717 |   |      |   | 42,949,181  |      |  |   | 26,339,979  |  
|Depreciation                                  |  |      | 5,260,323  |   |      |   | 3,893,958   |      |  |   | 2,409,620   |  
|Selling, general, and administrative expenses |  |      | 2,044,833  |   |      |   | 1,629,962   |      |  |   | 1,174,066   |  
|Loss on asset dispositions and write-down     |  |      | 529,770    |   |      |   | 690,041     |      |  |   | 762,330     |  
|                                              |  |      |            |   |      |   |             |      |  |   |             |  
|Total costs and expenses                      |  |      | 54,948,643 |   |      |   | 49,163,142  |      |  |   | 30,685,995  |  
|                                              |  |      |            |   |      |   |             |      |  |   |             |  
|Loss from operations                          |  |      | (6,205,895 | ) |      |   | (15,030,306 | )    |  |   | (12,549,027 | )
|Interest income                               |  |      | 184,134    |   |      |   | 145,797     |      |  |   | 185,817     |  
|Interest and other debt expense               |  |      | (3,733,029 | ) |      |   | (4,105,212  | )    |  |   | (5,901,010  | )
|                                              |  |      |            |   |      |   |             |      |  |   |             |  
|Net loss                                      |  |      | (9,754,790 | ) |      |   | (18,989,721 | )    |  |   | (18,264,220 | )
|Other comprehensive income/(loss)             |  |      |            |   |      |   |             |      |  |   |             |  
|SFAS 133 transition adjustment                |  |      |           |   |      |   |            |      |  |   | 729,834     |  
|Hedge reclassification adjustment             |  |      |           |   |      |   | 362,527     |      |  |   | 702,927     |  
|Loss in hedge fair value                      |  |      |           |   |      |   | (2,586      | )    |  |   | (1,792,702  | )
|                                              |  |      |            |   |      |   |             |      |  |   |             |  
|Total other comprehensive income/(loss)       |  |      |           |   |      |   | 359,941     |      |  |   | (359,941    | )
|                                              |  |      |            |   |      |   |             |      |  |   |             |  
|Total comprehensive income/(loss)             |  | $    | (9,754,790 | ) |      | $ | (18,629,780 | )    |  | $ | (18,624,161 | )
|                                              |  |      |            |   |      |   |             |      |  |   |             |  



See
accompanying notes to financial statements.



4



---

##### Table of Contents

DEL-TIN FIBER L.L.C.

Statements of Cash Flows

For the years 2003, 2002, 2001



|                                                                                |  |      |            |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                |  | 2003 |            |   | 2002 |   |             | 2001 | 
|Cash flows from operating activities                                            |  |      |            |   |      |   |             |      |  |   |             |  
|Net loss                                                                        |  | $    | (9,754,790 | ) |      | $ | (18,989,721 | )    |  | $ | (18,264,220 | )
|Adjustments to reconcile net loss to net cash used in operating activities      |  |      |            |   |      |   |             |      |  |   |             |  
|Depreciation expense                                                            |  |      | 5,260,323  |   |      |   | 3,893,958   |      |  |   | 2,409,620   |  
|Loss on dispositions of assets                                                  |  |      | 529,770    |   |      |   | 690,041     |      |  |   | 369,170     |  
|Write down of assets                                                            |  |      |           |   |      |   |            |      |  |   | 393,160     |  
|Amortization of debt issuance cost                                              |  |      | 245,407    |   |      |   | 245,407     |      |  |   | 245,406     |  
|Changes in current assets and liabilities, other than cash and cash equivalents |  |      |            |   |      |   |             |      |  |   |             |  
|(Increase)/decrease in trade accounts receivable                                |  |      | (515,781   | ) |      |   | (510,251    | )    |  |   | (369,177    | )
|(Increase)/decrease in other receivables                                        |  |      | 11,284     |   |      |   | 21,114      |      |  |   | 751,910     |  
|(Increase)/decrease in inventories                                              |  |      | (345,808   | ) |      |   | 130,968     |      |  |   | (619,637    | )
|(Increase)/decrease in prepaid expenses and other current assets                |  |      | (3,941     | ) |      |   | (306,765    | )    |  |   | (170,541    | )
|Increase/(decrease) in accounts payable                                         |  |      | 311,039    |   |      |   | 16,382      |      |  |   | (461,842    | )
|Increase/(decrease) in accrued expenses                                         |  |      | 279,700    |   |      |   | (129,604    | )    |  |   | (133,564    | )
|Other                                                                           |  |      | (3,431     | ) |      |   | (3,083      | )    |  |   | (118        | )
|                                                                                |  |      |            |   |      |   |             |      |  |   |             |  
|Net cash used in operating activities                                           |  |      | (3,986,228 | ) |      |   | (14,941,554 | )    |  |   | (15,849,833 | )
|                                                                                |  |      |            |   |      |   |             |      |  |   |             |  
|Cash flows from investing activities                                            |  |      |            |   |      |   |             |      |  |   |             |  
|Capital expenditures requiring cash                                             |  |      | (2,885,249 | ) |      |   | (1,907,132  | )    |  |   | (7,902,812  | )
|                                                                                |  |      |            |   |      |   |             |      |  |   |             |  
|Net cash used in investing activities                                           |  |      | (2,885,249 | ) |      |   | (1,907,132  | )    |  |   | (7,902,812  | )
|                                                                                |  |      |            |   |      |   |             |      |  |   |             |  
|Cash flows from financing activities                                            |  |      |            |   |      |   |             |      |  |   |             |  
|Increase/(decrease) in bank overdraft                                           |  |      | (1,534,997 | ) |      |   | 460,927     |      |  |   | 95,941      |  
|(Increase)/decrease in debt service reserve funds - net                         |  |      | (35,828    | ) |      |   | 58,574      |      |  |   | (120,147    | )
|(Increase)/decrease in bond sinking fund - net                                  |  |      | (9,109,446 | ) |      |   | (7,877,750  | )    |  |   | (6,072,247  | )
|Capital contributions by members                                                |  |      | 18,153,625 |   |      |   | 24,198,250  |      |  |   | 29,401,624  |  
|                                                                                |  |      |            |   |      |   |             |      |  |   |             |  
|Net cash provided by financing activities                                       |  |      | 7,473,354  |   |      |   | 16,840,001  |      |  |   | 23,305,171  |  
|                                                                                |  |      |            |   |      |   |             |      |  |   |             |  
|Net increase/(decrease) in cash and cash equivalents                            |  |      | 601,877    |   |      |   | (8,685      | )    |  |   | (447,474    | )
|Cash and cash equivalents at beginning of period                                |  |      | 13,757     |   |      |   | 22,442      |      |  |   | 469,916     |  
|                                                                                |  |      |            |   |      |   |             |      |  |   |             |  
|Cash and cash equivalents at the end of period                                  |  | $    | 615,634    |   |      | $ | 13,757      |      |  | $ | 22,442      |  
|                                                                                |  |      |            |   |      |   |             |      |  |   |             |  



See
accompanying notes to financial statements.



5



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##### Table of Contents

DEL-TIN FIBER L.L.C.

Statements of Members Capital

For the years 2003, 2002, and 2001



|                             |  |   |             |  
|---------------------------- |  | - | ----------- | -
|Balance at December 30, 2000 |  | $ | 12,519,457  |  
|Net loss                     |  |   | (18,264,220 | )
|Capital contributions        |  |   | 29,401,624  |  
|                             |  |   |             |  
|Balance at December 29, 2001 |  |   | 23,656,861  |  
|Net loss                     |  |   | (18,989,721 | )
|Capital contributions        |  |   | 24,198,250  |  
|                             |  |   |             |  
|Balance at December 28, 2002 |  |   | 28,865,390  |  
|Net loss                     |  |   | (9,754,790  | )
|Capital contributions        |  |   | 18,153,625  |  
|                             |  |   |             |  
|Balance at January 3, 2004   |  | $ | 37,264,225  |  
|                             |  |   |             |  



See
accompanying notes to financial statements.



6



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##### Table of Contents

DEL-TIN FIBER L.L.C.

Notes to Financial Statements

January 3, 2004



Note 1  Summary of Significant Accounting Policies



Description of Business



Del-Tin Fiber L.L.C. (Del-Tin or the Company) is an Arkansas limited liability company organized in
February 1995 and is equally owned by Temple-Inland Forest Products Corporation (Temple-Inland), a Delaware corporation, and Deltic Timber Corporation (Deltic), a Delaware corporation. Del-Tin is to exist until December 31,
2024, unless the Company is earlier dissolved in accordance with either the provisions of the Operating Agreement or the Arkansas Small Business Entity Tax Pass Through Act. The business of the Company is to manufacture, distribute, and sell medium
density fiberboard (MDF) under the trade name Solidium. Within the United States, MDF is sold primarily to manufacturers and distributors of laminated flooring, furniture, cabinets, fixtures, and moulding. Temple-Inland and
Deltic share equally in revenue, expenses, and funding requirements of the joint venture.



Under the terms of a separate Fiber Supply Agreement, Deltic will be the preferred supplier of wood fiber, consisting of sawdust, shavings, and chips. Del-Tin will purchase the majority of residual chips produced by
Deltics Waldo, Arkansas, sawmill, at a delivered price that approximates the weighted average delivered price of like-kind residual chips available to Del-Tin from third parties in the area. Del-Tin will also have first call on residual chips
from Deltics sawmill in Ola, Arkansas.



Under the terms
of a separate MDF Marketing Agreement, Temple-Inland will serve as the exclusive marketing agent for all MDF produced at the facility for a period of five years from the first day of production of MDF, which was in June 1998. The MDF Marketing
Agreement shall be automatically extended for successive five-year periods unless either party elects not to extend.



In January 2001, the members of the Company decided to temporarily cease production operations at Del-Tin. This decision to shut down the plant resulted
from a weak sales market for MDF and increased natural gas cost. While the plant was not operating, a capital project to modify the Companys heat energy system was implemented to allow for greater utilization of wood products as fuel rather
than natural gas. This project was completed in late May 2001, at a cost of $3,436,921. Operations were resumed in June 2001.



Accounting Period



The Companys fiscal year is the 52 or 53-week period ending the Saturday closest to December 31. Fiscal years 2003, 2002, and 2001, ended on January
3, 2004, December 28, 2002, and December 29, 2001, respectively. Reference to years in these financial statements relate to fiscal years rather than calendar years.



Cash and Cash Equivalents



The Company considers short-term investments with a remaining maturity of three months or less at the date of purchase to be
cash equivalents.



Inventories



Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average method for all inventories.



7



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##### Table of Contents

DEL-TIN FIBER L.L.C.

Notes to Financial Statements

January 3, 2004



Note 1  Summary of Significant Accounting Policies (continued)



Debt Service Reserve Funds



Debt service reserve funds consists of cash account balances, restricted
under the Companys permanent credit facility, to be used solely to pay debt service to the extent sufficient funds are not available for such scheduled debt service payments in the Companys operating account.



Bond Sinking Funds



Bond sinking funds consist of cash account balances required by the
Companys Credit Facility to be deposited quarterly beginning in 2001. These funds are restricted to use and will accumulate until 2005, at which time the funds deposited will equal the $89,000,000 in debt outstanding under the Credit Facility.



Property, Plant, and Equipment



Property, plant, and equipment is stated at cost less accumulated
depreciation. Depreciation of buildings, machinery and equipment, and other depreciable assets is calculated over the estimated useful lives of the assets by using the units of production method for machinery and equipment and the straight-line
method for all other depreciable assets. The estimated useful lives for property, plant, and equipment, excluding machinery and equipment, are as follows:



|                  |  |             
|----------------- |  | ------------
|Buildings         |  | 40 years    
|Land improvements |  | 20 years    
|Vehicles          |  | 3 to 5 years



Routine maintenance
and repairs are charged to operating expense, while costs of equipment upgrades and replacements are capitalized. When an asset is retired or sold, its cost and related accumulated depreciation are removed from the accounts and the difference
between the net book value of the asset and proceeds from disposition is recognized as a gain or loss.



Prior to fiscal 2002, long-lived assets were accounted for under Statement of Financial Accounting Standards (SFAS) 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.Effective with fiscal 2002, long-lived assets are accounted for under SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.The Company
records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the estimated undiscounted cash flows to be generated by those assets are less than the carrying amounts
of those assets. The Company recorded no such impairment in 2003 or 2002. As discussed in Note 3, in 2001, the Company recorded a loss of $393,160 from the write down of certain assets to fair value.



Deferred Debt Costs



Deferred debt costs consists of various costs related to obtaining the
Companys permanent credit facility (the Credit Facility), the issuance of the Union County, Arkansas Taxable Industrial Development Bonds (Del-Tin Fiber Project) 1998 Series (the Taxable Bonds), and the substitution of
the letters of credit supporting the Union County, Arkansas Solid Waste Disposal Revenue Bonds (Del-Tin Fiber Project) 1997 Series A & B (the Tax Exempt Bonds). (The Taxable Bonds and the



8



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##### Table of Contents

DEL-TIN FIBER L.L.C.

Notes to Financial Statements

January 3, 2004



Note 1  Summary of Significant Accounting Policies (continued)



Tax Exempt Bonds are collectively called the Bonds.) Such costs are stated on the Balance Sheet at original issuance cost, net of amortization on
a straight-line basis over the life of the Credit Facility. (For additional information regarding the Companys financing arrangements, see Note 4 - Indebtedness and Financing Arrangements.)



Revenue Recognition



Revenue from the sale of products is recognized upon passage of title to the
customer, which is at the time of shipment.



Income Taxes



Because the Company is a limited liability company,
it has the option of being taxed as a partnership or a corporation. The Company elected to be taxed as a partnership and as such is not subject to income taxes at the Company level. All taxes are recognized by the members of the Company.



Derivative Financial Instruments and Hedging Activities



The Company has limited involvement with derivative
financial instruments and uses them only to manage well-defined interest rate risks. Interest rate swap agreements have been used to reduce the potential impact on increases in interest rates of variable-rate long-term debt. Derivatives are held
only for the purpose of hedging such risks, not for speculation. Therefore, the Company enters into hedging relationships such that changes in the cash flows of the long-term debt being hedged are expected to be offset by corresponding changes in
the value of the derivatives.



All derivatives are recognized
on the balance sheet at fair value. On the date any interest-rate derivative contract is entered into, Del-Tin designates the derivative as a cash flow hedge and documents the relationship between the hedging instrument and the hedged item, in
addition to its risk-management objective and strategy for undertaking the hedge transaction. The Company also formally assesses both at the hedge inception and on an ongoing basis, whether the hedge is highly effective in offsetting changes in cash
flows of hedged items. If it is determined that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.



Changes in the fair value of any cash-flow hedge are recorded in Other Comprehensive Income until earnings are affected by the variability in cash flows
of the hedged item.



The Company would discontinue hedge
accounting prospectively if it is determined that the derivative is no longer effective in offsetting changes in cash flows of the hedged item; the derivative expires, is sold or terminated, or management determines that designation of the
derivative as a hedging instrument is no longer appropriate. The Company discontinued hedge accounting as the derivative contract was allowed to expire. Prior to the expiration date of the contract, on March 1, 2002, Del-Tin carried the derivative
at its fair value on the balance sheet and recognized any changes in fair value in other comprehensive income.



During 2002 and 2001, the Company reclassified $362,527 and $702,927, respectively, of cost associated with its hedging instruments into earnings. There
were no derivative instruments as of January 3, 2004.



9



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##### Table of Contents

DEL-TIN FIBER L.L.C.

Notes to Financial Statements

January 3, 2004



Note 1  Summary of Significant Accounting Policies (continued)



Impact of Recent Accounting Pronouncements



In August 2001, The Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) 143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible
long-lived assets and associated retirement costs and is effective for financial statements issued for fiscal years beginning after June 15, 2002. Adoption of SFAS 143 did not have an effect on the Companys financial position, results of
operations, or cash flows.



In June 2002, the FASB issued SFAS
146, Accounting for Costs Associated with Exit or DisposalActivities. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the
liability is incurred, and is effective for exit or disposal activities that are initiated after December 31, 2002. The Company has not initiated any such exit or disposal activities in 2003; therefore, adoption of SFAS 146 has had no impact on the
Companys financial statements.



In November 2002, the
FASB issued Financial Accounting Standards Board Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others. It clarified
that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The recognition and measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company has issued no such guarantees in 2003.



In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities. SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments and for hedging activities under SFAS 133, Accounting for Derivatives andHedging Activities. This statement (1) clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a derivative, (2) clarifies when a derivative contains a financing component, and (3) amends the definition of an underlying to conform to FIN 45. SFAS 149 is effective for contracts
entered into or modified after June 30, 2003, with all provisions applied prospectively. The company has no derivative instruments and is not currently engaged in hedging activities, accordingly, adoption of this statement is not expected to have a
material impact on the Companys financial statements.



In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires that an issuer classify an instrument that is within its scope as a liability. As of January 3, 2004, the Company had no financial instruments within the scope of SFAS 150.



Use of Estimates



Management of the Company has made a number of estimates and assumptions,
relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities,



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##### Table of Contents

DEL-TIN FIBER L.L.C.

Notes to Financial Statements

January 3, 2004



Note 1  Summary of Significant Accounting Policies (continued)



to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could
differ from those estimates.



Reclassifications



Certain prior year amounts have been reclassified to
conform with the 2003 presentation format.



Note 2  Inventories



Inventories at year-end consisted of the following:



|                                  |  |      |           |      |   |          
|--------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                  |  | 2003 |           | 2002
|Raw materials                     |  | $    | 152,950   |      | $ | 130,249  
|Work in progress / finished goods |  |      | 1,873,274 |      |   | 1,447,980
|Spare parts                       |  |      | 1,611,484 |      |   | 1,700,171
|Operating materials and supplies  |  |      | 3,680     |      |   | 17,180   
|                                  |  |      |           |      |   |          
|                                  |  | $    | 3,641,388 |      | $ | 3,295,580
|                                  |  |      |           |      |   |          



Note 3  Property, Plant, and
Equipment



Property, plant, and equipment at year-end
consisted of the following:



|                               |  |      |             |   |      |   |             |  
|------------------------------ |  | ---- | ----------- | - | ---- | - | ----------- | -
|                               |  | 2003 |             |   | 2002 |  
|Land                           |  | $    | 331,789     |   |      | $ | 331,789     |  
|Buildings                      |  |      | 7,523,093   |   |      |   | 7,518,419   |  
|Land improvements              |  |      | 2,727,653   |   |      |   | 2,727,653   |  
|Machinery and equipment        |  |      | 103,783,911 |   |      |   | 101,981,707 |  
|Vehicles                       |  |      | 32,955      |   |      |   | 38,777      |  
|Construction-in-progress       |  |      | 868,974     |   |      |   | 1,019,550   |  
|Capitalized spare parts        |  |      | 1,215,771   |   |      |   | 799,845     |  
|                               |  |      |             |   |      |   |             |  
|                               |  |      | 116,484,146 |   |      |   | 114,417,740 |  
|Less: accumulated depreciation |  |      | (21,158,970 | ) |      |   | (16,187,720 | )
|                               |  |      |             |   |      |   |             |  
|                               |  | $    | 95,325,176  |   |      | $ | 98,230,020  |  
|                               |  |      |             |   |      |   |             |  



Depreciation expense
totaled $5,260,323, $3,893,958, and $2,409,620, 2003, 2002, and 2001, respectively. Machinery and equipment, which are depreciated under the units of production method, continued to be depreciated during the shutdown period discussed in Note 1. This
amount was calculated at 25% of straight-line depreciation during the period in which the machinery and equipment was idle. Such depreciation amounted to $653,296.



11



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##### Table of Contents

DEL-TIN FIBER L.L.C.

Notes to Financial Statements

January 3, 2004



Note 3  Property, Plant, and Equipment (continued)



During the construction period of the Companys primary plant facility, $4,863,715 of applicable
interest incurred, net of interest income on invested debt proceeds, was capitalized.



As a result of modification to the plants heat energy system, six bag houses, which formerly served to house the filtration system for heated gases, were determined to be no longer necessary and are being
accounted for as held for sale. The carrying amount of these assets at this time was $623,160, which was written down to a net realizable value of $230,000. The loss from write down to the fair value of these assets was $393,160 and is included in
Loss on asset dispositions and write-down in the 2001 Statements of Operations and Other Comprehensive Income/(Loss).



Note 4  Indebtedness and Financing Arrangements



Long-term debt at year-end consisted of the following:



|                                                                                                                             |  |      |            |      |   |           
|---------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                                                                                                             |  | 2003 |            | 2002
|Union County, Arkansas Taxable Industrial Development Revenue Bonds (Del-Tin Fiber Project) 1998 Series, due October 1, 2027 |  | $    | 60,000,000 |      | $ | 60,000,000
|Union County, Arkansas Solid Waste Disposal Revenue Bonds (Del-Tin Fiber Project) 1997 Series A, due October 1, 2027         |  |      | 14,500,000 |      |   | 14,500,000
|Union County, Arkansas Solid Waste Disposal Revenue Bonds (Del-Tin Fiber Project) 1997 Series B, due October 1, 2027         |  |      | 14,500,000 |      |   | 14,500,000
|                                                                                                                             |  |      |            |      |   |           
|                                                                                                                             |  | $    | 89,000,000 |      | $ | 89,000,000
|                                                                                                                             |  |      |            |      |   |           



Sinking fund
requirements for the next two years are $10,457,000 in 2004, and $55,892,000 in 2005, net of interest earned. (For additional information regarding financial instruments, see Note 5Fair Value of Financial Instruments.)



The Credit Facility



In 1998, the Company entered into the Credit Facility with several major
banking institutions (the Lenders) having a stated maturity of December 17, 2005 (the Stated Maturity Date). The



Credit Facility provided a letter of credit commitment of $91,225,000 (the Letter of Credit Commitment Amount) which terminated on December
17, 2003 (the Termination Date), but



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##### Table of Contents

DEL-TIN FIBER L.L.C.

Notes to Financial Statements

January 3, 2004



Note 4  Indebtedness and Financing Arrangements (continued)



the Termination Date may be annually extended if the Company so requests and all the Lenders agree. An extension was granted until December 15, 2004. In any
case, the Termination Date may not be extended beyond the Stated Maturity Date.



The Letter of Credit Commitment  Three letters of credit have been issued pursuant to the Credit Facility in the aggregate stated amount of $89,824,657 as of January 3, 2004. The letters of credit have a
stated expiration of December 15, 2004. Under the Credit Facility, the letters of credit may be extended to the extent that the Termination Date of the letter of credit commitment is extended. If the letters of credit expire before the Stated
Maturity Date and are not renewed or replaced, the Lenders will make loans to the Company to purchase the Bonds. Any such loans would be finally due and payable at the Stated Maturity Date.



The three letters of credit provide a payment mechanism for the Bonds and
security for the Bondholders. Two of the letters of credit were issued to support the Tax Exempt Bonds and the third was issued to provide initial letter of credit support for the Taxable Bonds. On January 3, 2004 the maximum amount available to be
drawn was $14,639,041 under each of the two letters of credit supporting the Tax Exempt Bonds and $60,546,575 under the letter of credit supporting the Taxable Bonds. The maximum amount available to be drawn under the letters of credit cover the
principal amount of the relevant Bonds, plus an additional amount to cover interest. Security for the Permanent Credit Facility  Substantially all of the Companys assets are pledged to the Lenders as security for the Credit
Facility. The Credit Facility requires the Company to maintain debt service reserve funds in an amount equal to six months debt service.



The debt service to be reserved against includes all required payments for principal (other than for working capital loans), sinking fund requirements,
interest, and fees under both the Credit Facility and the Bonds. The funds in the debt service reserve bank accounts may be withdrawn solely to pay debt service to the extent sufficient funds are not available in the Companys operating
account. The total amount in the debt service reserve funds as of January 3, 2004, was $3,520,663 and has been classified as noncurrent on the Balance Sheet due to the restriction placed on the funds.



The Credit Facility requires the Company to make quarterly deposits into two
sinking funds. Failure to make such deposits is a default under the Credit Facility. These deposits began in the first quarter of 2001. The amount of the required deposits increases over the term of the Credit Facility, from $1,045,750 per quarter
in 2001, to $3,115,000 per quarter beginning in 2005. At January 3, 2004, the total amount in the sinking funds was $23,059,443, which is classified as noncurrent on the balance sheet due to the restriction placed on the funds.



In the fourth quarter of 2005, the Company must deposit $49,662,000 into the
sinking funds. The Company may not withdraw amounts deposited in the sinking funds during the term of the Credit Facility.



As further security for the Credit Facility, each member has agreed (1) to provide to the Company up to $17,500,000 (for a combined total of $35,000,000)
in the form of additional cash equity contributions or subordinated loans, if and to the extent, that the Company is in default



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##### Table of Contents

DEL-TIN FIBER L.L.C.

Notes to Financial Statements

January 3, 2004



Note 4  Indebtedness and Financing Arrangements (continued)



under the Credit Facility; or a deficiency exists in the Credit Facility debt service reserve funds or sinking funds; and (2) to pay to the Company in the
form of additional cash equity contributions or subordinated loans, the members prorata portion of the difference between the Companys projected operating cash flow at 90 percent of rated capacity, and the Companys projected
operating cash flow at the production rate actually achieved by the Company (the Operating Cash Flow Variance), if, and to the extent that, the Company still does not have sufficient funds to pay debt service. (The members will no longer
be obligated to pay the Operating Cash Flow Variance once the plant successfully completes a minimum production test.)



In connection with the Credit Facility, and with the issuance of the Bonds, the Company incurred approximately $1,639,000 in related costs. Such costs are
included in the Balance Sheet in Deferred Debt Costs and are being amortized to Interest and Other Debt Expense on a straight-line basis over the life of the Credit Facility.



Effective March 2, 1999, the Company entered into an interest rate swap agreement which converts $60,000,000 of its
long-term debt into fixed-rate obligations with an effective rate of 5.655 percent. Under the terms of the swap agreement, Del-Tin received variable interest rate payments and made fixed rate payments, thereby creating the equivalent of fixed-rate
debt. By using derivative instruments to hedge exposures in interest rates, the Company exposes itself to credit risk, which exists when the fair value of a derivative is positive and the counterparty owes an amount to the Company. The Company
minimizes this credit risk by entering into derivative agreements only with high-quality counterparties with strong credit ratings.



The interest rate swap agreement expired on March 1, 2002. During the contract, changes in the fair value of the interest rate swap were reported in
Accumulated other comprehensive income. These amounts were then subsequently reclassified into interest expense as a yield adjustment of the hedged debt obligation in the same period in which the related interest affected earnings.



The Bonds



The Bonds were issued by Union County, Arkansas, to finance the completion
of the construction of the Companys MDF plant, as well as the acquisition, construction, and improvement of certain sewerage and solid waste disposal facilities related to the Companys MDF plant. Neither the State of Arkansas nor Union
County, Arkansas have any liability under the Bonds. The Bonds are payable solely from the proceeds of the letters of credit issued to support the respective Bonds and from Company payments under the Loan Agreement and the Lease Agreement (both
described below) with Union County, Arkansas. The Company has also unconditionally guaranteed the payment of all amounts owing under the Bonds to the bondholders. The Companys indebtedness has been presented in these financial statements as
though the Company was directly liable for the Bonds. If the bonds are not remarketed as allowed under the agreement, the letters of credit and the commitment of the Lenders are available to support repayment.



The Bonds currently bear interest at a variable rate determined weekly by
the remarketing agent of the respective Bonds. Interest is due on the first business day of the month, and all unpaid interest and all principal is due on October 1, 2027. The maximum interest rate for the Tax Exempt Bonds is 10.0 percent and 9.5
percent for the Taxable Bonds. The interest rate on the Tax Exempt Bonds at



14



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##### Table of Contents

DEL-TIN FIBER L.L.C.

Notes to Financial Statements

January 3, 2004



Note 4  Indebtedness and Financing Arrangements (continued)



year-end 2003 and 2002 was 1.14 percent and 1.65 percent, respectively. The interest rate on the Taxable Bonds at year-end 2003 and 2002 was 1.18 percent and
1.6 percent, respectively. The Company has the right to convert the interest rate payable on the Bonds to either a flexible daily, term, or fixed rate, as defined in the trust indentures for the respective Bonds.



Union County issued the Tax Exempt Bonds in October 1997 which were issued
in two series, Series A and Series B, each in the amount of $14,500,000. In conjunction with this bond issuance, the Company and Union County entered into a loan agreement (the Loan Agreement) which obligates the Company to make loan
payments in the amount required to pay the debt service on the Tax Exempt Bonds. As described above, two letters of credit were issued under the Credit Facility to support the Tax Exempt Bonds.



In December 1998, Union County issued the Taxable Bonds, in the amount of
$60,000,000. The Company and Union County contemporaneously entered into a lease agreement (the Lease Agreement) that obligates the Company to make lease payments in an amount necessary to fund the debt service on the Taxable Bonds. As
described above, a letter of credit was issued under the Credit Facility to support the Taxable Bonds.



The Company is subject to certain restrictive covenants in connection with the Bonds and its Credit Facility and was in compliance with such covenants as
of January 3, 2004.



Note 5  Fair Value of Financial Instruments



The following table presents the carrying amounts and
estimated fair values of the Companys financial instruments at year-end 2003 and 2002. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.



|                           |  |                 |            |            |   |                 |  |            |            |  |   |           
|-------------------------- |  | --------------- | ---------- | ---------- | - | --------------- |  | ---------- | ---------- |  | - | ----------
|                           |  | 2003            |            | 2002      
|                           |  | Carrying Amount |            | Fair Value |   | Carrying Amount |  | Fair Value
|Financial assets           |  |                 |            |            |   |                 |  |            |            |  |   |           
|Cash and cash equivalents  |  | $               | 615,634    |            | $ | 615,634         |  | $          | 13,757     |  | $ | 13,757    
|Trade accounts receivable  |  |                 | 2,434,371  |            |   | 2,434,371       |  |            | 1,918,590  |  |   | 1,918,590 
|Other receivables          |  |                 | 26,569     |            |   | 26,569          |  |            | 37,853     |  |   | 37,853    
|Debt service reserve funds |  |                 | 3,520,663  |            |   | 3,520,663       |  |            | 3,484,835  |  |   | 3,484,835 
|Bond sinking funds         |  |                 | 23,059,443 |            |   | 23,059,443      |  |            | 13,949,997 |  |   | 13,949,997
|Financial liabilities      |  |                 |            |            |   |                 |  |            |            |  |   |           
|Bank overdraft             |  |                 |           |            |   |                |  |            | 1,534,997  |  |   | 1,534,997 
|Accounts payable           |  |                 | 1,588,823  |            |   | 1,588,823       |  |            | 1,277,784  |  |   | 1,277,784 
|Accrued expenses           |  |                 | 1,873,372  |            |   | 1,873,372       |  |            | 1,593,672  |  |   | 1,593,672 
|Long-term debt             |  |                 | 89,000,000 |            |   | 89,000,000      |  |            | 89,000,000 |  |   | 89,000,000



15



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##### Table of Contents

DEL-TIN FIBER L.L.C.

Notes to Financial Statements

January 3, 2004



Note 5  Fair Value of Financial Instruments (continued)



The carrying amounts shown in the table are included in the Balance Sheets under the indicated
captions.



The following methods and assumptions were used to
estimate the fair value of each class of financial instruments:



| |  | Cash and Cash Equivalents, Trade Accounts Receivable, Other Receivables, Bank Overdraft, Accounts Payable, and Accrued Expenses  The carrying amounts approximate fair value
because of the short maturity of these instruments.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Debt Service Reserve Bond Sinking Funds  The carrying amount approximates fair value since the interest earned on these deposits fluctuates with changes in current market
rates.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Long-term Debt  The carrying amount approximates fair value since the interest paid fluctuates with changes in current market rates.
| | - | -------------------------------------------------------------------------------------------------------------------------------------



Note 6  Lease Commitments



The Company is obligated under noncancelable operating leases for various
equipment.



As of January 03, 2004 future minimum lease
commitments under noncancelable operating leases consisted of the following:



|     |  |   |        
|---- |  | - | -------
|2004 |  | $ | 121,694
|2005 |  | $ | 118,066
|2006 |  | $ | 46,113 
|2007 |  | $ | 3,207  



Rent expense for all
operating leases was $246,208 in 2003, $354,497 in 2002, and $286,042 in 2001.



Note 7  Related-Party Transactions



The
Company is assessed a fee for marketing services provided by Temple-Inland. This expense amounted to $1,348,960 in 2003, $951,078 in 2002, and $513,319 in 2001, and is included in Selling, General, and Administrative Expenses in the accompanying
Statements of Operations. In addition, Del-Tin reimburses Temple-Inland for advertising arranged on behalf of the Companys Solidium brand and for a portion of expenses that Temple-Inland incurs for general advertising for MDF. These costs
amounted to $50,855 in 2003, $49,960 during 2002 and $37,629 in 2001, and are included in Selling, General, and Administrative Expenses in the accompanying Statements of Operations. The Company is also assessed a fee for computer services by
Temple-Inland. This fee amounted to $75,000 in each 2003, 2002 and 2001, and is included in Selling, General, and Administrative expenses in the accompanying Statements of Operations. As of January 3, 2004, the Companys balance due
Temple-Inland totaled $150,000 and is included in accounts payable on the accompanying balance sheet.



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##### Table of Contents

DEL-TIN FIBER L.L.C.

Notes to Financial Statements

January 3, 2004



Note 7  Related-Party Transactions (continued)



Under the terms of the MDF Marketing Agreement, the Companys sales are processed by
Temple-Inland. A corresponding receivable is recorded by the Company equal to the outstanding trade receivable balance maintained by Temple-Inland. Funds are transferred to the Company from Temple-Inland based on previous weeks sales. All credit
risk relating to the Companys trade receivables remains with Temple-Inland. As of January 3, 2004, and December 28, 2002, the Companys balance due from Temple-Inland relating to the trade receivables was $2,434,371 and $1,918,590
respectively.



The Company purchases raw materials from
Deltic. Total purchases of bark and chips amounted to $4,071,427 in 2003, $3,144,271 in 2002, and $1,851,733 in 2001. In relation to these purchases, the Company had outstanding balances payable to Deltic of $49,178 at January 3, 2004 and $54,592 at
December 28, 2002, which are included in accounts payable on the accompanying balance sheet.



The Company had sales of MDF to Temple-Inland totaling $ 1,134,998 in 2003, $344,752 for 2002, and $155,736 in 2001, which are included in Net Sales in the accompanying Statements of Operations.



Note 8  Supplemental Cash Flows Disclosures



Interest paid was $2,529,092 in 2003, $2,709,269 in 2002, and $4,195,122 in
2001.



Note 9  Liquidity



The Company has continued to incur significant operating losses and
accordingly has required substantial financial support from its members. While management anticipates profitable operations in the future, immediate and continued support from the members will be required to ensure the Company is able to meet its
obligations as they become due, including required deposits to the debt sinking funds. The members have committed to provide such support to the Company.



Note 10  Deltic Investment



In January 2003, citing reasons that the MDF business no longer represented a growth area for them and consequently that they intended to exit the
business upon the earliest, reasonable opportunity, Deltic evaluated its investment in Del-Tin and determined it to be impaired. As a result, Deltic wrote off its entire investment in Del-Tin, amounting to $18.7 million, based on estimated fair
value of the investment. This assessment differed from the Companys evaluation of the recoverability of the property, plant, and equipment under SFAS 144. Deltic had committed to provide continued support until such time as its ownership was
sold.



During 2003, Deltic and Temple-Inland continued to use
management resources to improve operating performance at Del-Tin. As a result of these improvements, on December 11, 2003, Deltics Board of Directors revised its intent regarding its investment in Del-Tin and discontinued efforts to sell their
interest while continuing to focus on improving operating and financial results of Del-Tin.



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##### Table of Contents

Schedule I



DEL-TIN FIBER L.L.C.

Schedule 1 
Supplemental Information Concerning Cost of Sales

For the years of 2003, 2002, and 2001

(Unaudited)



|                                 |  |      |            |   |      |   |            |  |   |            |  
|-------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- |  | - | ---------- | -
|                                 |  | 2003 |            |   | 2002 |   | 2001       | 
|Cost of raw wood                 |  | $    | 9,933,524  |   |      | $ | 7,823,061  |  | $ | 4,639,514  |  
|Cost of other raw materials      |  |      | 9,175,790  |   |      |   | 6,092,358  |  |   | 3,870,090  |  
|Change in inventories            |  |      | (425,294   | ) |      |   | 514,220    |  |   | (1,205,750 | )
|Freight                          |  |      | 4,334,012  |   |      |   | 2,825,936  |  |   | 1,419,384  |  
|Salaries, labor, and benefits    |  |      | 6,546,949  |   |      |   | 5,239,758  |  |   | 4,537,894  |  
|Utilities                        |  |      | 5,429,925  |   |      |   | 5,008,891  |  |   | 3,896,894  |  
|Gas                              |  |      | 2,043,867  |   |      |   | 4,195,727  |  |   | 2,166,525  |  
|Fuel                             |  |      | 2,123,262  |   |      |   | 1,221,823  |  |   | 803,385    |  
|Maintenance and repairs          |  |      | 3,050,770  |   |      |   | 4,322,427  |  |   | 2,689,309  |  
|Operating materials and supplies |  |      | 2,157,311  |   |      |   | 1,985,927  |  |   | 1,192,897  |  
|Other                            |  |      | 2,743,601  |   |      |   | 3,719,053  |  |   | 2,329,837  |  
|                                 |  |      |            |   |      |   |            |  |   |            |  
|                                 |  | $    | 47,113,717 |   |      | $ | 42,949,181 |  | $ | 26,339,979 |  
|                                 |  |      |            |   |      |   |            |  |   |            |  



United  see accompanying
independent Auditors Report



18