**UNITED STATESSECURITIES 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  September 30, 2007** |
|                                                   |
| **or**                                                 |
|                                                   |
| **o**                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Commission File Number 1-5103**

 

**BARNWELL INDUSTRIES, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    | ** ** | **72-0496921**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **1100 Alakea Street,  Suite 2900, Honolulu, Hawaii**      |       | **96813-2833**                        |
| (Address of principal executive offices)                        |       | (Zip code)                            |

 

Registrant’s telephone number, including areacode:** (808) 531-8400**

 

**Securities registered pursuant to Section 12(b) ofthe Act:**

 

| **Title of each class**                 | ** ** | **Name of each exchange on which  registered** |
|-----------------------------------------|------------|------------------------------------------------|
| Common Stock, par value $0.50 per share |       | American Stock Exchange                        |

 

Securities registered pursuant to Section 12(g) of theAct:  **None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.
| o  Yes | x  No |
|--------|-------|

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.
| o  Yes | x  No |
|--------|-------|

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports),
| and (2) has  been subject to such filing requirements for the past 90 days. | x  Yes | o  No |
|----------------------------------------------------------------------------------|--------|-------|

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained herein, and will not be contained, to the best of registrant’sknowledge, 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. |   | o      |
|--------------------------------------------------------------------------------------------------------------|--------|---------------------------------|

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o            Acceleratedfiler o            Non-acceleratedfiler x

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

 

The aggregate market value of the votingcommon stock held by non-affiliates of the registrant, computed by reference tothe closing price of a share of common stock on March 31, 2007 (the lastbusiness day of the registrant’s most recently completed second fiscal quarter)was $64,772,000.

 

As of December 12, 2007 there were8,196,460 shares of common stock outstanding.

 

Documents Incorporated by Reference

 

1.                                       Proxystatement to be forwarded to stockholders on or about January 17, 2008 isincorporated by reference in Part III hereof.

 

 

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TABLE OF CONTENTS

 
| ** **    | ** **                                |
|---------------|-------------------------------------------|
| PART I   |                                      |
|          | Discussion of  Forward-Looking Statements |   |
|          | Item 1.                                   | Business |   |
|          | Item  1A.                                 | Risk Factors |   |
|          | Item  2.                                  | Properties |   |
|          | Item 3.                                   | Legal Proceedings |   |
|          | Item 4.                                   | Submission of  Matters to a Vote of Security Holders |   |
|          |                                      |   |
| PART II  |                                      |   |
|          | Item 5.                                   | Market For  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |   |
|          | Item 6.                                   | Selected Financial  Data |   |
|          | Item 7.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|          | Item 7A.                                  | Quantitative  and Qualitative Disclosures About Market Risk |   |
|          | Item 8.                                   | Financial  Statements and Supplementary Data |   |
|          | Item 9.                                   | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure |   |
|          | Item 9A.                                  | Controls and  Procedures |   |
|          | Item 9B.                                  | Other Information |   |
|          |                                      |   |
| PART III |                                      |   |
|          | Item 10.                                  | Directors,  Executive Officers and Corporate Governance |   |
|          | Item 11.                                  | Executive  Compensation |   |
|          | Item 12.                                  | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   |
|          | Item 13.                                  | Certain  Relationships and Related Transactions, and Director Independence |   |
|          | Item 14.                                  | Principal  Accounting Fees and Services |   |
|          |                                      |   |
| PART IV  |                                      |   |
|          | Item 15.                                  | Exhibits,  Financial Statement Schedules |   |

 

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**PART I**

 

**CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION**

**FOR THEPURPOSE OF “SAFE HARBOR” PROVISIONS OF THE**

**PRIVATESECURITIES LITIGATION REFORM ACT OF 1995**

 

*This Form 10-K,and the documents incorporated herein by reference, contain “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. A forward-looking statementis one which is based on current expectations of future events or conditionsand does not relate to historical or current facts. These statements includevarious estimates, forecasts, projections of Barnwell Industries, Inc.’s(referred to herein together with its subsidiaries as “Barnwell,” “we,” “our,” “us”or the “Company”) future performance, statements of Barnwell’s plans andobjectives and other similar statements. Forward-looking statements includephrases such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,”“estimates,” “assumes,” “projects,” “may,” “will,” “will be,” “should,” orsimilar expressions. Although Barnwell believes that its current expectationsare based on reasonable assumptions, it cannot assure that the expectationscontained in such forward-looking statements will be achieved. Forward-lookingstatements involve risks, uncertainties and assumptions which could causeactual results to differ materially from those contained in such statements. Investorsshould not place undue reliance on these forward-looking statements, as theyspeak only as of the date of filing of this Form 10-K, and Barnwellexpressly disclaims any obligation or undertaking to publicly release anyupdates or revisions to any forward-looking statements contained herein.*

 

*Among the important factors that could cause actual results to differmaterially from those in the forward-looking statements are domestic andinternational general economic conditions, such as recessionary trends andinflation; domestic and international political, legislative, economic,regulatory and legal actions, including changes in the policies of theOrganization of Petroleum Exporting Countries or other developments involvingor affecting oil-producing countries; military conflict, embargoes, internalinstability or actions or reactions of the governments of the United Statesand/or Canada in anticipation of or in response to such developments; interestcosts, restrictions on production, restrictions on imports and exports in boththe United States and Canada, the maintenance of specified reserves, taxincreases and retroactive tax claims, royalty increases, expropriation ofproperty, cancellation of contract rights, environmental protection controls,environmental compliance requirements and laws pertaining to workers’ healthand safety; the condition of Hawaii’s real estate market, including the levelof real estate activity and prices, the demand for new housing and second homeson the island of Hawaii, the rate of increase in the cost of building materialsand labor, the introduction of building code modifications, changes to zoninglaws, the condition of Hawaii’s tourism industry and the level of confidence inHawaii’s economy; levels of land development activity in Hawaii; levels ofdemand for water well drilling and pump installation in Hawaii; the potentialliability resulting from pending or future litigation; the company’sacquisition or disposition of assets; the effects of changed accounting rules undergenerally accepted accounting principles promulgated by rule-setting bodies;and the factors set forth under the heading “Risk Factors” in this Form 10-K,in other portions of this Form 10-K, in the Notes to ConsolidatedFinancial Statements, and in other documents filed by Barnwell with theSecurities and Exchange Commission (“SEC”). In addition, unpredictable orunknown factors not discussed in this report could also cause actual results tomaterially and adversely differ from those discussed in the forward-lookingstatements.*

 

3

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Unlessotherwise indicated, all references to “dollars” in this Form 10-K are toUnited States dollars.

 

**ITEM 1.****                                                    ****BUSINESS**

 

**Overview**

 

Fiscal2007 represented Barnwell’s 51st year of operations, having beenincorporated in Delaware in 1956. Barnwell has the following four principalbusiness segments:

 

•                  *Oil and Natural GasSegment*. Barnwell engages in oil and natural gas exploration,development, production and sales in Canada.

 

•                  *Land Investment Segment*.Barnwell invests in leasehold interests in real estate in Hawaii.

 

•                  *Real Estate DevelopmentSegment*. Established in January 2007, Barnwell acquires houselots for investment and to construct turnkey single-family homes for sale.

 

•                  *Contract Drilling Segment*.Barnwell provides well drilling services and water pumping system installationand repairs in Hawaii.

 

Barnwell’soil and natural gas activities comprise its largest business segment. Approximately73% of Barnwell’s revenues for the fiscal year ended September 30, 2007was attributable to its oil and natural gas activities. Barnwell’s landinvestment segment revenues accounted for 12% of fiscal 2007 revenues; Barnwell’scontract drilling activities accounted for 13% of fiscal 2007 revenues; andother revenues comprised 2% of fiscal 2007 revenues. There were no revenuesgenerated by Barnwell’s real estate development segment during fiscal 2007. Approximately92% of Barnwell’s capital expenditures for the fiscal year ended September 30,2007 was attributable to its oil and natural gas activities and 8% wasapplicable to its other activities.

 

**Oil andNatural Gas Segment**

 

*Overview*

 

Through our wholly-owned subsidiary, Barnwell ofCanada, Limited (“Barnwell of Canada”), we are involved in the acquisition,exploration and development of oil and natural gas properties. Barnwell ofCanada initiates and participates in exploratory and developmental operationsfor oil and natural gas on property in which it has an interest, and evaluatesproposals by third parties with regard to participation in such exploratory anddevelopmental operations elsewhere.

 

*Operations*

 

Barnwell’sinvestments in oil and natural gas properties consist of investments in Canada,principally in the Province of Alberta, with minor holdings in the Provinces ofSaskatchewan and British Columbia. These property interests are principallyheld under governmental leases or licenses.

 

4

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Under the typicalCanadian provincial governmental lease, Barnwell must perform exploratoryoperations and comply with certain other conditions. Lease terms vary with eachprovince, but, in general, the terms grant Barnwell the right to remove oil,natural gas and related substances subject to payment of specified royalties onproduction.

 

Barnwell initiates andparticipates in exploratory and developmental operations for oil and naturalgas on property in which it has an interest. Barnwell also evaluates proposalsby third parties for participation in other exploratory and developmentalopportunities. All exploratory and developmental operations are overseen byBarnwell’s Calgary, Alberta staff and Barnwell’s Chief Operating Officerlocated in Honolulu, along with senior management and independent consultantsas necessary. In fiscal 2007, Barnwell participated in exploratory anddevelopmental operations primarily in the Canadian Province of Alberta, althoughBarnwell does not limit its consideration of exploratory and developmentaloperations to this area.

 

TheProvince of Alberta charges oil and gas producers a royalty for production inAlberta. The Province of Alberta determines its royalty share of natural gasand of oil by using reference prices that average all natural gas sales and oilsales, respectively, in Alberta. Royalty rates are calculated on a slidingscale basis, increasing as prices increase up to a maximum royalty rate of 35%.Additionally, Barnwell pays gross overriding royalties and leasehold royaltieson a portion of its natural gas and oil sales to parties other than theProvince of Alberta.

 

On October 25,2007, the Alberta Government announced increases to the royalty rates on oil,natural gas liquids and natural gas production beginning on January 1,2009. The new plan also intends to simplify royalties and eliminate “old” and “new”classifications of oil and natural gas with current maximum royalty rates of35% with new royalty rates up to 50%. The new proposed 50% royalty rate isreached for oil when oil is selling at or above $120.00 Canadian dollars perbarrel and for natural gas when natural gas is selling at or above $17.50Canadian dollars per MCF. Barnwell is awaiting clarification from the AlbertaGovernment on the new program and is in the process of assessing its impact. Thenew program may reduce Barnwell’s natural gas and oil reserve volumes, reportednet production, and estimated future revenues and estimated future cash flowsfrom natural gas and oil reserves. The new program may also materially impactthe economics of oil and natural gas exploration in the Alberta area. However,the magnitude of the potential impact, which will depend on the final form oflegislation upon enactment, cannot be reasonably estimated at this time.

 

In fiscal 2007 and 2006,the weighted-average rate of all royalties paid on all of Barnwell’s naturalgas was approximately 24% and 28%, respectively. The weighted-average rate ofall royalties paid to governments and others on natural gas from the DunveganUnit, Barnwell’s principal oil and natural gas property, was approximately 27%and 30% in fiscal 2007 and 2006, respectively. The decrease in royalty rate onall properties was primarily due to higher operating cost royalty creditsreceived from the Alberta Department of Energy for operating expendituresincurred by Barnwell and lower commodity prices. At Dunvegan, the decrease inroyalty rate was due to lower prices, lower average gross production per well,and these wells being categorized as lower productivity, decreasing the royaltyrate overall for the property.

 

In fiscal 2007 and 2006,the weighted-average royalty rate paid on oil was approximately 20% and 23%,respectively. The decrease in the weighted-average royalty rate on oil wasprimarily due to a higher percentage of Barnwell’s fiscal 2007 production ofoil coming from newer wells where royalties are assessed at a lower rate thanon older wells.

 

5

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Naturalgas prices are typically higher in the winter than at other times due toincreased heating demand. Oil prices are also subject to seasonal fluctuations,but to a lesser degree. Oil and natural gas unit sales are based on thequantity produced from the properties by the operator. During periods of lowdemand for natural gas, the operator of the Dunvegan property may re-injectnatural gas into underground storage facilities in the Dunvegan property fordelivery at a future date.

 

*WellDrilling Activities*

 

During fiscal 2007,Barnwell participated in the drilling of 30 gross development wells and 2 grossexploratory wells, of which management believes 29 should be capable ofproduction and three are dry holes.

 

The following table setsforth more detailed information with respect to the number of exploratory (“Exp.”)and development (“Dev.”) wells drilled for the fiscal years ended September 30,2007, 2006, and 2005 in which Barnwell participated:

 
| ** ** | ** ** | **Productive**     | ** ** | **Productive**     | ** ** | **Total Productive** | ** ** | ** **         | ** ** | ** **           | ** ** |
|------------|------------|--------------------|------------|--------------------|------------|---------------------------|------------|--------------------|------------|----------------------|------------|
| ** ** | ** ** | **Oil Wells** | ** ** | **Gas Wells** | ** ** | **Wells**                 | ** ** | **Dry Holes** | ** ** | **Total Wells** | ** ** |
| ** ** | ** ** | **Exp.**           | ** ** | **Dev.**           | ** ** | **Exp.**                  | ** ** | **Dev.**           | ** ** | **Exp.**             | ** ** | **Dev.** | ** ** | **Exp.** | ** ** | **Dev.** | ** ** | **Exp.** | ** ** | **Dev.** | ** ** |
| **2007**   | ** ** | ** **         | ** ** | ** **         | ** ** | ** **                | ** ** | ** **         | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross*** | ** ** | **—**         | ** ** | **9.0**            | ** ** | **2.0**                   | ** ** | **18.0**           | ** ** | **2.0**              | ** ** | **27.0** | ** ** | **—** | ** ** | **3.0** | ** ** | **2.0** | ** ** | **30.0** | ** ** |
| **Net***   | ** ** | **—**         | ** ** | **2.4**            | ** ** | **0.9**                   | ** ** | **2.3**            | ** ** | **0.9**              | ** ** | **4.7** | ** ** | **—** | ** ** | **1.1** | ** ** | **0.9** | ** ** | **5.8** | ** ** |
|       |       |               |       |               |       |                      |       |               |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| 2006       |       |               |       |               |       |                      |       |               |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Gross*     |       | 1.0                |       | 4.0                |       | 2.0                       |       | 33.0               |       | 3.0                  |       | 37.0 |   | 4.0 |   | 3.0 |   | 7.0 |   | 40.0 |   |
| Net*       |       | 0.4                |       | 1.1                |       | 0.7                       |       | 9.0                |       | 1.1                  |       | 10.1 |   | 1.3 |   | 1.0 |   | 2.4 |   | 11.1 |   |
|       |       |               |       |               |       |                      |       |               |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| 2005       |       |               |       |               |       |                      |       |               |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Gross*     |       | 1.0                |       | 7.0                |       | 4.0                       |       | 57.0               |       | 5.0                  |       | 64.0 |   | 5.0 |   | 6.0 |   | 10.0 |   | 70.0 |   |
| Net*       |       | 0.3                |       | 1.7                |       | 1.0                       |       | 7.3                |       | 1.3                  |       | 9.0 |   | 1.6 |   | 1.6 |   | 2.9 |   | 10.6 |   |

 

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*                 Theterm “Gross” refers to the total number of wells in which Barnwell owns aninterest, and “Net” refers to Barnwell’s aggregate interest therein. Forexample, a 50% interest in a well represents one gross well, but 0.5 net well. Thegross figure includes interests owned of record by Barnwell and, in addition,the portion owned by others.

 

Barnwellinvested $14,164,000 in oil and natural gas properties during fiscal 2007, ofwhich $1,187,000 (8%) was for acquisition of oil and natural gas leases andlease rentals, $1,428,000 (10%) was for geological and geophysical costs,$8,846,000 (63%) was for intangible drilling costs, $2,410,000 (17%) was forproduction equipment, and $293,000 (2%) was for future site restoration andabandonment and other costs. The major areas of investments in fiscal 2007 werein the Progress, Pouce Coupe South, Dunvegan, Bonanza/Balsam, Boundary Lake,Wood River, Cecil and Doris areas of Alberta.

 

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TheDunvegan Unit, in which Barnwell holds an 8.9% working interest, is Barnwell’sprincipal oil and natural gas property and is located in Alberta, Canada. AtSeptember 30, 2007, the Dunvegan Unit had 203 producing natural gas wells.In fiscal 2007, Barnwell participated in the drilling of 11 gross (1.0 net)development gas wells in the Dunvegan area, all of which were successful. Totalcapital expenditures at Dunvegan were $3,524,000 in fiscal 2007 as compared to$1,781,000 and $4,299,000 in fiscal 2006 and 2005, respectively. Barnwell expects that fiscal 2008 capitalexpenditures at Dunvegan will decline slightly from fiscal 2007’s level withthe anticipated drilling of 10 gross (0.9 net) development gas wells.

 

Capital expenditurestotaled $1,335,000 in the Boundary Lake area of Alberta in fiscal 2007 ascompared to $739,000 in fiscal 2006. Five gross (1.3 net) wells were drilled infiscal 2007 of which three gross (1.0 net) wells were successful with one (0.3net) producing and two (0.7 net) waiting to be tied in, one gross (0.1 net)well was not successful and one gross (0.2 net) well was being evaluated at September 30,2007. Barnwell did not acquire any undeveloped land in the Boundary Lake areain fiscal 2007. At September 30, 2007, Barnwell’s average working interestin its productive wells in the Boundary Lake area was 25%.

 

Capitalexpenditures totaled $1,196,000 in the Pouce Coupe South area in fiscal 2007 ascompared to $2,101,000 in fiscal 2006. One gross (0.5 net) well was drilled infiscal 2007 which was not successful, and certain wells drilled in prior yearsrequired additional development costs. At September 30, 2007 Barnwell’saverage working interest in its productive wells in the Pouce Coupe South areawas 48%.

 

Capitalexpenditures totaled $1,042,000 in the Progress area in fiscal 2007 as comparedto $6,094,000 in fiscal 2006. One gross (0.5 net) well was drilled in fiscal2007, and as of September 30, 2007, was being evaluated. In fiscal 2007,in the Progress area Barnwell acquired oil and natural gas rights in 640 gross(416 net) acres of undeveloped land and completed development of certain wellsdrilled in the prior year. At September 30, 2007 Barnwell’s averageworking interest in its productive wells in the Progress area was 39%.

 

Capitalexpenditures totaled $947,000 in the Wood River area in fiscal 2007 as comparedto $867,000 in fiscal 2006. Three gross (0.6 net) wells were successfullydrilled in fiscal 2007 with one gross well on production and two gross wellswaiting to be tied in at September 30, 2007. In the Wood River area,Barnwell did not acquire any undeveloped land in fiscal 2007. At September 30,2007 Barnwell’s average working interest in its productive wells in the WoodRiver area was 16%.

 

Capital expenditurestotaled $807,000 in the Cecil area in fiscal 2007 as compared to $551,000 infiscal 2006. One gross (0.4 net) well was successfully drilled. In the Cecilarea Barnwell acquired oil and natural gas rights in 1,920 gross (1,120 net)acres of undeveloped land in fiscal 2007.

 

Capitalexpenditures totaled $709,000 in the Doris area in fiscal 2007 as compared to$917,000 in fiscal 2006. One gross (0.5 net) well was drilled in fiscal 2007which was not successful. In the Doris area Barnwell acquired oil and naturalgas rights in 4,480 gross (2,880 net) acres of undeveloped land in fiscal 2007.At September 30, 2007 Barnwell’s average working interest in itsproductive wells in the Doris area was 47%.

 

Capitalexpenditures totaled $590,000 in the Bonanza/Balsam area in fiscal 2007 ascompared to $850,000 in fiscal 2006. One gross (0.2 net) well was drilled infiscal 2007 which was successful and waiting to be tied in at September 30,2007. In the Bonanza/Balsam area Barnwell acquired oil and natural gas rightsin 3,200 gross (2,048 net) acres of undeveloped land in fiscal 2007. AtSeptember 30, 2007 Barnwell’s average working interest in its productivewells in the Bonanza/Balsam area was 30%.

 

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Barnwell participated in16 gross (5.2 net) wells, 28 gross (11.7 net) wellsand 27 gross (8.8 net) wells in fiscal 2007, 2006 and 2005, respectively, thatwere on prospects developed by Barnwell.

 

*Oil andNatural Gas Production*

 

Thefollowing table summarizes (a) Barnwell’s net unit production for the lastthree fiscal years, based on sales of crude oil, natural gas, condensate andother natural gas liquids, from all wells in which Barnwell has or had aninterest, and (b) the average sales prices and average production anddepletion costs for such production during the same periods. Production amountsreported are net of royalties and the Alberta Royalty Tax Credit, whereapplicable. As discussed in further detail below, the Alberta Royalty TaxCredit was discontinued effective January 1, 2007. Barnwell’s netproduction in fiscal 2007, 2006, and 2005 was derived primarily from theProvince of Alberta.

 
| ** **                                            | ** ** | **Year Ended September 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Annual net  production:                               |       |                                        |       |   |   |   |   |
| Natural gas  liquids (BBLS)*                          | ** ** | **114,000**                                 |       | 115,000 |   | 114,000 |   |
| Oil (BBLS)*                                           | ** ** | **146,000**                                 |       | 145,000 |   | 139,000 |   |
| Natural gas  (MCF)*                                   | ** ** | **3,615,000**                               |       | 3,629,000 |   | 3,621,000 |   |
|                                                  |       |                                        |       |   |   |   |   |
| Annual average  sale price per unit of production:    |       |                                        |       |   |   |   |   |
| BBL of natural  gas liquids**                         | ** ** | **$**                                       | **37.36**  |   | $ | 40.18 |   | $ | 31.84 |   |
| BBL of oil**                                          | ** ** | **$**                                       | **56.96**  |   | $ | 56.85 |   | $ | 48.11 |   |
| MCF of natural  gas***                                | ** ** | **$**                                       | **5.88**   |   | $ | 6.67 |   | $ | 5.93 |   |
|                                                  |       |                                        |       |   |   |   |   |
| Annual average  production cost per MCFE produced**** | ** ** | **$**                                       | **1.83**   |   | $ | 1.45 |   | $ | 1.20 |   |
|                                                  |       |                                        |       |   |   |   |   |
| Annual average  depletion cost per MCFE produced***** | ** ** | **$**                                       | **2.49**   |   | $ | 2.17 |   | $ | 1.66 |   |

 

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| *     | When used in  this report, the term “BBL(S)” means stock tank barrel(s) of oil  equivalent to 42 U.S. gallons and the term “MCF” means 1,000 cubic feet of  natural gas at 14.65 pounds per square inch absolute and 60 degrees F. |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **    | Calculated on  revenues before royalty expense and Alberta Royalty Tax Credit divided by  gross production.                                                                                                                                                 |
| ***   | Calculated on  revenues net of pipeline charges before royalty expense and Alberta Royalty  Tax Credit divided by gross production.                                                                                                                         |
| ****  | Natural  gas liquids, oil and natural gas units were combined by converting barrels of  natural gas liquids and oil to an MCF equivalent (“MCFE”) on the basis of 1  BBL = 5.8 MCF. Excludes natural gas pipeline charges.                        |
| ***** | Natural  gas liquids, oil and natural gas units were combined by converting barrels of  natural gas liquids and oil to an MCF equivalent (“MCFE”) on the basis of 1  BBL = 5.8 MCF.                                                               |

 

In fiscal 2007,approximately 63%, 25% and 12% of Barnwell’soil and natural gas revenues were from the sale of natural gas, oil and naturalgas liquids, respectively.

 

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In fiscal 2007, Barnwell’snet production after royalties for natural gas averaged 9,900 MCF per day, aslight decrease from 9,940 MCF per day in fiscal 2006. Gross natural gasproduction decreased 6% in fiscal 2007, as compared to fiscal 2006. Grossnatural gas production decreased 6% while net natural gas production wasessentially unchanged due to lower royalties which were due in part to lowernatural gas prices. Dunvegan contributed approximately 52% of Barnwell’s netnatural gas production in fiscal 2007, an increase from 50% infiscal 2006 due to the lower royalties realized in fiscal 2007.

 

Barnwell’s major oilproducing properties are the Red Earth, Chauvin and Bonanza/Balsam areas inCanada. In fiscal 2007 and fiscal 2006, net production after royalties for oilaveraged 400 barrels per day; gross oil production declined 2%. The addition ofnew wells in the Wood River and Progress areas were offset by decreasedproduction from the Red Earth, Chauvin and Manyberries areas caused by naturaldeclines from existing wells.

 

In fiscal 2007, netproduction after royalties for natural gas liquids averaged 310 barrels perday, a decrease of 3% from 320 barrels per day in fiscal 2006. Gross naturalgas liquids production declined 2%. These decreases were principally due tolower Dunvegan production which decreased 2%or 6barrels per day. Dunvegan contributed approximately 86% of Barnwell’snet natural gas liquids production in fiscal 2007.

 

Theaverage production cost per MCFE was $1.83 for fiscal 2007, a 26% increase from$1.45 for fiscal 2006. Actual field costs increased due to continuedindustry-wide increases in costs for oilfield services and utilities in Canadaand a 3% increase in the average exchange rate of the Canadian dollar to theU.S. dollar in fiscal 2007, as compared to fiscal 2006.

 

The average depletioncost per MCFE was $2.49 for fiscal 2007, a 15% increase from $2.17 for fiscal2006. The increase was due to a 12% increase in the depletion rate and a 3%increase in the average exchange rate of the Canadian dollar to the U.S. dollar.The 12% increase in the depletion rate was the result of increases over thepast several years in Barnwell’s costs of finding and developing provenreserves. Barnwell’s cost of finding and developing proven reserves hasincreased due to the costs of oil and natural gas exploration and developmenthaving increased along with product prices and the drilling of unsuccessfulwells.

 

In fiscal 2006,approximately 66%, 22% and 12% of Barnwell’soil and natural gas revenues were from the sale of natural gas, oil and naturalgas liquids, respectively.

 

In fiscal 2006, Barnwell’snet production after royalties for natural gas averaged 9,940 MCF per day, aslight increase from 9,920 MCF per day in fiscal 2005. Gross natural gasproduction also increased 1% in fiscal 2006, as compared to fiscal 2005. Dunvegancontributed approximately 50% of Barnwell’s net natural gas production infiscal 2006, an increase from 48% infiscal 2005 due to the new wells drilled at Dunvegan.

 

In fiscal 2006, netproduction after royalties for oil averaged 400 barrels per day, an increase of5% from 380 barrels per day in fiscal 2005. This increase was principally dueto the addition of new wells in the Wood River and Progress areas which offsetdecreased production from the Bonanza/Balsam and Red Earth areas caused bynatural declines from existing wells.

 

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In fiscal 2006, netproduction after royalties for natural gas liquids averaged 320 barrels perday, an increase of 3% from 310 barrels per day in fiscal 2005. This increasewas due to higher Dunvegan production which increased 8%or 19barrels per day. Dunvegan contributed approximately 87% of Barnwell’snet natural gas liquids production in fiscal 2006.

 

Theaverage production cost per MCFE was $1.45 for fiscal 2006, a 21% increase from$1.20 for fiscal 2005. Actual field costs increased by 12% due to industry-wideincreases in costs for oilfield services and utilities in Canada and a 7%increase in the average exchange rate of the Canadian dollar to the U.S. dollarin fiscal 2006, as compared to fiscal 2005.

 

The average depletioncost per MCFE was $2.17 for fiscal2006, a 31% increase from $1.66for fiscal 2005. The increase was due to a 22%increase in the depletion rate and a 7% increase in the averageexchange rate of the Canadian dollar to the U.S. dollar.

 

*ProductiveWells*

 

The following table setsforth the gross and net number of productive wells Barnwell has an interest inas of September 30, 2007.

 
| ** **       | ** ** | **Productive Wells*** | ** ** |
|------------------|------------|----------------------------|------------|
| ** **       | ** ** | **Gross****                | ** ** | **Net**** | ** ** |
| **Location**     | ** ** | **Oil**                    | ** ** | **Gas** | ** ** | **Oil** | ** ** | **Gas** | ** ** |
| Canada           |       |                       |       |   |   |   |   |   |   |
| Alberta          |       | 159                        |       | 571 |   | 28.2 |   | 67.7 |   |
| Saskatchewan     |       | 7                          |       | 32 |   | 0.3 |   | 5.3 |   |
| British Columbia |       | 3                          |       | 1 |   | 0.8 |   | 0.2 |   |
| Total            |       | 169                        |       | 604 |   | 29.3 |   | 73.2 |   |

 

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*                       Twenty-eightnatural gas wells have dual or multiple completions.

**                Pleasesee note (2) on the following table.

 

10

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*Developed Acreage and UndevelopedAcreage*

 

The following table setsforth certain information with respect to oil and natural gas properties ofBarnwell as of September 30, 2007.

 
| ** **       | ** ** | ** **     | ** ** | ** **      | ** ** | ** **      | ** ** | ** ** | ** ** | **Developed and** | ** ** |
|------------------|------------|----------------|------------|-----------------|------------|-----------------|------------|------------|------------|-------------------|------------|
| ** **       | ** ** | **Developed**  | ** ** | **Undeveloped** | ** ** | **Undeveloped** | ** ** |
| ** **       | ** ** | **Acreage(1)** | ** ** | **Acreage(1)**  | ** ** | **Acreage(1)**  | ** ** |
| **Location**     | ** ** | **Gross(2)**   | ** ** | **Net(2)**      | ** ** | **Gross(2)**    | ** ** | **Net(2)** | ** ** | **Gross(2)**      | ** ** | **Net(2)** | ** ** |
| Canada           |       |           |       |            |       |            |       |       |       |              |       |   |   |
| Alberta          |       | 248,581        |       | 38,695          |       | 259,940         |       | 123,508    |       | 508,521           |       | 162,203 |   |
| British Columbia |       | 1,632          |       | 488             |       | 3,983           |       | 1,120      |       | 5,615             |       | 1,608 |   |
| Saskatchewan     |       | 3,140          |       | 426             |       | —          |       | —     |       | 3,140             |       | 426 |   |
| Total            |       | 253,353        |       | 39,609          |       | 263,923         |       | 124,628    |       | 517,276           |       | 164,237 |   |

 

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(1)                “Developed Acreage” includes the acrescovered by leases upon which there are one or more producing wells.  “Undeveloped Acreage” includes acres coveredby leases upon which there are no producing wells and which are maintained ineffect by the payment of delay rentals or the commencement of drilling thereon.

 

(2)                “Gross”refers to the total number of acres or wells in which Barnwell owns aninterest, and “Net” refers to Barnwell’s aggregate interest therein.  For example, a 50% interest in a 320 acrelease represents 320 gross acres and 160 net acres.  The gross acreage and well figures includeinterests owned of record by Barnwell and, in addition, the portion owned byothers.

 

Barnwell’s leasehold interests in itsundeveloped acreage expire over the next fiscal years, if not developed, asfollows: 15%expire during fiscal 2008; 27% expire during fiscal 2009; 21% expire duringfiscal 2010; 14% expire during fiscal 2011; and 12% expire during fiscal2012.  Eleven percent of Barnwell’sundeveloped acreage is related to heavy oil and therefore not subject toexpiration.  There can be no assurancethat Barnwell will be successful in renewing its leasehold interests in theevent of expiration.

 

Barnwell’s undevelopedacreage includes concentrations in Alberta, at Doris (9,984 net acres), Bremner (8,640net acres), Bonanza/Balsam (8,504 net acres), Rycroft (8,440 net acres),Swalwell (6,468 net acres), Mulligan (6,048 net acres), Thornbury (5,949 netacres) and Boundary Lake (5,890 net acres).

* *

*Reserves*

 

The amounts set forth in the table below,prepared by Paddock Lindstrom & Associates Ltd., Barnwell’sindependent reservoir engineering consultants, summarize the estimated netquantities of proved producing reserves and proved reserves of crude oil(including condensate and natural gas liquids) and natural gas as of September 30,2007, 2006, and 2005 on all properties in which Barnwell has an interest.  These reserves are before deductions forindebtedness secured by the properties and are based on constant dollars.  No estimates of total proved net oil ornatural gas reserves have been filed with or included in reports to any federalauthority or agency, other than the United States Securities and ExchangeCommission, since October 1, 2004.

 

11

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Proved Producing Reserves

 
| ** **                                                   | ** ** | **September 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **2007**               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Oil – barrels  (BBLS)  (including natural gas liquids): |       |                   |       |   |   |   |   |
| Dunvegan                                                     | ** ** | **387,000**            |       | 404,000 |   | 456,000 |   |
| All other  properties                                        | ** ** | **708,000**            |       | 665,000 |   | 646,000 |   |
| Total                                                        | ** ** | **1,095,000**          |       | 1,069,000 |   | 1,102,000 |   |
|                                                         |       |                   |       |   |   |   |   |
| Natural gas –  thousand cubic feet (MCF):               |       |                   |       |   |   |   |   |
| Dunvegan                                                     | ** ** | **11,577,000**         |       | 11,503,000 |   | 12,947,000 |   |
| All other  properties                                        | ** ** | **7,281,000**          |       | 7,055,000 |   | 8,895,000 |   |
| Total                                                        | ** ** | **18,858,000**         |       | 18,558,000 |   | 21,842,000 |   |

 

Total Proved Reserves

  (IncludesProved Producing Reserves)

 
| ** **                                                    | ** ** | **September 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **2007**               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Oil – barrels  (BBLS)   (including natural gas liquids): |       |                   |       |   |   |   |   |
| Dunvegan                                                      | ** ** | **387,000**            |       | 426,000 |   | 489,000 |   |
| All other  properties                                         | ** ** | **1,000,000**          |       | 877,000 |   | 817,000 |   |
| Total                                                         | ** ** | **1,387,000**          |       | 1,303,000 |   | 1,306,000 |   |
|                                                          |       |                   |       |   |   |   |   |
| Natural gas –  thousand cubic feet (MCF):                |       |                   |       |   |   |   |   |
| Dunvegan                                                      | ** ** | **11,577,000**         |       | 12,074,000 |   | 13,858,000 |   |
| All other  properties                                         | ** ** | **12,441,000**         |       | 12,752,000 |   | 11,376,000 |   |
| Total                                                         | ** ** | **24,018,000**         |       | 24,826,000 |   | 25,234,000 |   |

 

As of September 30,2007, essentially all of Barnwell’s proved producing and total proved reserveswere located in the Province of Alberta, with minor volumes located in theProvinces of Saskatchewan and British Columbia.

 

During fiscal 2007, Barnwell’s total netproved reserves, including proved producing reserves, of oil, condensate andnatural gas liquids increasedby 84,000 barrels, and total net proved reserves of natural gas decreased by808,000 MCF.

 

The change in oil, condensate and naturalgas liquids reserves during fiscal 2007 was the net result of production duringthe year of 260,000barrels, the additionof 168,000 barrels from thedrilling of wells, and the independent engineer’s 176,000 barrels upwardrevision of Barnwell’s oil reserves.

 

The change in natural gas reserves duringfiscal 2007 was the net result of production during the year of 3,615,000 MCF,the addition of 1,528,000 MCF from the drilling of natural gas wells, and theindependent engineer’s 1,279,000 MCF upward revision of Barnwell’s natural gasreserves.

 

12

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The upward revisions in reserves infiscal 2007 were due to improved performance on certain wells drilled in prioryears.

 

Barnwell’s workinginterest in the Dunvegan area accounted for approximately 48% and 49% of itstotal proved natural gas reserves at September 30, 2007 and 2006,respectively, and approximately 28% and 33% of total proved oil and natural gasliquids reserves at September 30, 2007 and 2006, respectively.

 

The following table setsforth Barnwell’s oil and natural gas reserves at September 30, 2007, byproperty name, based on information prepared by Paddock Lindstrom &Associates Ltd.  Gross reserves arebefore the deduction of royalties; net reserves are after the deduction ofroyalties.  This table is based onconstant dollars where reserve estimates are based on sales prices, costs andstatutory tax rates in existence at September 30, 2007, the date of theprojection.  Oil, which includes naturalgas liquids (“NGL”), is shown in thousands of barrels (“MBBLS”) and natural gasis shown in millions of cubic feet (“MMCF”).

 

OIL AND NATURAL GASRESERVES AT SEPTEMBER 30, 2007

 
| ** **        | ** ** | **Total  Proved Producing** | ** ** | **Total  Proved** | ** ** |
|-------------------|------------|-----------------------------|------------|-------------------|------------|
| ** **        | ** ** | **Oil &  NGL**     | ** ** | **Gas**           | ** ** | **Oil &  NGL** | ** ** | **Gas** | ** ** |
| ** **        | ** ** | **Gross**                   | ** ** | **Net**           | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| **Property Name** | ** ** | **(MBBLS)**                 | ** ** | **(MMCF)**        | ** ** | **(MBBLS)** | ** ** | **(MMCF)** | ** ** |
| **Dunvegan**      | ** ** | **566**                     | ** ** | **387**           | ** ** | **14,473** | ** ** | **11,577** | ** ** | **566** | ** ** | **387** | ** ** | **14,473** | ** ** | **11,577** | ** ** |
| Red Earth         |       | 269                         |       | 235               |       | 7 |   | 5 |   | 269 |   | 235 |   | 7 |   | 5 |   |
| Bonanza/Balsam    |       | 91                          |       | 77                |       | 633 |   | 520 |   | 119 |   | 97 |   | 1,133 |   | 907 |   |
| Pouce Coupe South |       | 12                          |       | 8                 |       | 1,495 |   | 1,213 |   | 65 |   | 54 |   | 1,619 |   | 1,306 |   |
| Medicine River    |       | 33                          |       | 22                |       | 618 |   | 442 |   | 33 |   | 22 |   | 618 |   | 442 |   |
| Doris             |       | —                      |       | —            |       | 827 |   | 691 |   | — |   | — |   | 1,259 |   | 1,042 |   |
| Faith South       |       | —                      |       | —            |       | — |   | — |   | — |   | — |   | 1,011 |   | 822 |   |
| Wood River        |       | 42                          |       | 37                |       | 272 |   | 226 |   | 71 |   | 60 |   | 521 |   | 419 |   |
| Progress          |       | 111                         |       | 103               |       | 576 |   | 467 |   | 190 |   | 168 |   | 2,243 |   | 1,741 |   |
| Pouce Coupe       |       | 4                           |       | 3                 |       | 317 |   | 264 |   | 4 |   | 3 |   | 317 |   | 264 |   |
| Boundary Lake     |       | 4                           |       | 3                 |       | 548 |   | 414 |   | 87 |   | 70 |   | 1,163 |   | 900 |   |
| Other properties  |       | 257                         |       | 220               |       | 3,570 |   | 3,039 |   | 340 |   | 291 |   | 5,399 |   | 4,593 |   |
| **TOTAL**         | ** ** | **1,389**                   | ** ** | **1,095**         | ** ** | **23,336** | ** ** | **18,858** | ** ** | **1,744** | ** ** | **1,387** | ** ** | **29,763** | ** ** | **24,018** | ** ** |

 

*StandardizedMeasure of Estimated Discounted Future Net Cash Flows*

 

The following table setsforth Barnwell’s “Estimated Future Net Revenues” from total proved oil, naturalgas and condensate reserves and the present value of Barnwell’s “EstimatedFuture Net Revenues” (discounted at 10%). Estimated future net revenues for total proved reserves are net ofestimated future expenditures of developing and producing the proved reserves,and assume the continuation of existing economic conditions.  Net revenues have been calculated using year-endsales prices and current costs, after deducting all royalties, operating costs,future estimated capital expenditures, and income taxes.

 

13

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On October 25, 2007,the Alberta Government announced increases to the royalty rates on oil, naturalgas liquids and natural gas production beginning on January 1, 2009.  The new plan also intends to simplifyroyalties and eliminate “old” and “new” classifications of oil and natural gaswith current maximum royalty rates of 35% with new royalty rates up to50%.  The new proposed 50% royalty rateis reached for oil when oil is selling at or above $120.00 Canadian dollars perbarrel and for natural gas when natural gas is selling at or above $17.50Canadian dollars per MCF.  Barnwell isawaiting clarification from the Alberta Government on the new program and is inthe process of assessing its impact.  Thenew program may reduce Barnwell’s natural gas and oil reserve volumes, reportednet production, and estimated future revenues and estimated future cash flowsfrom natural gas and oil reserves.  Thenew program may also materially impact the economics of oil and natural gasexploration in the Alberta area. However, the magnitude of the potential impact, which will depend on thefinal form of legislation upon enactment, cannot be reasonably estimated atthis time.

 
| ** **                                                    | ** ** | **Proved Producing** | ** ** | **Total Proved** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Reserves**         | ** ** | **Reserves**     | ** ** |
| Year ending September 30,                                |       |                 |       |             |       |
|                                                          |       |                 |       |             |       |
| 2008                                                          |       | $                    | 18,194,000 |             | $          | 20,629,000 |   |
| 2009                                                          |       | 14,422,000           |       | 19,133,000       |       |
| 2010                                                          |       | 11,174,000           |       | 14,822,000       |       |
| Thereafter                                                    |       | 39,700,000           |       | 54,123,000       |       |
|                                                          |       | $                    | 83,490,000 |             | $          | 108,707,000 |   |
|                                                          |       |                 |       |             |       |
| Present value (discounted at 10%) at  September 30, 2007 |       | $                    | 60,135,000 | *                | $          | 78,300,000 | * |

 

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*                 These amounts do not purport torepresent, nor should they be interpreted as, the fair value of Barnwell’snatural gas and oil reserves.  Anestimate of fair value would also consider, among other items, the value ofBarnwell’s undeveloped land position, the recovery of reserves not presentlyclassified as proved, anticipated future changes in oil and natural gas prices(these amounts were based on a natural gas price of $5.37 per 1,000 cubic feetas of September 30, 2007) and costs, and a discount factor morerepresentative of the time value of money and the risks inherent in reserveestimates.

* *

*Marketingof Oil and Natural Gas*

 

Barnwell sellssubstantially all of its oil and natural gas liquids production undershort-term contracts between itself and marketers of oil.  The price of oil and natural gas liquids isfreely negotiated between the buyers and sellers and is largely determined bythe world price for oil, which is principally denominated in U.S. dollars.

 

Natural gas sold byBarnwell is generally sold under both long-term and short-term contracts withprices indexed to market prices.  Theprice of natural gas and natural gas liquids is freely negotiated betweenbuyers and sellers and is principally determined for Barnwell by the NorthAmerican price for natural gas, which is principally denominated in U.S.dollars.  In fiscal 2007, 2006, and 2005,Barnwell took virtually all of its oil and natural gas “in kind” where Barnwellmarkets the products instead of having the operator of a producing propertymarket the products on Barnwell’s behalf.

 

In fiscal 2007, naturalgas production from the Dunvegan Unit was responsible for approximately 51% ofBarnwell’s natural gas revenues, as compared to 50% in fiscal 2006.  Barnwell’s oil and naturalgas segment derived 63% of its oil and natural gas revenues in fiscal 2007 fromfour 

 

14

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individuallysignificant customers, ProGas Limited (27%), Glencoe Resources Ltd. (17%),Plains Marketing Canada, L.P. (10%), and Seminole Canada Gas Company (9%).  A substantial portion of Barnwell’s Dunvegan naturalgas production and natural gas production from other properties is sold toaggregators and marketers under various short-term and long-term contracts,with the price of natural gas determined by negotiations between theaggregators and the final purchasers.  Infiscal 2007, over 90% of Barnwell’s oil and natural gas revenues were fromproducts sold at spot prices.

 

*GovernmentalRegulation*

 

The jurisdictions inwhich the oil and natural gas properties of Barnwell are located haveregulatory provisions relating to permits for the drilling of wells, thespacing of wells, the prevention of oil and natural gas waste, allowable ratesof production and other matters.  Theamount of oil and natural gas produced is subject to control by regulatoryagencies in each province that periodically assign allowable rates of production.  The Province of Alberta and Government ofCanada also monitor and regulate the volume of natural gas that may be removedfrom the province and the conditions of removal.

 

There is no currentgovernment regulation of the price that may be charged on the sale of Canadianoil or natural gas production.  Canadiannatural gas production destined for export is priced by market forces subjectto export contracts meeting certain criteria prescribed by Canada’s NationalEnergy Board and the Government of Canada.

 

Different royalty ratesare imposed by the provincial governments, the Government of Canada and privateinterests with respect to the production and sale of crude oil, natural gas andliquids.  In addition, provincialgovernments receive additional revenue through the imposition of taxes on crudeoil and natural gas owned by private interests within the province.  Essentially, provincial royalties arecalculated as a percentage of revenue and vary depending on production volumes,selling prices and the date of discovery.

 

As discussed above, on October 25,2007, the Alberta Government announced increases to the royalty rates on oil,natural gas liquids and natural gas production beginning on January 1,2009.  The new plan also intends tosimplify royalties and eliminate “old” and “new” classifications of oil andnatural gas with current maximum royalty rates of 35% with new royalty rates upto 50%.  The new proposed 50% royaltyrate is reached for oil when oil is selling at or above $120.00 Canadian dollarsper barrel and for natural gas when natural gas is selling at or above $17.50Canadian dollars per MCF.  Barnwell isawaiting clarification from the Alberta Government on the new program and is inthe process of assessing its impact.  Thenew program may reduce Barnwell’s natural gas and oil reserve volumes, reportednet production, and estimated future revenues and estimated future cash flowsfrom natural gas and oil reserves.  Thenew program may also materially impact the economics of oil and natural gasexploration in the Alberta area.  However, the magnitude of the potentialimpact, which will depend on the final form of legislation upon enactment,cannot be reasonably estimated at this time.

 

In May 2006, a billreducing the Province of Alberta’s corporate tax rate from 11.5% to 10.0% effectiveApril 1, 2006 received Royal Assent and was passed into law.  In June 2006, Royal Assent was receivedon a bill passed by the Parliament of Canada which reduces the federalcorporate income tax rate to 19% from 21% by 2010 starting January 1, 2008.  The federal corporate surtax will also beeliminated effective January 1, 2008. During the year ended September 30, 2006, Barnwell’s Canadian 

 

15

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net deferred income taxliabilities were reduced by approximately $1,094,000 as a result of thesereductions in Canadian tax rates.  Afurther minor reduction in Canadian federal tax rates in fiscal 2007 resultedin a $100,000 reduction in net deferred tax liabilities in fiscal 2007.

 

In Alberta, a producer ofoil or natural gas was entitled to a credit against the royalties payable toAlberta called the Alberta Royalty Tax Credit (“ARTC”).  The ARTC was discontinued by the Albertagovernment effective January 1, 2007. Barnwell received ARTC payments of $111,000, $438,000 and $409,000 infiscal years 2007, 2006 and 2005, respectively. The ARTC payments were recorded as a credit against oil and natural gasroyalties and reported in oil and natural gas revenues.

* *

*Competition*

 

The majority of Barnwell’snatural gas sales take place in Alberta, Canada.  Natural gas prices in Alberta are generallycompetitive with other major North American areas due to sufficient pipelinecapacity into the United States. Barnwell’s oil and natural gas liquids are sold in Alberta with pricesdetermined by the world price for oil.

 

Barnwell competes in thesale of oil and natural gas on the basis of price, and on the ability todeliver products.  The oil and naturalgas industry is intensely competitive in all phases, including the explorationfor new production and reserves and the acquisition of equipment and labornecessary to conduct drilling activities. The competition comes from numerous major oil companies as well asnumerous other independent operators. There is also competition between the oil and natural gas industry andother industries in supplying the energy and fuel requirements of industrial,commercial and individual consumers. Barnwell is a minor participant in the industry and competes in its oiland natural gas activities with many other companies having far greaterfinancial, technical and other resources.

** **

**Land Investment Segment**

* *

*Overview*

 

Barnwell owns a77.6% controlling interest in Kaupulehu Developments, a Hawaii generalpartnership that owns interests in leasehold land and development rights forproperty located approximately six miles north of the Kona InternationalAirport in the North Kona District of the Island of Hawaii.

 

*Operations*

 

Between 1986 and1989, Kaupulehu Developments obtained the state and county zoning changesnecessary to permit development of the Four Seasons Resort Hualalai at HistoricKa’upulehu and Hualalai Golf Club, which opened in 1996, a second golf course,and single-family and multi-family residential units.  These projects were developed on leaseholdland acquired from Kaupulehu Developments by Kaupulehu Makai Venture, anunrelated entity, which was subsequently acquired in June 2006 by HualalaiInvestors JV, LLC and Hualalai Investors II, LLC, two entities unrelated toBarnwell (hereinafter referred to as “Hualalai Investors”).  Barnwell acquired a 1.5% passive minorityinterest, through an 80%-owned joint venture, in Hualalai Investors in thefirst quarter of fiscal 2007.  Thedevelopment rights held by Kaupulehu Developments are for residentially-zonedleasehold land within and adjacent to the Hualalai Golf Club and are underoption to Hualalai Investors.

 

16

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Between 1993 and2001, Kaupulehu Developments obtained the state and county zoning changesnecessary to permit development of single-family and multi-family residentialunits, a golf course and a limited commercial area on approximately 870leasehold acres located adjacent to and north of the Four Seasons ResortHualalai at Historic Ka’upulehu.

 

In February 2004,Kaupulehu Developments entered into a Purchase and Sale Agreement with WB KDAcquisition, LLC (“WB”), an unrelated entity. WB is affiliated with RP-Hualalai Investors, LLC, a managing member ofHualalai Investors, owners and current developers of Hualalai Resort, andWestbrook Partners, developers of Kuki’o Resort located adjacent to HualalaiResort.  Under the terms of the Purchaseand Sale Agreement, Kaupulehu Developments transferred its leasehold interestin the aforementioned 870 acres zoned for resort/residential development, intwo increments (“Increment I” and “Increment II”), to WB.  Increment I is an area planned forapproximately 80 single-family lots and a beach club on the portion of theproperty bordering the Pacific Ocean. The purchasers of the 80 single-family lots will have the right to applyfor membership in the Kuki’o Resort Golf and Beach Club, which is locatedadjacent to and south of the Four Seasons Resort Hualalai at Historic Ka’upulehu.  Increment II is the remaining portion ofthe approximately 870-acre property and is zoned for single-family andmulti-family residential units and a golf course and clubhouse.

 

With respect toIncrement I, Kaupulehu Developments received an $11,550,000 payment in February 2004and is entitled to receive payments from WB based on the following percentagesof the gross receipts from WB’s sales of single-family residential lots inIncrement I: 9% of the gross proceeds from single-family lot sales up toaggregate gross proceeds of $100,000,000; 10% of such aggregate gross proceedsgreater than $100,000,000 but less than $300,000,000; and 14% of such aggregategross proceeds in excess of $300,000,000. During the year ended September 30, 2006, WB sold a total of fivesingle-family lots and paid Kaupulehu Developments $3,660,000 in percentage ofsales payments.  There were no percentageof sales payments received during the year ended September 30, 2005.

 

In June 2006,Kaupulehu Developments entered into an agreement with WB and WB KD AcquisitionII, LLC (“WBKD”), whereby Kaupulehu Developments sold its interest inIncrement II to WBKD (“Increment II Agreement”).  There is no affiliation between KaupulehuDevelopments and WB or WBKD.  WB and WBKDare both affiliates of RP-Hualalai Investors, LLC, a managing member ofHualalai Investors, owners and current developers of Hualalai Resort, andWestbrook Partners, developers of Kuki’o Resort located adjacent to HualalaiResort.  Pursuant to theIncrement II Agreement, Kaupulehu Developments received a $10,000,000closing payment and is entitled to receive future payments from WBKD based on apercentage of the sales prices of the residential lots, ranging from 3.25% to14%, to be determined in the future depending upon a number of variables,including whether the lots are sold prior to improvement.  There is no assurance that any futurepayments will be received.

 

In addition, under theterms of the Increment II Agreement, WBKD has the exclusive right tonegotiate with Kaupulehu Developments with respect to Lot 4C (“Lot 4C”),which is comprised of approximately 1,000 acres of vacant leasehold land zonedconservation located adjacent to Increment II.  This right expires in June 2009 or, ifbefore such date WBKD completes any and all environmental assessments andsurveys reasonably required to support a petition to the Hawaii State Land UseCommission for reclassification of Lot 4C zoning, in June 2012.

 

17

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*Activity*

 

WB sold a total of sevensingle-family lots within Increment I during the year ended September 30,2007 and paid Kaupulehu Developments $3,585,000 in percentage of salespayments.  Revenue from these percentageof sales payments was reduced by $215,000 of fees related to the sales,resulting in net revenues of $3,370,000 and a $2,633,000 operating profit,after minority interest.  There is noassurance that any future percentage of sales payments will be received.  Three of the seven lots sold by WB werepurchased by Kaupulehu 2007, LLLP (“Kaupulehu 2007”), a Hawaiilimited liability limited partnership 80%-owned by Barnwell and 20%-owned byNearco, Inc. (“Nearco”).  Nearco isa company controlled by Mr. Terry Johnston, a director of Barnwell andminority interest owner in certain of Barnwell’s business ventures (see RealEstate Development Segment below for further discussion of Kaupulehu 2007).  The three lots purchased by Kaupulehu 2007were made under a lot purchase contract executed in January 2007.  WB is not affiliated with Barnwell, KaupulehuDevelopments or Kaupulehu 2007. Accordingly, the percentage of sales payments received from WB as aresult of Kaupulehu 2007’s lot purchases have been recorded as revenues andhave not been eliminated.  Percentage ofsales payments received by Kaupulehu Developments as a result of Kaupulehu 2007’slot purchases in fiscal 2007 totaled $642,000. Recognized revenues, net of fees, and operating profit, net of minorityinterest and before taxes, resulting from Kaupulehu 2007’s lot purchasestotaled $604,000 and $472,000, respectively, in fiscal 2007.

 

In December 2006, Hualalai Investors paidKaupulehu Developments $2,437,500 upon exercising the balance of itsdevelopment rights option due on December 31, 2006.  The $2,437,500 ofoption proceeds was reduced by $146,000 of fees related to the sale, resultingin net revenues of $2,292,000 and a $1,791,000 operating profit, after minorityinterest.  There were no other costsdeducted from revenues from the sale of development rights in fiscal 2007 asall capitalized costs associated with the development rights were expensed inprevious years.

 

The total amount of remaining future optionreceipts, if all options are fully exercised, was $10,625,000 as of September 30,2007, comprised of four payments of $2,656,250 due on each December 31 ofyears 2007 to 2010.  In October 2007,Kaupulehu Developments received a $1,927,000 development rights option paymentfor a portion of the seventh payment due on December 31, 2007.  If any annual option payment is not made, thethen remaining development right options will expire.  There is no assurance that any portion of theremaining options will be exercised.

 

During the firstquarter of fiscal 2007, Kaupulehu Mauka Investors, LLC, a limited liabilitycompany wholly-owned by Barnwell, purchased 14 lot acquisition rights withinthe approximately 5,000 acres of agricultural-zoned leasehold land in theupland area of Kaupulehu (“Mauka Lands”) situated between the Queen KaahumanuHighway and the Mamalahoa Highway at Kaupulehu, North Kona, Island and State ofHawaii, for $1,400,000.  The lotacquisition rights give Barnwell the right to acquire residential lots whichmay be developed on the Mauka Lands. These lands are currently classified as agricultural by the State ofHawaii and, accordingly, the developer of these lands (Hualalai Investors) willneed to pursue both State and County of Hawaii approvals for reclassificationand rezoning to permit a residential subdivision and negotiate developmentterms.  There is no assurance that thedeveloper of the Mauka Lands will obtain the necessary land usereclassification, rezoning, 

 

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permits,approvals, and development terms and agreements needed to develop the Mauka Lands.  The investment is evaluated for impairmentwhenever events or changes in circumstances indicate that the recordedinvestment balance may not be fully recoverable.

 

The land interestsheld by Barnwell at September 30, 2007 include the development rightsunder option, the rights to receive percentage of sales payments onIncrement I and Increment II of the aforementioned 870 acres,Lot 4C, which is under a right of negotiation with WBKD, and lotacquisition rights in agricultural-zoned leasehold land.  There is no assurance that any futuredevelopment rights option payments or percentage of sales payments will bereceived, nor is there any assurance that WBKD will enter into an agreementwith Kaupulehu Developments regarding Lot 4C.  Furthermore, there is no assurance that therequired land use reclassification and rezoning from regulatory agencies willbe obtained nor is there any assurance that the necessary development terms andagreements will be successfully negotiated.

* *

*Competition*

 

Barnwell’s landinvestment segment is subject to intense competition in all phases of itsoperations including the acquisition of new properties, the securing ofapprovals necessary for land rezoning, and the search for potential buyers ofproperty interests presently owned.  Thecompetition comes from numerous independent land development companies andother industries involved in land investment activities.  The principal factors affecting competitionare the location of the project and pricing. Kaupulehu Developments is a minor participant in the land developmentindustry and competes in its land investment activities with many otherentities having far greater financial and other resources.

 

For the past few years,Hawaii’s economy has experienced positive growth and the South Kohala/NorthKona area of the island of Hawaii, the area in which Kaupulehu Developments’property is located, has experienced strong demand for residential realestate.  This trend continued throughfiscal 2007, but at a diminished rate, and it is not expected to declinesignificantly in the near term, although there can be no assurance this trendwill in fact continue.  The price andmarket for real estate in the South Kohala/North Kona area of the island ofHawaii has historically been cyclical and if the demand for real estate in thearea Kaupulehu Developments’ interests are located were to decrease, Barnwell’soperating results could be negatively affected. During periods when demand for real estate is low, inventory may turn atslower rates than expected or may be sold at prices lower thananticipated.  This could potentiallyimpair Barnwell’s liquidity and impede its ability to proceed with otherplanned projects or activities.

** **

**Real Estate Development Segment**

* *

*Overview*

 

Duringthe second quarter of fiscal 2007, Kaupulehu 2007, LLLP (“Kaupulehu 2007”), aHawaii limited liability limited partnership 80%-owned by Barnwell and20%-owned by Nearco was established for the purpose of acquiring house lots forinvestment and to construct turnkey single-family homes for future sale.

 

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*Activity*

 

Duringthe second quarter of fiscal 2007, Kaupulehu 2007 made nonrefundable initialdeposits of $200,000 each to secure the right to purchase seven parcels in theLot 4A Increment I area of Kaupulehu, North Kona, Hawaii from WB, anunrelated entity.  Each lot undercontract has a purchase price of $2,378,000 and the deposit for each lot willbe applied to the purchase price of each lot. If any of the parcels are not purchased, the deposit related to any suchparcels will be forfeited and Barnwell will incur an expense as a result of thewrite-off of its 80% share of any forfeited deposits.

 

InApril 2007, Kaupulehu 2007 purchased two of the aforementioned parcels andpaid $4,356,000 for the balance of the purchase price of those parcels and in September 2007,Kaupulehu 2007 purchased one additional lot and paid $2,178,000 for the balanceof the purchase price of that parcel.  $600,000of the previously paid deposits was applied to the purchase prices of theparcels.  As of September 30, 2007,Barnwell estimates that it will develop two residences for sale on two parcelsand that the third parcel purchased will be held for investment purposes.  The purchase of each of the remaining fourlots is scheduled to close in December 2007, March 2008, June 2008and September 2008.

 

Includedin the Consolidated Balance Sheet as of September 30, 2007 under thecaption “Residential Lots Under Development” are capitalized costs, whichinclude the costs of acquiring land, development and construction costs,interest, property taxes and general and administrative expenses related to thedevelopment of land and home construction. Costs that relate to a specific lot or home are assigned to that lot orhome while common costs related to multiple lots or homes will be allocated toeach in proportion to their anticipated sales value.

 

Kaupulehu2007 capitalizes interest costs during development and construction and intendsto include these costs in cost of sales when homes are sold.  Capitalized interest costs totaled $142,000for the year ended September 30, 2007.

 

Residentiallots under development, investment in residential parcel and deposits onresidential parcels are reported at the lower of the asset carrying value orfair value.  The recorded balances areevaluated for impairment whenever events or changes in circumstances indicatethat the balance may not be fully recoverable.

 

Asof the date of this filing, Kaupulehu 2007 is negotiating agreements with aproject management company affiliated with Mr. Johnston and an unrelatedbuilding contractor for home building services for Kaupulehu 2007’s lots.  It is anticipated that a significantprovision of such agreements will be that each such service provider willreceive 20% of the profit on the sale of each lot on which a house isconstructed.  In addition, Kaupulehu 2007intends to enter into contracts, one with the project management company affiliatedwith Mr. Johnston and one with the building contractor, wherein each willbe granted the right to purchase from WB one of the four remaining lotsKaupulehu 2007 has agreed to acquire.  Itis anticipated that any such agreement will specify the lot that will beacquired by such service provider and require such service provider toreimburse Kaupulehu 2007 for both the $200,000 deposit on such lot and interestcosts incurred by Kaupulehu 2007 related to the initial deposit on such lot.

 

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*Competition*

 

Barnwell’s real estatedevelopment segment is subject to intense competition in all phases of itsoperations including the acquisition of land, the building of residentialhomes, including the need for raw materials and skilled labor, and the searchfor potential purchasers of completed homes. The competition comes from numerous independent real estatedevelopers.  The principal factorsaffecting competition are the location of the project, reputation, design,quality and pricing.  Kaupulehu 2007 is anewcomer and a minor participant in the real estate development industry andcompetes with many other entities having far greater financial and otherresources.

 

For the past few years,Hawaii’s economy has experienced positive growth and the South Kohala/NorthKona area of the island of Hawaii, the area in which Kaupulehu 2007 will buildresidential homes, has experienced strong demand for residential realestate.  This trend continued throughfiscal 2007, but at a diminished rate, and, although we cannot be certain, itis not expected to decline significantly in the near term, although there canbe no assurance this trend will in fact continue.  The price and market for real estate in theSouth Kohala/North Kona area of the island of Hawaii has historically beencyclical and if the demand for real estate in the Lot 4A Increment I area ofKaupulehu were to decrease, Barnwell’s operating results could be negativelyaffected.  During periods when demand forreal estate is low, inventory may turn at slower rates than expected or may besold at prices lower than anticipated. This could potentially impair Barnwell’s liquidity and impede itsability to proceed with other planned projects or activities.

** **

**Contract Drilling Segment**

* *

*Overview*

 

Barnwell’s wholly-ownedsubsidiary, Water Resources International, Inc. (“Water Resources”),drills water, water monitoring and geothermal wells of varying depths inHawaii, installs and repairs water pumping systems, and is the state of Hawaii’sdistributor for Floway pumps and equipment.

 

*Operations*

 

Water Resources ownsand operates three Spencer-Harris portable rotary drill rigs capable ofdrilling up to approximately 6,000 feet, an IDECO H-35 rotary drill/workoverrig, a GEFCO 40-T portable rotary drill rig and pump installation and serviceequipment.  Additionally, Water Resourcesleases a three-quarter of an acre maintenance facility in Honolulu, Hawaii anda one acre maintenance and storage facility with 2,800 square feet of interiorspace in Kawaihae, Hawaii, and maintains an inventory of drilling materials andpump supplies.  As of September 30,2007, Water Resources employed 24 drilling, pump and administrative employees,none of whom are union members.

 

The demand for WaterResources’ services is primarily dependent upon land development activities inHawaii.  Water Resources markets itsservices to land developers and government agencies, and identifies potentialcontracts through public notices, its officers’ involvement in communityactivities and referrals.  Contracts areusually fixed price per lineal foot drilled or day rate contracts and arenegotiated with private entities or obtained through competitive bidding withprivate entities or local, state and federal agencies.  Contract revenues are not dependent upon thediscovery of water, geothermal production zones or other similar targets, andcontracts are not subject to renegotiation of profits or termination at theelection of the governmental entities involved. Contracts provide for arbitration in the event of disputes.

 

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Water Resourcesderived 47%, 37%, and 63% of its contract drilling revenues in fiscal 2007,2006, and 2005, respectively, pursuant to federal, State of Hawaii and countycontracts.  At September 30, 2007,Barnwell had accounts receivable from the State of Hawaii and county entitiestotaling approximately $696,000. Barnwell has lien rights on wells drilled and pumps installed forfederal, State of Hawaii, county and private entities.

 

Water Resourcescurrently operates in Hawaii and is not subject to seasonal fluctuations.

 

*Activity*

 

In fiscal 2007, Water Resources started six welldrilling contracts and 10 pump installation contracts and completed four welldrilling contracts and 11 pump installation contracts.  One of the completed well drilling contractsand one of the completed pump installation contracts were started in the prioryear.  Fifty-three percent (53%) of welldrilling and pump installation jobs, representing 47% of total contractdrilling revenues in fiscal 2007, have been pursuant to government contracts.

 

At September 30, 2007, Water Resources hada backlog of seven well drilling contracts and nine pump installation andrepair contracts, of which five, four well drilling and one pump installationand repair, were in progress as of September 30, 2007.

 

The dollar amount ofWater Resources’ backlog of firm well drilling and pump installation and repaircontracts at November 30, 2007 and 2006 was as follows:

 
| ** **                   | ** ** | **2007**      | ** **    | **2006**  | ** ** |
|------------------------------|------------|---------------|---------------|-----------|------------|
| Well drilling                | ** ** | **$**         | **7,860,000** |      | $          | 3,760,000 |   |
| Pump installation and repair | ** ** | **1,480,000** |          | 1,140,000 |       |
|                         | ** ** | **$**         | **9,340,000** |      | $          | 4,900,000 |   |

 

Approximately two-thirds of the contracts inbacklog at November 30, 2007 are expected to be completed within fiscalyear 2008 with the remainder completed in fiscal year 2009.

 

*Competition*

 

Water Resources utilizesrotary drill rigs and competes with other drilling contractors in Hawaii whichuse drill rigs similar to Water Resources’ drilling rigs or drilling rigs thatdrill as quickly as Water Resources’ equipment but require less labor.  These competitors are also capable ofinstalling and repairing vertical turbine and submersible water pumping systemsin Hawaii.  These contractors competeactively with Water Resources for government and private contracts.  Pricing is Water Resources’ major method ofcompetition; reliability of service is also a significant factor.

 

Competitive pressures areexpected to remain high, thus there is no assurance that the quantity ofavailable or awarded jobs which occurred in fiscal 2007 will continue.

 

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**Summary Financial Information Forall Industry Segments**

 

Revenues of each industrysegment for the fiscal years ended September 30, 2007, 2006, and 2005 aresummarized as follows (all revenues were from unaffiliated customers with nointersegment sales or transfers):

 
| ** **                | ** ** | **2007**       | ** **     | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------|------------|----------------|----------------|------------|------------|------------|------------|
| Oil and natural gas       | ** ** | **$**          | **34,599,000** | ** ** | **73**     | **%**      | $          | 37,904,000 |   | 66 | % | $ | 32,724,000 |   | 74 | % |
| Contract drilling         | ** ** | **5,993,000**  | ** **     | **13**     | **%**      | 5,866,000  |       | 10 | % | 7,644,000 |   | 17 | % |
| Land investment           | ** ** | **5,662,000**  | ** **     | **12**     | **%**      | 12,339,000 |       | 21 | % | 3,047,000 |   | 7 | % |
| Other                     | ** ** | **867,000**    | ** **     | **2**      | **%**      | 765,000    |       | 1 | % | 652,000 |   | 2 | % |
|                      |       |           |           |       |       |       |       |   |   |   |   |   |   |
| Revenues from segments    | ** ** | **47,121,000** | ** **     | **100**    | **%**      | 56,874,000 |       | 98 | % | 44,067,000 |   | 100 | % |
| Interest income           | ** ** | **315,000**    | ** **     | **0**      | **%**      | 386,000    |       | 1 | % | 143,000 |   | 0 | % |
| Gain on sale of drill rig | ** ** | **—**     | ** **     | **0**      | **%**      | 700,000    |       | 1 | % | — |   | 0 | % |
|                      |       |           |           |       |       |       |       |   |   |   |   |   |   |
| Total revenues            | ** ** | **$**          | **47,436,000** | ** ** | **100**    | **%**      | $          | 57,960,000 |   | 100 | % | $ | 44,210,000 |   | 100 | % |

 

For further discussionsee Note 12 (SEGMENT AND GEOGRAPHIC INFORMATION) and Note 17(CONCENTRATIONS OF CREDIT RISK) of “Notes to Consolidated Financial Statements”in Item 8.

** **

**Employees**

 

As of December 6, 2007, Barnwell employed68 employees, 65 of which are on a full-time basis.  Thirty-three are employed in contract drillingactivities, 20 are employed in oil and natural gas activities, and 15 aremembers of the corporate and administrative staff.

** **

**Financial Information aboutgeographic areas**

 

Revenues and long-livedassets by geographic area for the three years ended and as of September 30,2007, 2006 and 2005 are set forth in Note 12 (SEGMENT AND GEOGRAPHICINFORMATION) of “Notes to Consolidated Financial Statements” in Item 8.

** **

**Available Information**

 

We are required to fileannual, quarterly and current reports and other information with the Securitiesand Exchange Commission.  These filingsare not deemed to be incorporated by reference in this report.  You may read and copy any documents filed byus at the Public Reference Section of the SEC, 100 F Street, N.E.,Washington, D.C. 20549.  You may obtaininformation on the operation of the Public Reference Room by calling theSEC at 1-800-SEC-0330.  Our filings withthe SEC are also available to the public through the SEC’s website athttp://www.sec.gov.  We also maintain an Internetsite at www.brninc.com.   We makeavailable on our Internet website free of charge our annual reports on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-K assoon as practicable after we electronically file such reports with the SEC.

 

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**ITEM 1A.        RISK FACTORS**

 

The business ofBarnwell and its subsidiaries face numerous risks, including those set forthbelow or those described elsewhere in this Form 10-K or in Barnwell’sother filings with the SEC.  The risksdescribed below are not the only risks that Barnwell faces, nor are theynecessarily listed in order of significance.

 

*Risks Related to Oil and Gas Segment*

 

**The oil and natural gas industryis highly competitive.**

 

We compete forcapital, acquisitions of reserves, undeveloped lands, skilled personnel, accessto drilling rigs, service rigs and other equipment, access to processingfacilities, pipeline and refining capacity and in many other respects with asubstantial number of other organizations, many of which may have greatertechnical and financial resources than we do. Some of these organizations explore for, develop and produce oil andnatural gas, carry on refining operations and market oil and other products ona worldwide basis.  As a result of thesecomplementary activities, some of our competitors may have competitiveresources that are greater and more diverse than ours.  Furthermore, many of our competitors may havea competitive advantage when responding to factors that affect demand for oiland natural gas production, such as changing prices and production levels, thecost and availability of alternative fuels and the application of governmentregulations.  If our competitors are ableto capitalize on these competitive resources, it could adversely affect ourrevenues.

 

**Our results of operations andfinancial condition are dependent on the prices received for our oil andnatural gas production.**

 

Oil and naturalgas prices are volatile and have fluctuated widely during recent years inresponse to many factors that are beyond our control.  These factors include, but are not limitedto, minor changes in supply and demand, market uncertainty, worldwide politicalinstability, foreign supply of oil and natural gas, the level of consumerproduct demand, government regulations and taxes, the price and availability ofalternative fuels and the overall economic environment.  Any decline in crude oil or natural gasprices may have a material adverse effect on our operations, financialcondition, borrowing ability, reserves and amount of capital that we are ableto allocate for the development of oil and natural gas reserves.

 

Energy prices arealso subject to other political and regulatory actions outside our control,which may include changes in the policies of the Organization of PetroleumExporting Countries or other developments involving or affecting oil-producingcountries, or actions or reactions of the government of the United States inanticipation of or in response to such developments.

 

**An increase in operating costs ora decline in our production level could have a material adverse effect on ourresults of operations and financial condition.**

 

Higher operatingcosts for our underlying properties will directly decrease the amount of cashflow received by us and, therefore, may reduce the price of our commonstock.  Electricity, supplies, and laborcosts are a few of the operating costs that are susceptible to materialfluctuation.

 

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The level ofproduction from our existing properties may decline at rates greater thananticipated due to unforeseen circumstances, many of which are beyond ourcontrol.  A significant decline in ourproduction could result in materially lower revenues and cash flow.

 

**Our operating results are affected by our ability tomarket the oil and natural gas that we produce.**

 

Our businessdepends in part upon the availability, proximity and capacity of gas gatheringsystems, pipelines and processing facilities. Canadian federal and provincial, as well as United States federal andstate, regulation of oil and gas production, processing and transportation, taxand energy policies, general economic conditions, and changes in supply anddemand could adversely affect our ability to produce and market oil and naturalgas.  If market factors change andinhibit the marketing of our production, overall production or realized pricesmay decline.

 

**We are not the operator and have limited influenceover the operations of the majority of our oil and natural gas properties.**

 

We hold minorityinterests in the majority of our oil and natural gas properties.  As a result, we cannot control the pace ofexploration or development or major decisions affecting the drilling of wellsor the plan for development and production at non-operated properties, althoughcontract provisions give Barnwell certain consent rights in some matters.  The operator’s influence over these matterscan affect the pace at which we incur capital expenditures.

 

**Our operations are subject to domestic and foreign governmentregulation and other risks, particularly in the United States and Canada.**

 

Barnwell’s oil andgas operations are affected by political developments and laws and regulations,particularly in the United States and Canada, such as restrictions onproduction, restrictions on imports and exports, the maintenance of specifiedreserves, tax increases and retroactive tax claims, expropriation of property,cancellation of contract rights, environmental protection controls,environmental compliance requirements and laws pertaining to workers’ healthand safety.  Further, the right toexplore for and develop oil and natural gas on lands in Alberta, Saskatchewanand British Columbia is controlled by the governments of each of thoseprovinces.  Changes in royalties andother terms of provincial leases, permits and reservations may have asubstantial effect on Barnwell’s operations. We derive a significant portion of our revenues from our operations inCanada.  In fiscal 2007, we derivedapproximately 73% of our operating revenues from operations in Canada.

 

Additionally, our ability to compete in the Canadian oil and naturalgas industry may be adversely affected by governmental regulations or otherpolicies that favor the awarding of contracts to contractors in which Canadiannationals have substantial ownership interests. Furthermore, we may face governmentally imposed restrictions or feesfrom time to time on the transfer of funds to the U.S.

 

Government regulations control and often limit access to potentialmarkets and impose extensive requirements concerning employee safety,environmental protection, pollution control and remediation of environmentalcontamination.  Environmentalregulations, in particular, prohibit access to some markets and make othersless economical, increase equipment and personnel costs and often imposeliability without regard to negligence or fault.  In addition, governmental regulations may discourageour customers’ activities, reducing demand for our products and services.

 

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****Compliance with foreign tax and other laws may adversely affect ouroperations.****

 

Tax and other laws and regulations are not always interpretedconsistently among local, regional and national authorities.  It is also possible that in the future wewill be subject to disputes concerning taxation and other matters in Canada,and these disputes could have a material adverse effect on our financialperformance.

 

****We are dependent upon future discoveries or acquisitions of oil and gasto maintain our reserves.****

 

We actively explore for oil and natural gas reserves.  However, future exploration and drillingresults are uncertain and may involve substantial costs.  Despite this uncertainty or potential cost,discoveries or acquisitions of additional reserves are needed to avoid amaterial decline in reserves and production. As a result, future oil and natural gas reserves may be dependent on oursuccess in exploiting existing properties and acquiring additionalreserves.  If our access to capitalbecomes limited or unavailable, our ability to make the necessary capitalinvestments to maintain or expand our oil and gas reserves will beimpaired.  Additionally, we cannot guaranteethat we will be successful in developing additional reserves or acquiringadditional reserves on terms that meet our investment objectives.  Without these reserve additions, our reserveswill deplete and as a consequence, either production from, or the averagereserve life of, our properties will decline.

 

****Actual reserves will vary from reserve estimates.****

 

The value of our common stock depends upon, among other things, thelevel of reserves of oil and gas. Estimating reserves is inherently uncertain, and the figures herein areonly estimates.  Ultimately, actualreserves attributable to our properties will vary from estimates, and thosevariations may be material.  The estimationof reserves involves a number of factors and assumptions, including, amongothers:

 

·                  historical production fromour wells compared with production rates from similar producing wells in thearea;

·                  future commodity prices, production anddevelopment costs, royalties and capital expenditures;

·                  initial production rates;

·                  production decline rates;

·                  ultimate recovery of reserves;

·                  success of future development activities;

·                  marketability of production;

·                  effects of government regulation; and

·                  other government levies that may be imposedover the producing life of reserves.

 

Reserve estimates are based on the relevant factors, assumptions andprices as of the date on which the evaluations are prepared.  Many of these factors are subject to changeand are beyond our control.  If thesefactors, assumptions and prices prove to be inaccurate, actual results may varymaterially from reserve estimates.

 

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****Delays in business operations could adversely affect our distributions.****

 

In addition to the usual delays in payment by purchasers of oil andnatural gas to the operators of our properties, and the delays of thoseoperators in remitting payment to us, payments between any of these parties mayalso be delayed by:

 

·                  restrictions imposed by lenders;

·                  accounting delays;

·                  delays in the sale or delivery of products;

·                  delays in the connection of wells to agathering system;

·                  blowouts or other accidents;

·                  adjustments for prior periods;

·                  recovery by the operator of expenses incurredin the operation of the properties; or

·                  the establishment by the operator of reservesfor these expenses.

 

Any of these delays could expose us to additional third party creditrisks.

 

****The industry in which we operate exposes us to potential liabilitiesthat may not be covered by insurance.****

 

Our operations are subject to all of the risks associated with theoperation and development of oil and natural gas properties, including thedrilling of oil and natural gas wells, and the production and transportation ofoil and natural gas.  These risks includeencountering unexpected formations or pressures, premature declines ofreservoirs, blow-outs, equipment failures and other accidents, cratering, sourgas releases, uncontrollable flows of oil, natural gas or well fluids, adverseweather conditions, pollution, other environmental risks, fires andspills.  A number of these risks couldresult in personal injury, loss of life, or environmental and other damage toour property or the property of others.

 

While we maintain reserves for anticipated liabilities and carry variouslevels of insurance, we could be affected by civil, criminal, regulatory oradministrative actions, claims or proceedings. We cannot fully protect against all of the risks listed above, nor areall of these risks insurable.  There isno assurance that any applicable insurance or indemnification agreements willadequately protect us against liability for the risks listed above.  We could face substantial losses, if an eventoccurs for which we are not fully insured or are not indemnified against, or acustomer or insurer fails to meet its indemnification or insuranceobligations.  In addition, there can beno assurance that insurance will continue to be available to cover any or allof these risks, or, even if available, that insurance premiums or other costswill not rise significantly in the future, so as to make the cost of suchinsurance prohibitive.

 

****We may incur material costs to comply with or as a result of health,safety, and environmental laws and regulations.****

 

The oil and natural gas industry is subject to extensive environmentalregulation pursuant to local, provincial and federal legislation.  A violation of that legislation may result inthe imposition of fines or the issuance of “clean up” orders.  Legislation regulating the oil and naturalgas industry may be changed to impose higher standards and potentially morecostly obligations.  For example, the1997 Kyoto Protocol to the United Nation’s Framework Convention on ClimateChange, known as the Kyoto 

 

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Protocol,was ratified by the Canadian government in December 2002 and will require,among other things, significant reductions in greenhouse gases.  The impact of the Kyoto Protocol on us isuncertain and may result in significant additional costs for our futureoperations.  Although we record aprovision in our financial statements relating to our estimated futureenvironmental and reclamation obligations, we cannot guarantee that we will beable to satisfy our actual future environmental and reclamation obligations.

 

We are not fully insured against certain environmental risks, eitherbecause such insurance is not available or because of high premium costs.  In particular, insurance against risks fromenvironmental pollution occurring over time, as opposed to sudden andcatastrophic damages, is not available on economically reasonable terms.  Accordingly, any site reclamation orabandonment costs actually incurred in the ordinary course of business in aspecific period could negatively impact our cash flow.  Should we be unable to fully fund the cost ofremedying an environmental problem, we might be required to suspend operationsor enter into interim compliance measures pending completion of the requiredremedy.

 

****We may havedifficulty financing our planned capital expenditures, which could have anadverse affect on our business.****

 

We make and will continue to make substantial capital expenditures inour exploration and development projects. Without adequate capital resources, our drilling and other activitiesmay be limited and our business, financial condition and results of operationsmay suffer.  We may not be able to securenecessary financing on reasonable terms or at all and financing may not continueto be available to us under our existing financing arrangements.  If capital resources are unavailable, we maycurtail our drilling, development and other activities or be forced to sellsome of our assets under untimely or unfavorable terms.  Any such curtailment or sale could have a materialadverse effect on our business, financial condition and results of operation.

 

**Ourfuture level of indebtedness and the terms of our financing arrangements mayadversely affect operations and limit our growth.**

 

AtSeptember 30, 2007, we had long-term indebtedness, net of the $0.4 millioncurrent portion long-term debt, of approximately $22.1 million, including $14.5million in outstanding borrowings drawn under our revolving creditfacility.  However, we may need to incuradditional indebtedness in order to fund a portion of future capitalexpenditures.  See also our risk factorheaded “We may have difficulty financing our planned capital expenditures whichcould adversely affect our growth,” above.

 

The terms of our revolving credit facility impose restrictions on ourability and, in some cases, the ability of our subsidiaries to take a number ofactions that we may otherwise desire to take, including one or more of thefollowing:

 

·                  incurring additional debt, includingguarantees of indebtedness;

·                  making investments;

·                  creating liens on our assets; and

·                  selling assets.

 

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Our level of indebtednessand the covenants contained in our financing agreements, could have importantconsequences for our operations, including:

 

·                  a substantial portion of our cash flow fromoperations may be required to service our indebtedness, thereby reducing theavailability of cash flow for working capital, capital expenditures and othergeneral business activities;

·                  our debt level may limit our ability toobtain additional financing in the future, through equity offerings or debtfinancings, for working capital, capital expenditures, acquisitions and generalcorporate and other activities, or refinancing of indebtedness;

·                  we may be at a competitive disadvantage ascompared to similar companies that have less debt;

·                  additional financing in the future forworking capital, capital expenditures, acquisitions, general corporate or otherpurposes may have higher costs and more restrictive covenants;

·                  our revolving credit facility is subject tovariable interest rates which makes us vulnerable to interest rate increases;

·                  detracting from our ability to successfullywithstand a downturn in our business or the economy generally; and

·                  our debt level makes us more vulnerable togeneral economic downturns and adverse developments in our industry, especiallydeclines in natural gas and crude oil prices, and the economy in general.

 

We may incur additional debt, including significant securedindebtedness, or issue additional stock in order to make future acquisitions orto develop our properties.  A higherlevel of indebtedness increases the risk that we may default on ourobligations.  Our ability to meet ourdebt obligations and to reduce our level of indebtedness depends on our futureperformance.  General economicconditions, oil and natural gas prices and financial, business and otherfactors affect our operations and our future performance.  Many of these factors are beyond ourcontrol.  Factors that will affect ourability to raise cash through a refinancing of our debt include financialmarket conditions, the value of our assets and our performance at the time weneed capital.

 

In addition, our bank borrowing base is subject to periodicredetermination.  A lowering of ourborrowing base could require us to repay indebtedness in excess of theborrowing base, or we may need to further secure the lenders with additionalcollateral.

 

****Unforeseen titledefects may result in a loss of entitlement to production and reserves.****

 

Although we conduct title reviews in accordance with industry practiceprior to any purchase of resource assets or property, such reviews do not guaranteethat an unforeseen defect in the chain of title will not arise and defeat ourtitle to the purchased assets.  If such adefect were to occur, our entitlement to the production from such purchasedassets could be jeopardized.

 

****Changes in tax andother legislation may adversely affect stockholders.****

 

Income tax laws, other legislation or government incentive programsrelating to the oil and gas industry may in the future be changed orinterpreted in a manner that adversely affects us and our stockholders.  Tax authorities having jurisdiction over usmay disagree with the manner in which we calculate our income for tax purposesor could change their administrative practices to our detriment.

 

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*Risks Related to Land InvestmentSegment*

**** ****

****A downturn ineconomic conditions and demand for real estate could adversely affect ourbusiness.****

 

The real estate investment industry is cyclical in nature and isparticularly vulnerable to shifts in local, regional, and national economicconditions outside of our control such as interest rates, housing demand,population growth, employment levels and job growth and property taxes.  Further, a weakening of the economic driversin Hawaii, which include tourism, military spending, construction starts andemployment, or a decrease in market demand may adversely impact the level ofreal estate activity in Hawaii.  As aresult, revenues, operating results and cash inflows may fluctuate significantly.  In particular, the timing and amount of landinvestment segment percentage of sales proceeds are unpredictable, may besporadic, and are not under our control. Accordingly, if estimated cash inflows from land investment segmentpercentage of sales proceeds do not occur on a timely basis or are less thancurrent expectations, our revenues, operating results, cash inflows andfinancial condition could be materially impacted.

 

Considerable economic and political uncertainties currently exist thatcould have adverse effects on consumer buying habits, construction costs,availability of labor and materials and other factors affecting us and the realestate industry in general.  Significantexpenditures associated with investment in real estate, such as real estatetaxes, insurance, maintenance costs and debt payments, cannot generally bereduced even though changes in Hawaii’s or the nation’s economy may cause adecrease in revenues from our properties.

 

****Our real estatebusiness is primarily concentrated in the state of Hawaii.  As a result, our financial results aredependent on the economic growth and health of Hawaii, particularly the islandof Hawaii.****

 

Barnwell’s land investment business segment is affected by thecondition of Hawaii’s real estate market. The Hawaii real estate market is affected by Hawaii’s economy and Hawaii’stourism industry, as well as the United States’ economy in general.  Any future cash flows from Barnwell’s landdevelopment activities are subject to, among other factors, the level of realestate activity and prices, the demand for new housing and second homes on theisland of Hawaii, the rate of increase in the cost of building materials andlabor, the introduction of building code modifications, changes to zoning laws,and the level of confidence in Hawaii’s economy.  The future economic growth in certainportions of the island of Hawaii may be adversely affected if itsinfrastructure, such as roads, airports, medical facilities and schools, arenot improved to meet increased demand. There can be no assurance that these improvements will occur.

 

****The occurrence ofnatural disasters in Hawaii could adversely affect our business.****

 

The occurrence of natural disasters in Hawaii could have a materialadverse effect on our ability to develop and sell properties or realize incomefrom our projects.  The occurrence ofnatural disasters could also cause increases in property and flood insurancerates and deductibles, which could reduce demand for our properties.

 

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****Increases ininterest rates could reduce demand for our real estate.****

 

Continued increases in interest rates could reduce the demand fordevelopment, particularly land. Increased interest rates could also negatively impact pricing for ourproducts.  A reduction in demand orpricing would materially adversely affect our profitability.

 

****Our business issubject to extensive regulation which makes it difficult and expensive for usto conduct our operations.****

 

We are subject to a wide variety of federal, state and local laws andregulations relating to land use and development and to environmentalcompliance and permitting obligations, including those related to the use,storage, discharge, emission, and disposal of hazardous materials.  Any failure to comply with these laws couldresult in capital or operating expenditures or the imposition of severepenalties or restrictions on operations that could adversely affect present andfuture operations, or jeopardize our ability to sell the leasehold interestcurrently held.

 

****A portion offuture percentage of sales payments could be impaired if the developer of theproperty is unable to negotiate fee simple interests.****

 

In 2006 we sold our leasehold interest in the second of two incrementsof resort/residential zoned property to an unrelated developer.  As a part of the sale, we are entitled toreceive future payments based on a percentage of the sales prices ofresidential lots sold in this second increment. Receipt of these percentage of sales payments will be contingent upon theability of the developer of the leasehold interest in the resort/residentialzoned property to successfully negotiate fee simple prices within this secondincrement.  If the developer isunsuccessful in such negotiations, our ability to receive percentage of salespayments on the sales of those lots would be impaired.

 

****If we are unableto obtain required land use entitlements at reasonable costs, or at all, ouroperating results could be adversely affected.****

 

We hold the leasehold interest to approximately 1,000 acres of vacantland that is currently zoned conservation. Our success in selling this interest may be contingent upon obtainingthe necessary reclassification from the State of Hawaii Land Use Commission andCounty of Hawaii.  Obtaining the necessaryreclassification and ministerial approvals is often difficult, costly and maytake several years, or more, to complete. Delays or failures to obtain the necessary reclassification approvalsmay adversely affect our financial results.

 

****Environmental andother regulations may have an adverse effect on our business.****

 

Our properties are subject to federal, state and local environmentalregulations and restrictions that may impose significant limitations.  In most cases, approval to develop requiresmultiple permits which involve a long, uncertain and costly regulatory process.

 

**General economic conditions in the lodging industry****could adversely affect ouroverall financial results.**

 

Weown a 1.5% passive minority interest in Hualalai Resort, which includes theFour Seasons Resort Hualalai at Historic Ka’upulehu, two golf courses and aclubhouse, and Kona Village Resort, an 

 

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80-acreoceanfront hotel property.  Soft economicconditions and reduced travel to North Kona, Hawaii could adversely affect ourresults from these properties and, therefore, our overall financialresults.  The aforementioned propertiesare also subject to risks that generally relate to investments in commercialreal estate, including governmental regulations; real estate, insurance,zoning, tax and eminent domain laws; the ongoing need for capital improvementsto maintain or upgrade properties; fluctuations in real estate values; and therelative illiquidity of real estate compared to other investments.

 

****The value of thelot acquisition rights we recently purchased could be impaired if the developerof the property is unable to obtain required land use entitlements orsuccessfully negotiate development terms and agreements.****

 

We recently purchasedthe acquisition rights to 14 lots in agricultural-zoned leasehold lands in theupland area of Kaupulehu (“Mauka Lands”) situated between the Queen KaahumanuHighway and the Mamalahoa Highway at Kaupulehu, North Kona, Island and State ofHawaii.  The lot acquisition rights giveus the right to purchase residential lots which may be developed on the MaukaLands.  The ability to purchaseresidential lots and the value of such lots in the future is contingent uponthe developer of the property obtaining the necessary land usereclassification, zoning and development approvals from regulatoryentities.  Obtaining the necessaryreclassification and ministerial approvals is often difficult, costly and maytake several years, or more, to complete. Delays or failures to obtain the necessary reclassification and rezoningapprovals may adversely affect our financial results.  Our ability to purchase lots and the value ofsuch lots is also contingent upon the ability of the developer of the propertyto successfully negotiate development terms and agreements within the MaukaLands.  If the developer is unsuccessfulin such negotiations, our ability to purchase residential lots in the MaukaLands would be impaired.

 

*Risks Related to Real EstateDevelopment Segment*

 

****Significantcompetition in the real estate industry could have an adverse effect on ourbusiness.****

 

We face competition from other developers on the island of Hawaii, andfrom other luxury residential properties in Hawaii and the mainland UnitedStates.  In many cases, our competitorshave greater financial and other resources than us.  If we are unable to compete with these largercompetitors, our financial results could be adversely affected.

 

****We have limitedexperience in the homebuilding industry.****

 

Homebuilding is a newbusiness segment for us and we are relying to a material extent on our businesspartners to help us execute our business plan.

 

****We will needadditional financing to fund our property acquisition and homebuildingactivities, and if we are unable to obtain sufficient financing or suchfinancing is obtained on adverse terms, we may not be able to operate ourbusiness as planned, which could adversely affect our results of operations andfuture growth.****

 

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Barnwell,through its 80%-owned real estate joint venture (“Kaupulehu 2007”), madenonrefundable initial deposits of $200,000 each to secure the right to purchaseseven parcels in the  Lot 4AIncrement I area of Kaupulehu, North Kona, Hawaii from WB KD Acquisition,LLC, an unrelated entity, during the second quarter of fiscal 2007.  Each lot under contract has a purchase priceof $2,378,000 and the deposit for each lot will be applied to the purchase priceof each lot.  The purchase of each of theremaining four lots is scheduled to close in December 2007, March 2008,June 2008 and September 2008. Additionally, if any of the parcels are not purchased, the depositrelated to any such parcels will be forfeited and Barnwell will incur anexpense as a result of the write-off of its 80% share of any forfeiteddeposits.

 

Thereal estate development industry is capital intensive and homebuilding requiressignificant up-front expenditures to acquire land and begin development.  Accordingly, we will incur substantialindebtedness to finance our homebuilding activities.  Although we believe that internally generatedfunds and borrowing capacity under our credit facilities will be sufficient tofund our development and construction activities, the amounts available fromsuch sources may not be adequate to meet our needs.  Additionally, we will need to establish newfunding sources to finance our land acquisition capital expenditures.  If such sources are not sufficient, we wouldseek additional capital in the form of debt or equity financing from a varietyof potential sources, including additional bank financing, joint venturepartner financing, and/or securities offerings. The amount and types of indebtedness which we may incur are limited bythe terms of the agreements governing our existing debt.  In addition, the availability of borrowedfunds to be utilized for land acquisition, development and construction, may begreatly reduced, and the lending community may require increased amounts ofequity to be invested in a project by borrowers in connection with both newloans and the extension of existing loans. The failure to obtain sufficient capital to fund our planned capital andother expenditures could have a material adverse effect on our business.  Further, if we are unable to obtainsufficient capital and thus are unable to purchase the remaining parcels whendue, we may be required to forfeit the remaining balance of the initialdeposits and write off the carrying cost of such deposits.

 

****Because of thecyclical nature of the homebuilding industry, changes in general economic, realestate construction or other business conditions could adversely affect ourbusiness or our financial results.****

 

Theresidential homebuilding industry historically has been cyclical and issensitive to changes in economic conditions such as employment levels, consumerconfidence, consumer income, availability of financing and interest ratelevels.  Adverse changes in any of theseconditions generally, or in the market in which we operate, could decreasedemand and pricing for new homes in these areas or result in customercancellations of pending contracts, which could adversely affect the number ofhome deliveries we make or reduce the prices we can charge for homes, either ofwhich could result in a reduction in our revenues or deterioration of ourmargins.

 

****Our operating results from homebuilding are expectedto be variable.****

 

Dueto the cyclical nature of the real estate development industry, we expect toexperience variability in our future operating results on a quarterly and anannual basis.  Factors expected tocontribute to this variability include, among other things:

 

·                  the timing of land acquisitions and zoningand other regulatory approvals;

·                  the timing of home closings, land sales andlevel of home sales;

·                  our ability to continue to acquire additionalland or options thereon on acceptable terms;

 

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·                  the condition of the real estate market andthe general economy; and

·                  delays in construction due to naturaldisasters, adverse weather, reduced contractor availability and strikes.

 

Forexample, the timing of land acquisitions, zoning and other regulatory approvalsimpacts our ability to pursue the development of new housing projects inaccordance with our business plan.  Ifthe timing of land acquisitions or zoning or regulatory approvals is delayed,we will be delayed in our ability to develop housing projects, which wouldlikely decrease our backlog. Furthermore, these delays could result in a decrease in our revenues andearnings for the periods in which the delays occur and possibly subsequentperiods until the planned housing projects can be completed.  A delay in a significant number of homeclosings or land sales due to natural disasters, adverse weather, contractoravailability or strikes would have a similar impact on revenues and earningsfor the period in which the delays occur. Further, revenues may increase in subsequent periods over what wouldnormally be expected as a result of increased home closings as the delaysdescribed above are resolved.

 

****Changes in the government regulations applicable tohomebuilders could restrict our business activities, increase our operatingexpenses and cause our revenues to decline.****

 

Regulatoryrequirements applicable to homebuilders could cause us to incur significantliabilities and operating expenses and could restrict our businessactivities.  We are subject to local,state and federal statutes and rules regulating, among other thingscertain developmental matters, building and site design, and matters concerningthe protection of worker health and safety, and the environment.  Our operating expenses may be increased bygovernmental regulations, such as building permit allocation ordinances, impactand other fees and taxes, which may be imposed to defray the cost of providingcertain governmental services and improvements. Other governmental regulations, such as building moratoriums and “nogrowth’’ or “slow growth’’ initiatives, which may be adopted in communitieswhich have developed rapidly, may cause delays in our home projects orotherwise restrict our business activities resulting in reductions in ourrevenues.  Any delay or refusal to grantus necessary licenses, permits or approvals from government agencies couldcause substantial increases to development costs or cause us to abandon theproject and to sell the affected land at a potential loss, which in turn couldharm our operating results.

 

****Our real estate development segment is dependent onthe continued availability and satisfactory performance of our buildingcontractors, which, if unavailable, could have a material adverse effect on ourbusiness.****

 

Wewill conduct our construction operations through unaffiliated buildingcontractors.  As a consequence, we dependon the continued availability of and satisfactory performance by thecontractors for the construction of our homes. There may not be sufficient availability of and satisfactory performanceby the contractors.  If the contractors’quality of work is not sufficient to assist us in home construction, ourability to construct homes on the schedule we have planned would beaffected.  This could result in anincrease in our costs to construct homes in a timely manner, which could resultin an increase in our overall costs and thus a decline in our margins and inour net income.  Further, non-timelycompletion of work could affect our ability to sell homes based upon our projectedtimeline thus possibly affecting our ability to obtain additional financing tocontinue our homebuilding efforts.

 

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****Labor and material shortages could delay or increasethe cost of home construction and reduce our sales and earnings.****

 

Thehomebuilding business has from time to time experienced building material andlabor shortages, as well as shortages of materials and volatility in the pricesof certain materials, including lumber, framing, drywall and cement, which aresignificant components of home construction costs.  These labor and material shortages can bemore severe during periods of strong demand for housing or during periods wherethe area in which we operate experiences natural disasters that have asignificant impact on existing residential and commercial structures.  Shortages and price increases could causedelays in and increase our costs of home construction, which in turn could harmour operating results.

 

****Our financial condition and results of operations maybe adversely affected by a decrease in the value of our residential lots underdevelopment inventory and residential parcel investment, as well as by theassociated carrying costs.****

 

Therisk of owning developed and undeveloped land can be substantial forhomebuilders. Homebuilding requires that we acquire land for replacement andexpansion of land inventory within our existing and new markets.  The risks inherent in purchasing anddeveloping land increase as consumer demand for housing decreases.  Thus, we may have bought and developed landwhich we cannot profitably sell or on which we cannot profitably build and sellhomes.  The market value of land,buildable lots and housing inventories can fluctuate significantly as a resultof changing economic market conditions. It is possible that the measures we employ to manage inventory riskswill not be successful and as a result our operations may suffer.  In addition, inventory carrying costs can besignificant and can result in losses in a poorly performing market.  In the event of significant changes ineconomic or market conditions, we may have to sell homes or land inventory atsignificantly lower margins or at a loss.

 

****Severe weather and other natural conditions ordisasters may disrupt or delay construction and may impair the value of ourreal estate property.****

 

Severeweather and other natural conditions or disasters, such as, but not limited to,earthquakes, landslides, hurricanes, tornadoes, volcanic activity, droughts,floods, and heavy or prolonged rain, can negatively affect our operations byrequiring us to delay or halt construction or to perform potentially costlyrepairs to our projects under construction and to unsold homes.  Further, these conditions can delay homeclosings, adversely affect the cost or availability of materials or labor, orimpair the value of the property on a temporary or permanent basis.

 

****The homebuilding industry is highly competitive and,with more limited resources than some of our competitors, we may not be able tocompete effectively.****

 

Thehomebuilding industry is highly competitive. Homebuilders compete for, among other things, desirable land, financing,raw materials, skilled labor and purchasers. We compete for residential sales on the basis of a number ofinterrelated factors, including location, reputation, amenities, design,quality and price, with numerous homebuilders, including some homebuilders withgreater financial resources and/or lower costs than us.  Increased competition could also reduce thenumber of homes we deliver, reducing our revenues, or cause us to acceptreduced margins to maintain sales volumes. A reduction in our revenue or margins due to competitive factors couldaffect our ability to service our debt, including the credit facilities.

 

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****Our debt could adversely affect our financialcondition.****

 

As of September 30, 2007, our consolidated debt was$22.5 million.  In the ordinarycourse of business, we may incur significant additional debt, to the extentpermitted by our revolving credit facility and our debt facilities.  The amount of our debt could have importantconsequences.  For example, it could:

 

·                  limit our ability to obtain future financingfor working capital, capital expenditures, acquisitions, debt servicerequirements or other requirements;

·                  require us to dedicate a substantial portionof our cash flow from operations to payment of our debt and reduce our abilityto use our cash flow for other purposes;

·                  limit our flexibility in planning for, orreacting to, the changes in our business;

·                  place us at a competitive disadvantagebecause we have more debt than some of our competitors; and

·                  make us more vulnerable in the event of adownturn in our business or in general economic conditions.

 

*Risks Related to ContractDrilling Segment*

 

****Demand for water well drilling and/or pump installation isvolatile.  A decrease in demand for ourservices would result in a decrease in our revenues.****

 

Demand for services is highly dependent upon land developmentactivities in the state of Hawaii.  Asalso noted above, the real estate investment industry is cyclical in nature andis particularly vulnerable to shifts in local, regional, and national economicconditions outside of our control such as interest rates, housing demand,population growth, employment levels and job growth and property taxes.  If we experience a decrease in water welldrilling and/or pump installation contracts, we may experience decreasedrevenues and operating results.

 

****A significantportion of our contract drilling business is dependent on municipalities and adecline in municipal spending could adversely impact our business.****

 

A significant portion of our contract drilling division revenues arederived from water and infrastructure contracts with governmental entities oragencies.  Reduced tax revenues incertain regions may limit spending and new development by local municipalitieswhich in turn will affect the demand for our services in these regions.  Material reductions in spending by asignificant number of municipalities or local governmental agencies could havea material adverse effect on our business, results of operations, liquidity andfinancial position.

 

****Our contractdrilling operations face significant competition from companies with greaterfinancial resources.****

 

We face competition for our services from a variety ofcompetitors.  Many of our competitorsutilize drilling rigs that drill as quickly as our equipment but require lesslabor.  Our strategy is to compete basedon pricing and to a lesser degree, quality of service.  If we are unable to compete effectively withour competitors, our financial results could be adversely affected.

 

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****The loss of ordamage to key vendor, customer or sub-contractor relationships would adverselyaffect our operations.****

 

Our business is dependent on our relationships with key vendors,customers and subcontractors.  The lossof or damage to any of our key relationships could negatively affect ourbusiness.

 

*Entity-Wide Risks*

 

****The price of ourcommon stock has been volatile and could continue to fluctuate substantially.****

 

The market price of our common stock has been volatile and couldfluctuate based on a variety of factors, including:

 

·                  fluctuations in commodity prices;

·                  variations in results of operations;

·                  announcements by us and our competitors;

·                  legislative or regulatory changes;

·                  general trends in the industry;

·                  general market conditions; and

·                  analysts’ estimates and other events in theoil and natural gas industry.

 

****Failure to retainkey personnel could hurt our operations.****

 

We require highly skilled and experienced personnel to operate ourbusiness.  In addition to competing inhighly competitive industries, we compete in a highly competitive labormarket.  Our business could be adverselyaffected by an inability to retain personnel or upward pressure on wages as aresult of the highly competitive labor market.

 

****A small number ofstockholders, including our executive officers, own a significant amount of ourcommon stock and have influence over our business regardless of the oppositionof other stockholders.****

 

As of September 30, 2007, three of our investors and our executiveofficers held approximately 53% of our common stock.  The interests of these stockholders may notalways coincide with the interests of other stockholders.  These stockholders, acting together, havesignificant influence over all matters submitted to our stockholders, includingthe election of our directors, and could accelerate, delay, deter or prevent achange of control of us.  Thesestockholders are able to exercise significant control over our business,policies and affairs.

 

****We may be requiredto comply with Section 404 of the Sarbanes-Oxley Act in 2008, which webelieve will result in additional expenses and may divert management’sattention.****

 

The Company may become an accelerated filer as defined in Rule 12b-2of the Exchange Act, which would require the Company to comply with Section 404of the Sarbanes-Oxley Act for fiscal 2008. In such event, management would be required to provide with the Company’sAnnual Report on Form 10-K for the year ending September 30, 2008,its assessment of the effectiveness of the Company’s internal control overfinancial reporting as of September 30, 2008 and our independent 

 

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registeredpublic accounting firm would be required to provide its attestation of theadequacy of the Company’s internal controls. If such compliance is required, the Company anticipates incurringadditional general and administrative expenses and anticipates that itscompliance efforts may divert management’s time and attention away from otheraspects of our business.

 

****Adverse changes inactuarial assumptions used to calculate retirement plan costs due to economicor other factors, or lower returns on plan assets could adversely affectBarnwell’s results and financial condition.****

 

Retirement plan cash funding obligations and plan expenses andobligations are subject to a high degree of uncertainty and could increase infuture years depending on numerous factors, including the performance of thefinancial markets, specifically the equity markets, and the levels of interestrates.

 

****We are involved injoint ventures and are subject to risks associated with joint venturepartnerships.****

 

We are involved in joint venture relationships and may initiate futurejoint venture projects.  Entering into ajoint venture involves certain risks which include:

 

·                  the inability to exercise voting control overthe joint venture;

·                  economic or business interests which are notaligned with our venture partner; and

·                  the inability for the venture partner tofulfill its commitments and obligations due to financial or other difficulties.

 

**ITEM 2.           PROPERTIES**

 

**Oil andGas and Real Estate Investment Properties.**

 

The location and character of Barnwell’s oil and natural gasproperties, and its land investment and real estate development properties, aredescribed above under Item 1, “Business.”

 

**CorporateOffices**

 

Barnwell owns, and uses as its corporate office,4,600 square feet on the 29th floor of an office building indowntown Honolulu located at 1100 Alakea Street, Suite 2900, Honolulu,Hawaii 96813.

 

**ITEM 3.           LEGAL PROCEEDINGS**

 

Barnwell is occasionally involved in routine litigation and is subjectto governmental and regulatory controls that are incidental to thebusiness.  Barnwell’s management believesthat routine claims and litigation involving Barnwell are not likely to have amaterial adverse effect on its financial position, results of operations orliquidity.

 

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| **ITEM 4.** | ** ** | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS** |
|-------------|------------|----------------------------------------------------------|

 

None.

 

**PART II**

** **
| **ITEM 5.** | ** ** | **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------|

**                                                                                               **

**Market Information**

 

In December 2004,Barnwell declared a two-for-one stock split in the form of a stockdividend.  The new shares weredistributed on January 28, 2005 to all stockholders of record as of January 11,2005.

 

In October 2005,Barnwell declared a three-for-one stock split in the form of a stock dividend.  The new shares were distributed on November 14,2005 to all stockholders of record as of October 28, 2005.  All information in this Form 10-K hasbeen adjusted to reflect the stock splits for all periods presented.

 

The principal market onwhich Barnwell’s common stock is being traded is the American Stock Exchange(AMEX) under the symbol “BRN.”  Thefollowing tables present the quarterly high and low sales prices, on theAmerican Stock Exchange, for Barnwell’s common stock during the periods indicated:

 
| **Quarter Ended**       | ** ** | **High** | ** ** | **Low** | ** ** | **Quarter Ended**       | ** ** | **High**               | ** ** | **Low** | ** ** |
|-------------------------|------------|----------|------------|---------|------------|-------------------------|------------|------------------------|------------|---------|------------|
| December 31, 2005  |       | $        | 28.25      |    | $          | 19.50                   |       | December 31, 2006 |       | $       | 24.00      |   | $ | 16.82 |   |
| March 31, 2006     |       | 25.68    |       | 20.71   |       | March 31, 2007     |       | 23.96                  |       | 19.26   |       |
| June 30, 2006      |       | 24.45    |       | 18.75   |       | June 30, 2007      |       | 22.43                  |       | 18.30   |       |
| September 30, 2006 |       | 24.30    |       | 18.45   |       | September 30, 2007 |       | 22.00                  |       | 14.37   |       |
|                         |            |          |            |         |            |                         |            |                        |            |         |            |  |  |  |  |

** **

**Holders**

 

Asof December 12, 2007, there were 8,196,460 shares of common stock, parvalue $0.50, outstanding.  There wereapproximately 1,500 holders of the common stock of the registrant as of December 12,2007.

 

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**Dividends**

 

In December 2007,Barnwell declared a cash dividend of $0.05 per share payable January 22,2008, to stockholders of record on January 7, 2008.

 

The table below setsforth the cash dividends paid per share of common stock for 2007 and 2006.

 
| **Record Date**        | ** ** | **Payable Date**        | ** ** | **Dividend Paid** | ** ** |
|------------------------|------------|-------------------------|------------|-------------------|------------|
| September 7, 2007 |       | September 21, 2007 |       | $                 | 0.05       |   |
| June 1, 2007      |       | June 15, 2007      |       | $                 | 0.05       |   |
| March 1, 2007     |       | March 15, 2007     |       | $                 | 0.05       |   |
| December 28, 2006 |       | January 15, 2007   |       | $                 | 0.10       |   |
| September 1, 2006 |       | September 15, 2006 |       | $                 | 0.05       |   |
| June 1, 2006      |       | June 15, 2006      |       | $                 | 0.05       |   |
| March 1, 2006     |       | March 15, 2006     |       | $                 | 0.05       |   |
| December 20, 2005 |       | January 4, 2006    |       | $                 | 0.025      |   |

** **

**Securities Authorized forIssuance Under Equity Compensation Plans**

 

See the informationincluded in Part III, Item 12, under the caption “Equity CompensationPlan Information.”

 

**Share Repurchase Program**

 

In December 2005,Barnwell’s Board of Directors authorized the purchase of up to 250,000 sharesof its common stock from time to time in the open market or in privatelynegotiated transactions, depending on market conditions.  On September 20, 2007,the Board of Directors authorized a stock repurchase program in the open marketof up to 150,000 shares of these 250,000 shares during the period commencing onSeptember 24, 2007 and ending on March 24, 2008.  During the period from September 24,2007 through September 30, 2007, Barnwell repurchased 10,000 shares for anaggregate purchase price of $155,000 or approximately $15.50 per share pursuantto the plan.  The remaining 100,000shares of the 250,000 shares of common stock originally authorized may bepurchased in the open market or in privately negotiated transactions.

 

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**Stock Performance Graph andCumulative Total Return**

 

The graph below compares the five-year cumulative total return,assuming the reinvestment of dividends, on Barnwell Common Stock with that ofthe AMEX Composite Index, the Dow Jones Exploration and Production Index andthe Dow Jones Real Estate Holding and Development Index.  This graph assumes $100 was invested on September 30,2002, in each of Barnwell Common Stock, the companies in the AMEX CompositeIndex, the companies in the Dow Jones Exploration and Production Index, and thecompanies in the Dow Jones Real Estate Holding and Development Index.

 

COMPARISON OF5-YEAR CUMULATIVE TOTAL RETURN *

AMONG BARNWELL INDUSTRIES, INC., THE AMEXCOMPOSITE INDEX,

THE DOW JONES EXPLORATION AND PRODUCTIONINDEX

AND THE DOW JONES REAL ESTATE HOLDING ANDDEVELOPMENT INDEX

 

*$100 INVESTED ON 9/30/02IN STOCK OR INDEX-INCLUDING REINVESTMENT OF DIVIDENDS

 

 

 

**Total Return to Stockholders**

**(Includes reinvestment of dividends)**

** **
| ** **                                                      | ** ** | ** **    | ** ** | **INDEXED RETURNS**                 | ** ** |
|-----------------------------------------------------------------|------------|---------------|------------|-------------------------------------|------------|
| ** **                                                      | ** ** | **Sept. 30,** | ** ** | **Years Ending September 30,** | ** ** |
| **Company / Index**                                             | ** ** | **2002**      | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Barnwell Industries, Inc.**                              | ** ** | **$**         | **100**    |                                | $          | 125 |   | $ | 238 |   | $ | 660 |   | $ | 608 |   | $ | 525 |   |
| **AMEX Composite**                                              | ** ** | **100**       |       | 120                                 |       | 154 |   | 210 |   | 231 |   | 291 |   |
| **Dow Jones Exploration & Production  Index**          | ** ** | **100**       |       | 116                                 |       | 186 |   | 340 |   | 324 |   | 429 |   |
| **Dow  Jones Real Estate Holding & Development Index** | ** ** | **100**       |       | 125                                 |       | 157 |   | 232 |   | 290 |   | 301 |   |
|                                                                 |            |               |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 6.****                                 ****SELECTEDFINANCIAL DATA**

 

The following financialdata as of and for the years ended is derived from the Consolidated FinancialStatements.  The data should be read inconjunction with the Consolidated Financial Statements and related Notes toConsolidated Financial Statements, and other financial information includedherein.  See “Financial Statements andSupplementary Data” in Item 8 and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in Item 7.

 

**FINANCIAL AND OPERATING HIGHLIGHTS**

**BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES**

 
| ** **                                 | ** ** | **Years ended September 30,** | ** **            |
|--------------------------------------------|------------|------------------------------------|-----------------------|
| ** **                                 | ** ** | **2007**                           | ** **            | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **FINANCIAL****:**                         |       |                               |                  |   |   |   |   |   |   |   |   |
| Revenues                                   | ** ** | **$**                              | **47,436,000**        |   | $ | 57,960,000 |   | $ | 44,210,000 |   | $ | 38,540,000 |   | $ | 24,160,000 |   |
|                                       |       |                               |                  |   |   |   |   |   |   |   |   |
| Net earnings                               | ** ** | **$**                              | **3,516,000**         |   | $ | 14,637,000 |   | $ | 6,027,000 |   | $ | 8,710,000 |   | $ | 2,320,000 |   |
|                                       |       |                               |                  |   |   |   |   |   |   |   |   |
| Net earnings per  share - diluted          | ** ** | **$**                              | **0.41**              |   | $ | 1.68 |   | $ | 0.70 |   | $ | 1.03 |   | $ | 0.28 |   |
|                                       |       |                               |                  |   |   |   |   |   |   |   |   |
| Total assets                               | ** ** | **$**                              | ** 124,565,000** |   | $ |  104,555,000 |   | $ |  84,977,000 |   | $ |  65,087,000 |   | $ | 52,337,000 |   |
|                                       |       |                               |                  |   |   |   |   |   |   |   |   |
| Long-term debt,  excluding current portion | ** ** | **$**                              | ** 22,104,000**  |   | $ |  11,735,000 |   | $ |  11,576,000 |   | $ |  10,165,000 |   | $ |  10,477,000 |   |
|                                       |       |                               |                  |   |   |   |   |   |   |   |   |
| Dividends  declared per share              | ** ** | **$**                              | ** 0.25**        |   | $ |  0.18 |   | $ |  0.10 |   | $ |  0.14 |   | $ | — |   |
|                                       |       |                               |                  |   |   |   |   |   |   |   |   |
| **OPERATING****:**                         |       |                               |                  |   |   |   |   |   |   |   |   |
| Production -                               |       |                               |                  |   |   |   |   |   |   |   |   |
| Oil and natural gas  liquids (barrels)     | ** ** | **260,000**                        |                  | 260,000 |   | 253,000 |   | 259,000 |   | 227,000 |   |
|                                       |       |                               |                  |   |   |   |   |   |   |   |   |
| Natural gas  (MCF)                         | ** ** | **3,615,000**                      |                  | 3,629,000 |   | 3,621,000 |   | 3,383,000 |   | 3,175,000 |   |
|                                       |       |                               |                  |   |   |   |   |   |   |   |   |
| Average price -                            | ** ** | ** **                         |                  |   |   |   |   |   |   |   |   |
| Oil and natural  gas liquids, per barrel   | ** ** | **$**                              | ** 48.37**       |   | $ |  49.48 |   | $ |  40.78 |   | $ |  29.57 |   | $ |  25.37 |   |
|                                       |       |                               |                  |   |   |   |   |   |   |   |   |
| Natural gas, per  MCF                      | ** ** | **$**                              | ** 5.88**        |   | $ |  6.67 |   | $ |  5.93 |   | $ |  4.60 |   | $ |  4.27 |   |

 
| ** **                                                                   | ** ** | **At September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **RESERVES****:**                                                            | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proved reserves:                                                             |       |                           |       |   |   |   |   |   |   |   |   |
| Oil and  liquids-barrels                                                     | ** ** | **1,387,000**                  |       | 1,303,000 |   | 1,306,000 |   | 1,304,000 |   | 1,401,000 |   |
|                                                                         |       |                           |       |   |   |   |   |   |   |   |   |
| Natural gas –  MCF*                                                     | ** ** | **24,018,000**                 |       | 24,826,000 |   | 25,234,000 |   | 26,825,000 |   | 27,639,000 |   |
|                                                                         |       |                           |       |   |   |   |   |   |   |   |   |
| Total natural  gas and natural gas equivalent of oil and liquids**– MCF | ** ** | **32,063,000**                 |       | 32,383,000 |   | 32,809,000 |   | 34,388,000 |   | 35,765,000 |   |

 

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  *MCFmeans 1,000 cubic feet

**Oiland liquids are converted to natural gas equivalents on the basis of one barrelequals 5.8 MCF.

 

Reservesare calculated by an independent engineering firm based on estimated pricesreceived by Barnwell at year end.

 

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**ITEM 7.****                                 ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

The following discussionis intended to assist in the understanding of the Consolidated Balance Sheetsof Barnwell Industries, Inc. and subsidiaries (collectively referred toherein as “Barnwell,” “we,” “our,” “us” or the “Company”) as of September 30,2007 and 2006, and the related Consolidated Statements of Earnings,Stockholders’ Equity and Comprehensive Income, and Cash Flows for each of theyears in the three-year period ended September 30, 2007.  This discussion should be read in conjunctionwith the consolidated financial statements and related Notes to ConsolidatedFinancial Statements included in this report.

 

**Use ofEstimates in the Preparation of Financial Statements**

** **

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management of Barnwell tomake estimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses and the disclosure of contingent assets andliabilities.  Actual results could differsignificantly from those estimates.

 

**CriticalAccounting Policies and Estimates**

** **

Management believes theaccounting policies that are most critical in assisting financial statementreaders in understanding and evaluating our results due to their subjectivejudgments are as follows:

 

*Oil and natural gas properties -full cost ceiling calculation and depletion*

* *

Policy description

 

We use the full cost method of accountingfor our oil and natural gas properties, under which we are required to conductquarterly calculations of a “ceiling,” or limitation on the carrying value ofoil and natural gas properties.  Theceiling limitation is the sum of 1) the discounted present value (at 10%),using prices as of the end of each reporting period on a constant basis, ofBarnwell’s estimated future net cash flows from estimated production of provedoil and natural gas reserves, less estimated future expenditures to be incurredin developing and producing the proved reserves but excluding future cashoutflows associated with settling asset retirement obligations accrued on thebalance sheet; plus 2) the cost of major development projects and unprovenproperties not subject to depletion, if any; plus 3) the lower of cost orestimated fair value of unproven properties included in costs subject todepletion; less 4) related income tax effects.  If net capitalized costs exceed this limit,the excess is expensed unless subsequent market price changes eliminate orreduce the indicated write-down in accordance with Securities and ExchangeCommission Staff Accounting Bulletin Topic 12D.

 

Judgments and Assumptions

 

The estimate of our oil and natural gasreserves is a major component of the ceiling calculation and represents thecomponent that requires the most subjective judgments.  Estimates of reserves are forecasts based onengineering data, historical data, projected future rates of production and thetiming

 

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of futureexpenditures.  The process of estimatingoil and natural gas reserves requires substantial judgment, resulting inimprecise determinations, particularly for new discoveries.  Our reserve estimates are prepared annuallyby independent petroleum engineers and quarterly by internal personnel.  The passage of time provides morequantitative and qualitative information regarding estimates of reserves, andrevisions are made to prior estimates to reflect updated information.  In the past three fiscal years, annualrevisions to our reserve volume estimates have averaged 1% of the previous year’sestimate.  However, there can be noassurance that more significant revisions will not be necessary in thefuture.  If future significant revisionsare necessary that reduce previously estimated reserve quantities, suchrevisions could result in a write-down of oil and natural gas properties.  If reported reserve volumes were revised downwardby 5% at the end of fiscal 2007, the ceiling limitation would have decreasedapproximately $3,915,000.  This decreasewould not have resulted in a write-down in fiscal 2007.

 

In addition to the impact of theestimates of proved reserves on the calculation of the ceiling, estimatedproved reserves are also a significant component of the quarterly calculationof depletion expense.  The lower theestimated reserves, the higher the depletion rate per unit of production.  Conversely, the higher the estimatedreserves, the lower the depletion rate per unit of production.  If reported reserve volumes were reviseddownward by 5% as of the beginning of fiscal 2007, depletion for fiscal 2007would have increased by approximately $588,000.

 

While the quantities of proved reservesrequire substantial judgment, the associated prices of oil, natural gas andnatural gas liquids reserves, and the applicable discount rate, that are usedto calculate the discounted present value of the reserves do not requirejudgment.  The ceiling calculationdictates that a 10% discount factor be used and that prices and costs in effectas of the last day of the period are held constant indefinitely which resultsin a value that is not necessarily indicative of the fair market value of thereserves.  Therefore, the future netrevenues associated with the estimated proved reserves are not based on ourassessment of future prices or costs. Rather, they are based on such prices and costs in effect as of the endof each period for which the ceiling calculation is performed.

 

Oil and natural gas prices havehistorically been volatile.  Therefore,oil and natural gas property write-downs that result from applying the fullcost ceiling limitation, and that are caused by fluctuations in prices asopposed to reductions to the underlying quantities of reserves, should not beviewed as absolute indicators of a reduction of the ultimate value of therelated reserves.

 

On October 25, 2007,the Alberta Government announced increases to the royalty rates on oil, naturalgas liquids and natural gas production beginning on January 1, 2009.  The new plan also intends to simplifyroyalties and eliminate “old” and “new” classifications of oil and natural gaswith current maximum royalty rates of 35% with new royalty rates up to50%.  The new proposed 50% royalty rateis reached for oil when oil is selling at or above $120.00 Canadian dollars perbarrel and for natural gas when natural gas is selling at or above $17.50 Canadiandollars per MCF.  Barnwell is awaitingclarification from the Alberta Government on the new program and is in theprocess of assessing its impact.  The newprogram may reduce Barnwell’s natural gas and oil reserve volumes, reported netproduction, and estimated future revenues and estimated future cash flows fromnatural gas and oil reserves.  The newprogram may also materially impact the economics of oil and natural gasexploration in the Alberta area.  However,the magnitude of the potential impact, which will depend on the final form oflegislation upon enactment, cannot be reasonably estimated at this time.

 

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*Income taxes*

* *

Policy Description

 

Deferred income taxes are determinedusing the asset and liability method. Deferred tax assets and liabilities are recognized for the estimatedfuture tax impacts of differences between the financial statement carryingamounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities aremeasured using enacted tax rates in effect for the year in which thosetemporary differences are expected to be recovered or settled.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.  A valuationallowance is provided when it is more likely than not that some portion or allof the deferred tax asset will not be realized.

 

Judgments and Assumptions

 

We make estimates and judgments indetermining our income tax expense for each reporting period.  Significant changes to these estimates couldresult in an increase or decrease in our tax provision in future periods.  We are also required to make judgments aboutthe recoverability of deferred tax assets and when it is more likely than notthat all or a portion of deferred tax assets will not be realized, a valuationallowance is provided.  Changes in theassumptions regarding the realization of deferred tax assets could result in anincrease or decrease in our income tax provision.  Furthermore, changes in our businessperformance could require a valuation allowance or a reversal in the valuationallowance in future periods.  The impactof any of these changes could be material. Historically, our current income tax estimates have not materiallydiffered from our income tax returns filed with taxing authorities.  However, there can be no assurance thatmaterial differences will not occur in the future.

 

Barnwell has established a valuationallowance primarily for the U.S. tax effect of deferred Canadian taxes, accruedexpenses and state of Hawaii net operating loss carryforwards which may not berealizable in future years as there can be no assurance of any specific levelof earnings or that the timing of U.S. taxable income will coincide with thepayment of Canadian taxes to enable Canadian taxes to be a fully beneficialdeduction for U.S. tax purposes.

 

Canadian deferred tax assets related toexpenses accrued for book purposes but not for tax purposes are estimated to berealized through future Canadian income tax deductions against future Canadianoil and natural gas earnings.  U.S.deferred tax assets related to expenses accrued for book purposes but not fortax purposes and the excess of the cost basis of investment in land for taxpurposes over the cost basis of investment in land for book purposes areestimated to be realized from deductions against future U.S. earnings fromsales of interests in leasehold land and land development rights.  Foreign tax credit carryforwards are estimatedto be utilized when U.S. federal income taxes otherwise due on Canadian sourceincome in a given year exceed the foreign tax credit generated in thatyear.  The foreign tax creditcarryforwards expire in fiscal 2013.  Theamount of deferred income tax assets considered realizable may be reduced ifestimates of future taxable income are reduced.

 

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*Asset Retirement Obligation*

* *

Policy Description

 

Barnwell accounts for asset retirementobligations in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 143, “Accounting for Asset Retirement Obligations,” and FinancialAccounting Standards Board (“FASB”) Interpretation No. 47, “Accounting forConditional Asset Retirement Obligations - an interpretation of FASB Statement No. 143,”which requires that the fair value of a liability for an asset retirementobligation be recognized in the period in which it is incurred if a reasonableestimate of fair value can be made. Barnwell’s estimated site restoration and abandonment costs of its oiland natural gas properties are capitalized as part of the carrying amount ofoil and natural gas properties and depleted over the life of the relatedreserves.  The liability is accreted atthe end of each period through charges to oil and natural gas operatingexpense.  If an obligation is settled forother than the carrying amount of the liability, Barnwell will recognize a gainor loss on settlement.

 

Judgments and Assumptions

 

The asset retirement obligation isrecorded at fair value in the period in which it is incurred along with acorresponding increase in the carrying amount of the related asset.  Barnwell has estimated fair value bydiscounting the estimated future cash outflows required to settle abandonmentand restoration liabilities.  The presentvalue calculation includes numerous estimates, assumptions and judgmentsregarding the existence of liabilities, the amount and timing of cash outflowsrequired to settle the liability, what constitutes adequate restoration,inflation factors, credit adjusted discount rates, and consideration of changesin legal, regulatory, environmental and political environments.  Abandonment and restoration cost estimatesare determined in conjunction with Barnwell’s reserve engineers based onhistorical information regarding costs incurred to abandon and restore similarwell sites, information regarding current market conditions and costs, andknowledge of subject well sites and properties. The process of estimating the asset retirement obligation requiressubstantial judgment and use of estimates, resulting in imprecisedeterminations.  Following theimplementation of SFAS No. 143, actual asset retirement obligationsthrough the end of fiscal 2007 have not materially differed from ourestimates.  However, because of theinherent imprecision of estimates as described above, there can be no assurancethat material differences will not occur in the future.  A 20% increase in accretion and depletionrelated to the asset retirement obligation would have increased Barnwell’sfiscal 2007 expenses before taxes by approximately $133,000.

 

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**ContractualObligations**

 

The following tablepresents significant contractual obligations of Barnwell as of September 30,2007, estimating that Barnwell’s credit facility with Royal Bank of Canada willbe renewed on each annual renewal date, currently April 30:

 
| ** **                  | ** ** | **Payments Due by Fiscal Year** | ** **       |
|-----------------------------|------------|---------------------------------|------------------|
| **Contractual Obligations** | ** ** | **Total**                       | ** **       | **2008** | ** ** | **2009-2010** | ** ** | **2011-2012** | ** ** | **After 2012** | ** ** |
| Long-term debt (1) (2) |       | $                               |  22,458,000 |   | $ |  354,000 |   | $ |  7,372,000 |   | $ |  212,000 |   | $ |  14,520,000 |   |
| Operating leases (3)        |       | 4,450,000                       |             | 590,000 |   | 1,088,000 |   | 1,063,000 |   | 1,709,000 |   |
| Retirement plans (4)        |       | 1,735,000                       |             | 141,000 |   | 282,000 |   | 282,000 |   | 1,030,000 |   |
|                        |       |                            |             |   |   |   |   |   |   |   |   |
| Total                       |       | $                               |  28,643,000 |   | $ |  1,085,000 |   | $ |  8,742,000 |   | $ |  1,557,000 |   | $ |  17,259,000 |   |

 

There is no assurance that Royal Bank ofCanada will in fact extend the term of the facility on each renewal date orthat the facility will be renewed at its current amount.  The following table lists Barnwell’ssignificant contractual obligations as of September 30, 2007 assuming thatthe facility will not be renewed on the next renewal date, April 30, 2008(for which repayment, if any, has been deferred until no sooner than October 1,2008), and that Barnwell then elects to convert the revolving facility to termstatus:

 
| ** **                  | ** ** | **Payments Due by Fiscal Year** | ** **       |
|-----------------------------|------------|---------------------------------|------------------|
| **Contractual Obligations** | ** ** | **Total**                       | ** **       | **2008** | ** ** | **2009-2010** | ** ** | **2011-2012** | ** ** | **After 2012** | ** ** |
| Long-term debt (1)          |       | $                               |  22,458,000 |   | $ |  354,000 |   | $ |  21,892,000 |   | $ |  212,000 |   | $ | — |   |
| Operating leases (3)        |       | 4,450,000                       |             | 590,000 |   | 1,088,000 |   | 1,063,000 |   | 1,709,000 |   |
| Retirement plans (4)        |       | 1,735,000                       |             | 141,000 |   | 282,000 |   | 282,000 |   | 1,030,000 |   |
|                        |       |                            |             |   |   |   |   |   |   |   |   |
| Total                       |       | $                               |  28,643,000 |   | $ |  1,085,000 |   | $ |  23,262,000 |   | $ |  1,557,000 |   | $ |  2,739,000 |   |

 

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(1)Required principal payments only.

 

(2)Assumes Barnwell’s credit facility with Royal Bankof Canada will be renewed on each annual renewal date, currently April 30.

 

(3)Amounts include scheduled minimum rental paymentsof non-cancelable operating leases for office space and leasehold land.  The lease payments for land were subject torenegotiation as of January 1, 2006. Per the lease agreement, the lease payments will remain unchangedpending an appraisal, whereupon the lease rent will be adjusted to fair marketvalue.  Barnwell does not know the amountof the new lease payments which could be effective upon performance of theappraisal; they may remain unchanged or increase, and Barnwell currentlyexpects the adjustment, if any, to not be material.  The future rental payment disclosures aboveassume the minimum lease payments for land in effect at December 31, 2005remain unchanged through December 2025, the end of the lease term.

 

(4)Amounts represent our obligations under our definedbenefit pension plan, supplemental employee retirement plan, and postretirementmedical insurance benefits plan.

 

**Overview**

** **

Barnwell is engaged inthe following lines of business: 1) exploring for, developing, producingand selling oil and natural gas essentially all in Canada (oil and natural gassegment), 2) investment in leasehold land and other real estate interestsin Hawaii (land investment segment), 3) acquisition of property forinvestment and development of homes for sale (real estate development segment,established January 2007) and 4) drilling wells and installing andrepairing water pumping systems in Hawaii (contract drilling segment).

 

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*Oil and NaturalGas Segment*

* *

Barnwell sellssubstantially all of its oil and condensate production under short-termcontracts with marketers of oil.  Naturalgas sold by Barnwell is generally sold under both long-term and short-termcontracts with prices indexed to market prices. The price of natural gas, oil and natural gas liquids is freelynegotiated between the buyers and sellers. Market prices for petroleum products are dependent upon factors such as,but not limited to, changes in weather, storage levels, and output.  Petroleum and natural gas prices are verydifficult to predict and fluctuate significantly.  For example, natural gas prices for Barnwell,based on quarterly averages during the three years ended September 30,2007, have ranged from a low of $5.09 per thousand cubic feet to a high of$9.76 per thousand cubic feet, and tend to be higher in the winter than in thesummer due to increased demand.  Oil andnatural gas exploration, development and operating costs generally followtrends in product market prices, thus in times of higher product prices thecost of exploration, development and operation of oil and natural gasproperties will tend to escalate as well. Barnwell’s oil and natural gas operations make capital expenditures inthe exploration, development, and production of oil and natural gas.  Cash outlays for capital expenditures arelargely discretionary, however, a minimum level of capital expenditures isrequired to replace depleting reserves. Due to the nature of oil and natural gas exploration and development,significant uncertainty exists as to the ultimate success of any drillingeffort.

 

*Land InvestmentSegment*

* *

Barnwell owns a 77.6% controllinginterest in Kaupulehu Developments, a Hawaii general partnership which ownsinterests in leasehold land and development rights for property locatedapproximately six miles north of the Kona International Airport in the NorthKona District of the Island of Hawaii, within and adjacent to the HualalaiResort at Historic Ka’upulehu, between the Queen Kaahumanu Highway and the PacificOcean.  Mr. Terry Johnston, a director ofBarnwell and minority interest owner in certain of Barnwell’s businessventures, and his affiliated entities own a direct financial interest in 19.3%of Kaupulehu Developments.  Refer toNote 9 of “Notes to Consolidated Financial Statements” in Item 8 forfurther discussion on related party interests.

 

Kaupulehu Developments’ developmentrights are under option to a developer for $10,625,000 as of September 30,2007, comprised of four payments of $2,656,250 due on each December 31 ofyears 2007 to 2010.

 

In February 2004, KaupulehuDevelopments entered into a Purchase and Sale Agreement with an independentbuyer whereby Kaupulehu Developments transferred its leasehold interest inapproximately 870 acres zoned for resort/residential development, in twoincrements, to the buyer.  For the firstincrement (“Increment I”), Kaupulehu Developments received an $11,550,000 cashclosing payment in February 2004 and is also entitled to receive futurepayments from the buyer based on the following percentages of gross receiptsfrom the developer’s sales of single-family residential lots inIncrement I: 9% of the gross proceeds from single-family lot sales up toaggregate gross proceeds of $100,000,000; 10% of such aggregate gross proceedsgreater than $100,000,000 but less than $300,000,000; and 14% of such aggregategross proceeds in excess of $300,000,000.

 

In June 2006, Kaupulehu Developmentsentered into an agreement whereby Kaupulehu Developments sold its interest inthe second increment (“Increment II”), representing the remainder of theaforementioned approximately 870 acres. Pursuant to this agreement, Kaupulehu Developments received $10,000,000and is entitled to receive future payments from the buyer based on a percentageof the sales prices of the residential lots, ranging from 3.25% to 14%, to bedetermined in the future depending upon a number of variables, includingwhether the lots are sold prior to improvement. This agreement also provides the buyer with the exclusive right tonegotiate with Kaupulehu Developments 

 

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with respect toLot 4C (“Lot 4C”), which is comprised of approximately 1,000 acres ofvacant leasehold land zoned conservation located adjacent toIncrement II.  This right expires inJune 2009 or, if the buyer completes any and all environmental assessmentsand surveys reasonably required to support a petition to the Hawaii State LandUse Commission for reclassification of Lot 4C zoning, in June 2012.

 

The area in which Kaupulehu Developments’interests are located has experienced demand for premium residential realestate in recent years, however there is no assurance that this will continueor that any future development rights or percentage of sales payments will bereceived.

 

Kaupulehu Mauka Investors, LLC, a limitedliability company wholly-owned by Barnwell, holds lot acquisition rights as tolots within approximately 5,000 acres of agricultural-zoned leasehold land inthe upland area of Kaupulehu (“Mauka Lands”) situated between the QueenKaahumanu Highway and the Mamalahoa Highway at Kaupulehu, North Kona, Islandand State of Hawaii.  The lot acquisitionrights give Barnwell the right to acquire residential lots which may bedeveloped on the Mauka Lands, which are currently classified as agricultural bythe State of Hawaii.

 

*Real EstateDevelopment Segment*

* *

Barnwellowns an 80% controlling interest in Kaupulehu 2007, LLLP (“Kaupulehu 2007”), aHawaii limited liability limited partnership, which acquires house lots forinvestment and to construct turnkey single-family homes for future sale.  Mr. Terry Johnston, a director of Barnwelland minority interest owner in certain of Barnwell’s business ventures, and hisaffiliates hold certain interests in Kaupulehu 2007.  Refer to Note 9 of “Notes toConsolidated Financial Statements” in Item 8 for further discussion onrelated party interests.  Kaupulehu 2007is in the process of obtaining building permits for the two homes to beconstructed and anticipates construction on the first home to begin during thesecond quarter of fiscal 2008.

 

*ContractDrilling Segment*

* *

Barnwell drills water,water monitoring and geothermal wells and installs and repairs water pumpingsystems in Hawaii.  Contract drilling resultsare highly dependent upon the quantity, dollar value and timing of contractsawarded by governmental and private entities and can fluctuatesignificantly.  Water well drilling andpump installation activity remained at the same levels during fiscal 2007 ascompared to the prior year, and management expects a moderate increase in theseactivities in fiscal 2008, as compared to fiscal 2007.

 

**Resultsof Operations**

** **

*Summary*

* *

Barnwell generated net earnings of$3,516,000 in fiscal 2007, an $11,121,000 decrease from net earnings of$14,637,000 in fiscal 2006.  Net earningsfor fiscal 2007 decreased as net earnings of the prior fiscal year included thereceipt of a closing payment from the sale of Increment II of KaupulehuDevelopments’ leasehold land interests, which generated a $4,621,000 operatingprofit, after minority interest and before taxes, and proceeds from real estateconsulting services rendered.  There wasno closing payment or real estate consulting proceeds received in fiscal2007.  Also contributing to the decreasewas the recognition of $4,130,000 of deferred tax benefits due to a reductionin the valuation allowance for foreign tax credit carryforwards and $1,094,000of deferred tax benefits due to a reduction of Canadian income tax rates duringfiscal 2006.  There was no reduction inthe valuation allowance for foreign tax credit carryforwards in fiscal2007.  The decrease was furtherattributable to 

 

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lower prices received byBarnwell for natural gas and natural gas liquids in the current year, ascompared to the prior year.  The decreasein net earnings was partially offset by lower general and administrativeexpenses in the current fiscal year due primarily to reduced bonus expense anda decrease in costs associated with Sarbanes-Oxley compliance efforts.

 

The fiscal year average exchange rate ofthe Canadian dollar to the U.S. dollar increased 3% in fiscal 2007, as comparedto fiscal 2006, and the exchange rate of the Canadian dollar to the U.S. dollarincreased 12% at September 30, 2007, as compared to September 30,2006.  This increase in the value of theCanadian dollar in U.S. dollars increased Barnwell’s reported revenues andexpenses and assets and liabilities.

 

Barnwell generated net earnings of$14,637,000 in fiscal 2006, an $8,610,000 increase from net earnings of$6,027,000 in fiscal 2005.  The increasewas due in part to the receipt of a payment from the sale of Increment IIof Kaupulehu Developments’ leasehold land interests which generated anoperating profit, after minority interest and before taxes, of approximately$4,621,000, higher prices received by Barnwell for all petroleum products, thereceipt of percentage of sales payments from the sale of lots inIncrement I of the leasehold land interest previously held by KaupulehuDevelopments, and proceeds from real estate consulting services rendered.  The increase was also due in part to therecognition of $4,130,000 of deferred tax benefits due to a reduction in thevaluation allowance for foreign tax credit carryforwards and $1,094,000 ofdeferred tax benefits due to a reduction in Canadian income tax rates.  There were no Increment II receipts,percentage of sales payments, or real estate consulting proceeds received infiscal 2005, nor were there reductions in the valuation allowance for foreigntax credit carryforwards or Canadian tax rates in fiscal 2005.

 

*Oil and naturalgas revenues*

* *

Selected OperatingStatistics

 

The following tables set forth Barnwell’sannual net production and annual average price per unit of production forfiscal 2007 as compared to fiscal 2006, and fiscal 2006 as compared to fiscal2005.  Production amounts reported arenet of royalties and the Alberta Royalty Tax Credit, where applicable.  As discussed in further detail below, theAlberta Royalty Tax Credit was discontinued effective January 1, 2007.

 

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Fiscal 2007 - Fiscal 2006

 
| ** **          | ** ** | **Annual Net Production** | ** ** |
|---------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | ** **                          | ** ** | ** ** | ** ** | **Increase (Decrease)** | ** ** |
| ** **          | ** ** | **2007**                            | ** ** | **2006** | ** ** | **Units** | ** ** | **%** | ** ** |
| Natural gas  (MCF)* | ** ** | **3,615,000**                       |       | 3,629,000 |   | (14,000 | ) | 0 | % |
| Oil (Bbl)**         | ** ** | **146,000**                         |       | 145,000 |   | 1,000 |   | 1 | % |
| Liquids (Bbl)**     | ** ** | **114,000**                         |       | 115,000 |   | (1,000 | ) | (1 | )% |

 
| ** **          | ** ** | **Annual Average Price Per Unit** | ** ** |
|---------------------|------------|-------------------------------------------------------|------------|
| ** **          | ** ** | ** **                                            | ** ** | ** ** | ** ** | **Increase (Decrease)** | ** ** |
| ** **          | ** ** | **2007**                                              | ** ** | **2006** | ** ** | **$** | ** ** | **%** | ** ** |
| Natural gas  (MCF)* | ** ** | **$**                                                 | **5.88**   |   | $ | 6.67 |   | $ | (0.79 | ) | (12 | )% |
| Oil (Bbl)**         | ** ** | **$**                                                 | **56.96**  |   | $ | 56.85 |   | $ | 0.11 |   | 0 | % |
| Liquids (Bbl)**     | ** ** | **$**                                                 | **37.36**  |   | $ | 40.18 |   | $ | (2.82 | ) | (7 | )% |

 

Fiscal 2006 - Fiscal 2005

 
| ** **         | ** ** | **Annual Net Production** | ** ** |
|--------------------|------------|-------------------------------------|------------|
| ** **         | ** ** | ** **                          | ** ** | ** ** | ** ** | **Increase** | ** ** |
| ** **         | ** ** | **2006**                            | ** ** | **2005** | ** ** | **Units** | ** ** | **%** | ** ** |
| Natural gas (MCF)* |       | 3,629,000                           |       | 3,621,000 |   | 8,000 |   | 0 | % |
| Oil (Bbl)**        |       | 145,000                             |       | 139,000 |   | 6,000 |   | 4 | % |
| Liquids (Bbl)**    |       | 115,000                             |       | 114,000 |   | 1,000 |   | 1 | % |

 
| ** **          | ** ** | **Annual Average Price Per Unit** | ** ** |
|---------------------|------------|-------------------------------------------------------|------------|
| ** **          | ** ** | ** **                                            | ** ** | ** ** | ** ** | **Increase** | ** ** |
| ** **          | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
| Natural gas  (MCF)* |       | $                                                     | 6.67       |   | $ | 5.93 |   | $ | 0.74 |   | 12 | % |
| Oil (Bbl)**         |       | $                                                     | 56.85      |   | $ | 48.11 |   | $ | 8.74 |   | 18 | % |
| Liquids (Bbl)**     |       | $                                                     | 40.18      |   | $ | 31.84 |   | $ | 8.34 |   | 26 | % |

 

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*                       MCF = 1,000 cubic feet.  Natural gas price per unit is net of pipelinecharges.

**                Bbl = stock tank barrel equivalent to 42U.S. gallons

 

Oil and natural gas revenues decreased$3,305,000 (9%) from $37,904,000 in fiscal 2006 to $34,599,000 in fiscal 2007,due primarily to decreases in prices for natural gas and natural gasliquids.  Oil prices in fiscal 2007 wereessentially equivalent to oil prices in fiscal 2006.

 

Net natural gas production in fiscal 2007was essentially unchanged from that of fiscal 2006.  Gross natural gas production decreased 6% infiscal 2007, as compared fiscal 2006, due to natural declines in production fromolder properties and declines at certain newer properties due to variousoperational issues.  The impact of thedecreases in gross production was largely offset by lower royalties as apercentage of revenues, due in part to lower prices, which reduced the royaltyowners’ share of gas production.  AtDunvegan, Barnwell’s principal oil and gas property, gross natural gasproduction decreased 89,000 MCF due to natural declines from older wells,whereas net natural gas production at Dunvegan increased 72,000 MCF due to a decreasein royalties as a percentage of revenues, due in part to lower prices.  Gross natural gas production increased atBarnwell’s newer properties at Pouce Coupe South, Progress, Boundary Lake andBilawchuk, but the increase was more than offset by declines at Doris, Bonanza,and Malmo, which are also newer properties.

 

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The Alberta Royalty Tax Credit (“ARTC”)program was discontinued by the Alberta government, effective January 1,2007.  In fiscal years 2007, 2006, and2005, Barnwell received $111,000, $438,000 and $409,000, respectively, underthe ARTC program.  The ARTC payments wererecorded as a credit against oil and natural gas royalties and reported in oil andnatural gas revenues.

 

On October 25, 2007,the Alberta Government announced increases to the royalty rates on oil, naturalgas liquids and natural gas production beginning on January 1, 2009.  The new plan also intends to simplifyroyalties and eliminate “old” and “new” classifications of oil and natural gaswith current maximum royalty rates of 35% with new royalty rates up to50%.  The new proposed 50% royalty rateis reached for oil when oil is selling at or above $120.00 Canadian dollars perbarrel and for natural gas when natural gas is selling at or above $17.50Canadian dollars per MCF.  Barnwell isawaiting clarification from the Alberta Government on the new program and is inthe process of assessing its impact.  Thenew program may reduce Barnwell’s natural gas and oil reserve volumes, reportednet production, and estimated future revenues and estimated future cash flowsfrom natural gas and oil reserves.  Thenew program may also materially impact the economics of oil and natural gasexploration in the Alberta area. However, the magnitude of the potential impact, which will depend on thefinal form of legislation upon enactment, cannot be reasonably estimated atthis time.

 

Oil and natural gas revenues increased$5,180,000 (16%) from $32,724,000 in fiscal 2005 to $37,904,000 in fiscal 2006,due to increases in prices for all petroleum products.  Fiscal 2006 net natural gas productionincreased 99,000 MCF at Dunvegan, and net natural gas production also increasedat Doris, Boundary Lake, Wood River and Bonanza/Balsam.  The increase was more than offset by declinesat Progress, Leduc, Malmo and Pouce Coupe South.

 

Net oil production increased 6,000barrels (4%) in fiscal 2006 due to increased production from the Progress andWood River areas.  The increase waspartially offset by declines in oil production from the Bonanza/Balsam area andthe Red Earth area.

 

*Oil and naturalgas operating expenses*

* *

Operatingexpenses increased $1,986,000 (24%) to $10,203,000 in fiscal 2007, as comparedto $8,217,000 in fiscal 2006.  Operatingexpenses increased due to higher utility costs, industry-wide cost pressureswhich resulted in higher oilfield services costs, and higher than usualworkover activity which resulted in higher repairs and maintenance costs.  The increase was also due to a 3% increase inthe average exchange rate of the Canadian dollar to the U.S. dollar thatincreased oil and natural gas operating expenses $283,000 in fiscal 2007 ascompared to the prior year.

 

Operatingexpenses increased $1,318,000 (19%) to $8,217,000 in fiscal 2006, as comparedto $6,899,000 in fiscal 2005.  Theincrease was due to higher fuel, utilities and oilfield services costs at allproperties, and higher repairs and maintenance costs at older properties and toa 7% increase in the average exchange rate of the Canadian dollar to the U.S.dollar that increased oil and natural gas operating expenses $535,000 in fiscal2006 as compared to the prior year.

 

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*Sale ofdevelopment rights, Sale of interest in leasehold land, and Minority interestin earnings*

* *

The development rights held by Kaupulehu Developments are forresidentially-zoned leasehold land within and adjacent to the Hualalai GolfClub and are under option to Hualalai Investors, an entity in which Barnwell acquireda 1.5% passive minority interest through an 80%-owned joint venture in fiscal2007.  The development rights werepreviously under option to Kaupulehu Makai Venture, an unrelated entity.  Hualalai Investors acquired the developmentrights option from Kaupulehu Makai Venture in June 2006.  Netrevenues from the sale of development rights were $2,292,000, $2,702,000 and$2,497,000 in fiscal years 2007, 2006 and 2005, respectively.  In December 2004, Kaupulehu Developmentsreceived a payment of $2,656,250 representing the development rights option dueon December 31, 2004.  In November 2005,Kaupulehu Developments received a payment of $2,875,000 representing payment ofthe development rights option due on December 31, 2005 of $2,656,250 and a$218,750 portion of its development rights option due on December 31,2006.  InDecember 2006, Hualalai Investors paid Kaupulehu Developments $2,437,500upon exercising the balance of its development rights option due on December 31,2006.

 

Revenue from the development rights salesreceived in fiscal years 2007, 2006 and 2005 were reduced by $146,000, $173,000and $159,000, respectively, of fees related to the sales, resulting in netrevenues of $2,292,000, $2,702,000 and $2,497,000, respectively.  Operating profits, after minority interest,from the development rights sales were $1,791,000, $2,111,000 and $1,950,000 infiscal years 2007, 2006 and 2005, respectively. All capitalized costs associated with Kaupulehu Developments’development rights were expensed in previous years.  The development rights option revenues, netof related fees, are recorded in the Consolidated Statement of Earnings as “Saleof development rights, net.”  The totalamount of remaining future option receipts, if all options are fully exercised,was $10,625,000 as of September 30, 2007, comprised of four payments of$2,656,250 due on each December 31 of years 2007 to 2010.  In October 2007, Kaupulehu Developmentsreceived a $1,927,000 development rights option payment for a portion of theseventh payment due on December 31, 2007. This development rights option payment will be recognized in Barnwell’sfirst quarter of fiscal 2008.  If anyannual option payment is not made, the then remaining development right optionswill expire.  There is no assurance thatany portion of the remaining options will be exercised.

 

In February 2004, KaupulehuDevelopments entered into a Purchase and Sale Agreement with WB KD Acquisition,LLC (“WB”), an unrelated entity.  WB isaffiliated with RP-Hualalai Investors, LLC, a managing member of HualalaiInvestors, owners and current developers of Hualalai Resort, and WestbrookPartners, developers of Kuki’o Resort located adjacent to Hualalai Resort.  Under the terms of the Purchase and SaleAgreement, Kaupulehu Developments transferred its leasehold interest inapproximately 870 acres zoned for resort/residential development, in twoincrements (“Increment I” and “Increment II”), to WB.  Increment I is an area planned forapproximately 80 single-family lots and a beach club on the portion of theproperty bordering the Pacific Ocean. The purchasers of the 80 single-family lots will have the right to applyfor membership in the Kuki’o Resort Golf and Beach Club, which is locatedadjacent to and south of the Four Seasons Resort Hualalai at Historic Ka’upulehu.  Increment II is the remaining portion ofthe approximately 870-acre property and is zoned for single-family andmulti-family residential units and a golf course and clubhouse.

 

With respect toIncrement I, Kaupulehu Developments received an $11,550,000 payment in February 2004and is entitled to receive payments from WB based on the following percentagesof the gross receipts from WB’s sales of single-family residential lots inIncrement I: 9% of the gross proceeds from single-family lot sales up toaggregate gross proceeds of $100,000,000; 10% of such aggregate gross proceedsgreater than $100,000,000 but less than $300,000,000; and 14% of such aggregategross proceeds in excess of $300,000,000. WB sold a total of five single-family lots and 

 

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paid KaupulehuDevelopments $3,660,000 in percentage of sales payments during the year ended September 30,2006.  The revenue from the fiscal 2006percentage of sales payments was reduced by $220,000 of fees related to thesales, resulting in net revenues of $3,440,000 and a $2,688,000 operatingprofit, after minority interest.  WB soldan additional seven single-family lots during the year ended September 30,2007 and paid Kaupulehu Developments $3,585,000 in percentage of salespayments.  Three of the seven lots soldby WB in fiscal 2007 were purchased by Kaupulehu 2007, a Hawaiilimited liability limited partnership 80%-owned by Barnwell and 20%-owned byNearco, Inc. (“Nearco”), established during the second quarter of fiscal2007 for the purpose of acquiring house lots for investment and to constructturnkey single-family homes for future sale. Nearco is a company controlled by Mr. Terry Johnston, a director ofBarnwell and minority interest owner in certain of Barnwell’s businessventures.  The three lots purchased by Kaupulehu 2007were made under a lot purchase contract executed in January 2007.  WB is not affiliated with Barnwell, KaupulehuDevelopments or Kaupulehu 2007.  Accordingly,the percentage of sales payments received from WB as a result of Kaupulehu 2007’slot purchases have been recorded as revenues and have not been eliminated.  Percentage of sales payments received byKaupulehu Developments as a result of Kaupulehu 2007’s lot purchases in fiscal2007 totaled $642,000.  Recognizedrevenues, net of fees, and operating profit, net of minority interest andbefore taxes, resulting from Kaupulehu 2007’s lot purchases totaled $604,000and $472,000, respectively, in fiscal 2007.  Revenue from total fiscal 2007 percentage of salespayments was reduced by $215,000 of fees related to the sales, resulting in netrevenues of $3,370,000 and a $2,633,000 operating profit, after minorityinterest.  There were no lot sales, andtherefore, no percentage of sales payments received during fiscal 2005.  There is no assurance that any futurepercentage of sales payments will be received.

 

In June 2006,Kaupulehu Developments entered into an agreement with WB and WB KD AcquisitionII, LLC (“WBKD”) by which Kaupulehu Developments sold its interest inIncrement II to WBKD (“Increment II Agreement”).  There is no affiliation between KaupulehuDevelopments and WB or WBKD.  WB and WBKDare both affiliates of RP-Hualalai Investors, LLC, a managing member ofHualalai Investors, owners and current developers of Hualalai Resort, andWestbrook Partners, developers of Kuki’o Resort located adjacent to HualalaiResort.  Pursuant to theIncrement II Agreement, Kaupulehu Developments received a $10,000,000closing payment and is entitled to receive future payments from WBKD based on apercentage of the sales prices of the residential lots, ranging from 3.25% to14%, to be determined in the future depending upon a number of variables,including whether the lots are sold prior to improvement.  The revenue from the $10,000,000Increment II closing payment received in fiscal 2006 was reduced by$600,000 of fees related to the sale, $220,000 in other costs related to thesale, and approximately $2,983,000 of previously capitalized costs relating toIncrement II, resulting in net revenues of $6,197,000 and a $4,621,000operating profit, after minority interest. No Increment II payments were received in fiscal 2005 or fiscal2007.  There is no assurance that anyfuture payments will be received.

 

In fiscal 2005,Kaupulehu Developments received fees, before minority interest, totaling$550,000.  The Increment I andIncrement II revenues and fees, net of related fees and other costs, arerecorded in the Consolidated Statements of Earnings as “Sale of interest inleasehold land, net.”

 

*Contractdrilling*

* *

Contract drilling revenues and costs areassociated with well drilling and water pump installation, replacement andrepair in Hawaii.

 

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Contract drillingrevenues increased $127,000 (2%) to $5,993,000 in fiscal 2007, as compared to $5,866,000in fiscal 2006, and contract drilling operating expenses increased $230,000 (5%)to $4,939,000 in fiscal 2007, as compared to $4,709,000 in fiscal 2006. Operatingprofit before general and administrative expenses decreased $138,000 (14%) from$968,000 in fiscal 2006 to $830,000 in fiscal 2007 due to higherdrilling costs incurred on certain current contracts. Contractdrilling revenues and costs are not seasonal in nature but can fluctuatesignificantly based on the awarding and timing of contracts, which aredetermined by contract drilling customer demand.

 

At September 30,2007, there was a backlog of seven well drilling contracts and nine pump installationand repair contracts, of which five, four well drilling and one pumpinstallation and repair, were in progress as of September 30, 2007. Thebacklog of contract drilling revenues as of November 30, 2007 wasapproximately $9,340,000. Approximately two-thirds of the contracts in backlogat November 30, 2007 are expected to be completed within fiscal year 2008with the remainder completed in fiscal year 2009.

 

Contract drillingrevenues decreased $1,778,000 (23%) to $5,866,000 in fiscal 2006, as comparedto $7,644,000 in fiscal 2005, and contract drilling operating expensesdecreased $1,056,000 (18%) to $4,709,000 in fiscal 2006, as compared to$5,765,000 in fiscal 2005. Operating profit before general and administrativeexpenses decreased $786,000 (45%) from $1,754,000 in fiscal 2005 to $968,000 infiscal 2006 due to a decrease in welldrilling work coupled with a decrease in the values and margins of contractsperformed in fiscal 2006, as compared to fiscal 2005.

 

*Gas processing and other income*

 

Gas processing and other income was relativelyunchanged (increased $31,000 or 3%) in fiscal 2007 as compared to fiscal 2006.

 

Gas processing and other income increased $356,000(45%) to $1,151,000 in fiscal 2006 as compared to $795,000 in fiscal 2005. Theincrease was primarily due to a $243,000 increase in interest income receivedfrom certificates of deposit and cash management funds, gains on sales of otherassets of $73,000, and a $42,000 increase in gas processing revenues duringfiscal 2006, as compared to fiscal 2005.

 

*Gain on sale of drill rig*

 

Barnwell sold a drill rig in fiscal 2006 for $712,000,net of costs associated with the sale, and recognized a pre-tax gain of$700,000; there was no such sale in fiscal 2007. The drill rig was identical toone of Barnwell’s other drill rigs and was originally purchased to drillgeothermal wells.

 

*General and administrative expenses*

 

General andadministrative expenses decreased $1,187,000 (10%) to $10,457,000 in fiscal 2007,as compared to $11,644,000 in fiscal 2006. The decrease was principallyattributable to i) decreased personnel costs of $813,000, largely due todecreased bonus expense and incentive compensation costs, ii) decreasedprofessional services costs of $219,000, primarily related to Sarbanes-Oxley compliancecosts incurred in fiscal 2006, and iii) increased administrative expensereimbursements from oil and natural gas joint venture partners of $281,000. Thisdecrease was partially offset by general inflationary increases.

 

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General andadministrative expenses decreased $87,000 (1%) to $11,644,000 in fiscal 2006,as compared to $11,731,000 in fiscal 2005. The decrease was primarily due to a$3,061,000 decrease in stock appreciation rights expense for the year ended September 30,2006 due to fluctuations in Barnwell’s stock price, partially offset by anincrease in the number of shares vested. This decrease was virtually offset by i) increasedpersonnel costs of $1,323,000, ii) increased professional servicesincurred in connection with the preparation for future requirements to complywith the Sarbanes-Oxley Act, legal fees related to the land segment, audit feesand actuarial fees for a total of $1,000,000, iii) decreasedadministrative expense reimbursements from oil and natural gas joint venturepartners of $523,000, and iv) an increase in share-based compensation of$144,000 due to implementation of SFAS No. 123(R) during the year ended September 30,2006.

 

*Depletion, depreciation and amortization*

 

Depletion, depreciation and amortization increased $1,597,000(14%) to $13,174,000 in fiscal 2007, as compared to $11,577,000 in fiscal 2006, due to a 12%increase in the depletion rate and a 3% increase in the average exchange rateof the Canadian dollar to the U.S. dollar.

 

The higher depletion rate is due to increases inBarnwell’s costs of finding and developing proven reserves. Barnwell’s cost offinding and developing proven reserves has increased due to the costs of oiland natural gas exploration and development having increased along with productprices and the drilling of unsuccessful wells.

 

Depletion, depreciation and amortization increased$2,789,000 (32%) to $11,577,000 in fiscal 2006, as compared to $8,788,000 infiscal 2005, due to a 22% increase in the depletion rate, a 1% increase inproduction (in MCF equivalents where one barrel of oil and natural gas liquidsare converted to 5.8 MCF equivalents) and a 7% increase in the average exchangerate of the Canadian dollar to the U.S. dollar.

 

*Interest expense*

 

Interest expense increased $166,000 (20%) to $999,000in fiscal 2007, as compared to $833,000 in fiscal 2006, due to higher averageloan balances and, to a lesser degree, higher average interest rates duringfiscal 2007 as compared to fiscal 2006. The average interest rate incurredduring fiscal 2007 on Barnwell’s borrowings from Royal Bank of Canada increasedto 7.28%, as compared to 6.67% in fiscal 2006. The weighted-average balance ofoutstanding borrowings from Royal Bank of Canada increased to $12,566,000 infiscal 2007 as compared to $11,640,000 in fiscal 2006. The increase was alsodue in part to interest on borrowings under a $7,500,000 credit facilityobtained during the latter half of fiscal 2007 on which Barnwell incurredinterest at an average rate of 7.25%, $142,000 of which was capitalized;Barnwell did not have such a loan during fiscal 2006.

 

Interest expense increased $217,000 (35%) to $833,000in fiscal 2006, as compared to $616,000 in fiscal 2005, due to higher averageinterest rates and, to a lesser degree, higher average loan balances duringfiscal 2006 as compared to fiscal 2005. The average interest rate incurredduring fiscal 2006 on Barnwell’s borrowings from Royal Bank of Canada increasedto 6.67%, as compared to 4.82% in fiscal 2005. The weighted-average balance ofoutstanding borrowings from Royal Bank of Canada increased to $11,640,000 infiscal 2006 as compared to $10,300,000 in fiscal 2005.

 

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Interest costs for the fiscal years ended September 30,2007, 2006 and 2005 are summarized as follows:

 
| ** **                                                            | ** ** | **Year ended September 30,** | ** **    |
|-----------------------------------------------------------------------|------------|---------------------------------------------|---------------|
| ** **                                                            | ** ** | **2007**                                    | ** **    | **2006** | ** ** | **2005** | ** ** |
| Interest costs incurred                                               | ** ** | **$**                                       | **1,141,000** |   | $ | 833,000 |   | $ | 616,000 |   |
| Less interest costs capitalized on residential lots under development |       | **142,000**                                 |          | — |   | — |   |
| Interest expense                                                      | ** ** | **$**                                       | **999,000**   |   | $ | 833,000 |   | $ | 616,000 |   |

 

The majority of Barnwell’s debt is denominated in U.S.dollars. Therefore, the increase in the average exchange rate of the Canadiandollar to the U.S. dollar had a minimal impact on interest expense.

 

*Foreign currency fluctuations andother comprehensive income*

 

In addition to U.S. operations, Barnwell conductsoperations in Canada. Consequently, Barnwell is subject to foreign currencytranslation and transaction gains and losses due to fluctuations of theexchange rates between the Canadian dollar and the U.S. dollar.

 

The fiscal year averageexchange rate of the Canadian dollar to the U.S. dollar increased 3% in fiscal2007, as compared to fiscal 2006, and the exchange rate of the Canadian dollarto the U.S. dollar increased 12% at September 30, 2007, as compared to September 30,2006. Accordingly, the revenues and expenses and assets, liabilities andstockholders’ equity of Barnwell’s subsidiaries operating in Canada haveincreased. Barnwell’s Canadian dollar assets are greater than its Canadiandollar liabilities; therefore, increases in value of the Canadian dollar to theU.S. dollar generate other comprehensive income. The fiscal year averageexchange rate of the Canadian dollar to the U.S. dollar increased 7% in fiscal2006, as compared to fiscal 2005, and the exchange rate of the Canadian dollarto the U.S. dollar increased 4% at September 30, 2006, as compared to September 30,2005. Other comprehensive income due to foreign currency translationadjustments for fiscal 2007 was $3,316,000, a $2,176,000 increase from othercomprehensive income of $1,140,000 in fiscal 2006.

 

Foreign currency transaction gains and losses were notmaterial in fiscal 2007, 2006 and 2005 and are reflected in general andadministrative expenses.

 

The impact of fluctuations of the exchange ratesbetween the Canadian dollar and the U.S. dollar may be material fromperiod to period. Barnwell cannot accurately predict future fluctuationsbetween the Canadian and U.S. dollars.

 

*Income taxes*

 

Included in the provisionfor income taxes for fiscal 2006 is a Canadian deferred tax benefit of$1,094,000 resulting from reductions in Canadian tax rates. Also included inthe provision for income taxes for fiscal 2006 is the recognition of a deferredincome tax benefit of $4,130,000 due to a reduction in the valuation allowancefor foreign tax credit carryforwards. The acceleration of Barnwell’s investments in Canadianoil and natural gas properties beginning in the first quarter of fiscal 2006,coupled with Kaupulehu Developments’ receipt of proceeds related toIncrement I, resulted in the determination that it was more likely thannot that fiscal 2006 and future years’ taxable income 

 

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from Canadian operations under U.S. tax law wouldexceed taxable income from Canadian operations under Canadian tax law to adegree that will result in the utilization of foreign tax credit carryforwardsto reduce U.S. taxes. This is primarily attributable to differences in thestatutory deduction rates for Barnwell’s Canadian oil and natural gas capitalexpenditures under Canadian tax law as compared to such deductions under U.S.tax law. There were no reductions in the valuation allowance for foreign taxcredit carryforwards in fiscal 2007 or 2005. A minor reduction in Canadianfederal tax rates in fiscal 2007 resulted in a $100,000 reduction in netdeferred tax liability in fiscal 2007. There was no reduction in Canadian taxrates in fiscal 2005.

 

In October 2007, theCanadian government proposed changes in the corporate tax rate from the currenttax rates of 20.5%, 20.0%, 19.0%, 18.5% and 18.5% in calendar years 2008, 2009,2010, 2011 and 2012, respectively, to 19.5%, 19.0%, 18.0%, 16.5% and 15%,respectively. There is no assurance that this proposed change in taxes willbecome law.

 

*Equity in earnings of real estateaffiliate*

 

In fiscal 2006, Barnwellentered into an agreement with Nearco, Inc. (“Nearco”), to form Mauka 3K,LLC (“Mauka 3K”), for the purpose of providing real estate consultingservices and investing in real estate. Barnwell and Nearco each have a 50%voting interest in Mauka 3K. Nearco is a company controlled by Mr. TerryJohnston, a director of Barnwell and minority interest owner in certain ofBarnwell’s business ventures. Barnwell does not have a controlling interest inMauka 3K and thus accounts for its investment utilizing the equity methodof accounting. Under the equity method of accounting, Barnwell’s proportionateshare of its affiliate’s income is included in equity in earnings of realestate affiliate.

 

In fiscal 2006 Barnwellreceived net proceeds of $1,440,000 representing its share of real estateconsulting revenues, less related expenses. The net proceeds are reflected inthe Consolidated Statements of Earnings for the year ended September 30,2006 as “Equity in earnings of real estate affiliate, net of tax.”  There was no significant activity inMauka 3K during fiscal 2007.

 

*Environmental Matters*

 

Federal,state, and Canadian governmental agencies issue rules and regulations andenforce laws to protect the environment which are often difficult and costly tocomply with and which carry substantial penalties for failure to comply,particularly in regard to the discharge of materials into the environment. Theregulatory burden on the oil and gas industry increases its cost of doingbusiness. These laws, rules and regulations affect the operations ofBarnwell and could have a material adverse effect upon the earnings orcompetitive position of Barnwell. Although Barnwell’s experience has been tothe contrary, there is no assurance that this will continue to be the case.

 

*Inflation*

 

Theeffect of inflation on Barnwell has generally been to increase its cost ofoperations, interest cost (as a substantial portion of Barnwell’s debt is atvariable short-term rates of interest which tend to increase as inflationincreases), general and administrative costs and direct costs associated withoil and natural gas production and contract drilling operations. Oil andnatural gas prices realized by Barnwell are essentially determined by worldprices for oil and western Canadian/Midwestern U.S. prices for natural gas.

 

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*Recent Accounting Pronouncements*

 

In June 2006, the Financial AccountingStandards Board (the “FASB”) ratified the Emerging Issues Task Force (“EITF”)consensus on EITF Issue No. 06-3, “HowTaxes Collected from Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement.” The scope of EITF 06-3 includes any tax assessed by a governmentalauthority that is directly imposed on a revenue-producing transaction between aseller and a customer and may include, but is not limited to, sales, use,value added, Universal Service Fund contributions and some excise taxes. TheTask Force affirmed its conclusion that entities should present these taxes inthe income statement on either a gross or a net basis, based on theiraccounting policy, which should be disclosed pursuant to Accounting PrincipalBoard Opinion No. 22, “Disclosureof Accounting Policies.”  Barnwelladopted the provisions of EITF 06-3 on January 1, 2007. The adoption ofEITF 06-3 did not have a material impact on Barnwell’s financial statements. Barnwellpresents taxes within the scope of EITF 06-3 on both a net and gross basis,depending upon the nature of the tax. Amounts that are reported gross are notsignificant to Barnwell’s financial statements.

 

In September 2006, the United States Securitiesand Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.”  SAB No. 108provides guidance on the consideration of the effects of prior yearmisstatements in quantifying current year misstatements for the purpose of amateriality assessment. Barnwell adopted the provisions of SAB No. 108during the first quarter of fiscal 2007. Adoption had no material impact onBarnwell’s financial condition, results of operations, or cash flows.

 

In June 2006, the FASB issued FASBInterpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes– an interpretation of FASB Statement No. 109.”  This interpretation prescribes a “more-likely-than-not”recognition threshold and measurement attribute (the largest amount of benefitthat is greater than 50% likely of being realized upon ultimate settlement withtax authorities) for the financial statement recognition and measurement of atax position taken or expected to be taken in a tax return. This interpretationalso provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. FIN No. 48is effective for fiscal years beginning after December 15, 2006. Adoptionof FIN No. 48 will not have a material impact on Barnwell’s results ofoperations, financial condition and liquidity.

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.”  SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements. SFASNo. 157 does not require any new fair value measurements, however, forsome entities, the application of SFAS No. 157 will change currentpractice. SFAS No. 157 is effective for fiscal years beginning after November 15,2007. Barnwell’s management is currently evaluating the effect of theseprovisions on Barnwell’s results of operations, financial condition andliquidity.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities –including an amendment of FASB Statement No. 115.”  SFAS No. 159 provides companies with anoption to report selected financial assets and financial liabilities at fairvalue. Unrealized gains and losses on items for which the fair value option hasbeen elected are reported in earnings at each subsequent reporting date. Upfrontcosts and fees related to items for 

 

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whichthe fair value option is elected are recognized in earnings as incurred. SFAS No. 159is effective for fiscal years beginning after November 15, 2007. Barnwell’smanagement is currently evaluating the effect of these provisions on Barnwell’sresults of operations, financial condition and liquidity.

 

In June 2007, the FASB ratified the EITFconsensus on EITF Issue No. 06-11, “Accounting for Income Tax Benefits onDividends on Share-Based Payment Awards.” This EITF indicates that tax benefits of dividends on unvestedrestricted stock are to be recognized in equity as an increase in the pool ofexcess tax benefits. Should the related awards forfeit or no longer becomeexpected to vest, the benefits are to be reclassified from equity to the incomestatement. The EITF is effective for fiscal years beginning after December 15,2007. Barnwell will adopt the EITF as required and management does not expectit to have any impact on Barnwell’s results of operations, financial conditionor liquidity.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”  SFAS No. 141(R)establishes principles and requirements for how an acquirer in a businesscombination recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, any controlling interestin the acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements to enableusers of the financial statements to evaluate the nature and financial effectsof the business combination.  SFASNo. 141(R) applies to business combinations for which the acquisition dateis on or after December 15, 2008. Barnwell’s management is currently evaluating the impact of theseprovisions on Barnwell’s results of operations, financial condition andliquidity.

 

InDecember 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests inConsolidated Financial Statements – an amendment to Accounting ResearchBulletin No. 51.”  SFAS No. 160establishes accounting and reporting standards that require the ownershipinterest in subsidiaries held by parties other than the parent be clearlyidentified and presented in the Consolidated Balance Sheets within equity, butseparate from the parent’s equity; the amount of consolidated net incomeattributable to the parent and the noncontrolling interest be clearlyidentified and presented on the face of the Consolidated Statement of Earnings;and changes in a parent’s ownership interest while the parent retains itscontrolling financial interest in its subsidiary be accounted forconsistently.  This statement iseffective for fiscal years beginning on or after December 15, 2008.  Barnwell’s management is currently evaluatingthe impact of these provisions on Barnwell’s results of operations, financialcondition and liquidity.

 

**Liquidityand Capital Resources**

 

*CashFlows, Debt and Available Credit*

 

Cash flows provided byoperations totaled $8,792,000 for fiscal 2007, a decrease of $9,337,000 ascompared to $18,129,000 of cash flows provided by operations for the sameperiod in the prior year. This decrease was due primarily to a decrease inoperating profit generated by Barnwell’s oil and natural gas segment and due tocash outflows of $4,868,000 for the acquisition of residential parcels andrelated development costs by the real estate development segment for theconstruction and future sale of two single-family homes.

 

Cash flows used in investing activities totaled $18,035,000for fiscal 2007, an increase of $10,731,000 from cash flows used in investingactivities of $7,304,000 in fiscal 2006. Cash outflows for investing activitiesincreased during fiscal 2007, as compared to fiscal 2006, due primarily toBarnwell’s investment of $2,765,000, net of a return of capital, to acquire a1.5% passive minority interest in three joint ventures, investment of$1,400,000 for lot acquisition rights in the Kaupulehu uplands area, investmentof $2,383,000 to acquire a residential parcel for investment, and investment of$800,000 for initial deposits to acquire four residential parcels in theLot 4A Increment I area. As of September 30, 2007, Barnwell estimatesthat the third parcel, and parcels purchased in the future for which depositshave been made, will be held for investment purposes. No such investments weremade during fiscal 2006. The increase in cash outflows for investing activitieswas partially offset by an $8,788,000 (35%) decrease in capital expenditures to$16,597,000 during fiscal 2007 as compared to $25,385,000 during fiscal 2006. Thedecrease in capital expenditures was primarily attributable to Barnwell’s oiland natural gas segment. Cash inflows from investing activities also decreaseddue to a $9,660,000 decrease in proceeds from land segment sales, net ofexpenses, during fiscal 2007 as compared to fiscal 2006. Additionally, Barnwellreceived $712,000 of proceeds, net of associated costs, from the sale of adrill rig and $1,700,000 of proceeds from the maturity of certificates ofdeposit during fiscal 2006; there were no such proceeds received during fiscal2007.

 

Cash flows provided byfinancing activities totaled $7,275,000 for fiscal 2007 as compared to$4,525,000 of cash used in financing activities in fiscal 2006. The increase incash flows from financing activities was primarily due to $2,257,000 ofadditional borrowings on the Royal Bank of Canada credit facility, $6,845,000in borrowings on a credit facility obtained to finance deposits on fourresidential parcels and to finance the acquisition of three residential parcelsand a portion of the initial home construction on two of the parcels, and$525,000 representing a loan from Nearco to Kaupulehu 2007. Furthermore, duringfiscal 2007, Barnwell received $751,000 from Nearco, of which $553,000 representsNearco’s capital contribution for a 20% ownership interest in Kaupulehu 

 

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Investors, LLC and $198,000represents a capital contribution to Kaupulehu 2007. Cash flows provided byfinancing activities also increased as distributions made to minority interestpartners totaled $1,032,000 for fiscal 2007, a $2,063,000 decrease as comparedto $3,095,000 for fiscal 2006. The increase in cash flows from financingactivities was partially offset by the payment of $2,052,000 in dividendsduring fiscal 2007 as compared to $1,430,000 in fiscal 2006.

 

In December 2006,Barnwell declared a cash dividend of $0.10 per share payable January 15,2007 to stockholders of record on December 28, 2006.

 

In February 2007,Barnwell declared a cash dividend of $0.05 per share payable March 15, 2007to stockholders of record on March 1, 2007.

 

In May 2007, Barnwelldeclared a cash dividend of $0.05 per share payable June 15, 2007 tostockholders of record on June 1, 2007.

 

In August 2007,Barnwell declared a cash dividend of $0.05 per share, payable September 21,2007, to stockholders of record on September 7, 2007.

 

Royal Bank of Canada has renewed Barnwell’s creditfacility through April 2008 at $20,000,000 Canadian dollars, approximatelyUS$20,070,000, at September 30, 2007. The facility is available inU.S. dollars at the London Interbank Offer Rate plus 1.5%, at U.S. prime plus0.25%, or in Canadian dollars at Canadian prime plus 0.25%. A standby fee of0.25% per annum is charged on the unused facility balance. The bank affirmed that it will notrequire any repayments under the facility before October 1, 2008. Accordingly,Barnwell has classified outstanding borrowings under the facility as long-termdebt.

 

In December 2005,Barnwell’s Board of Directors authorized the purchase of up to 250,000 sharesof its common stock from time to time in the open market or in privatelynegotiated transactions, depending on market conditions. On September 20, 2007, the Board ofDirectors authorized a stock repurchase program in the open market of up to150,000 shares of these 250,000 shares during the period commencing on September 24,2007 and ending on March 24, 2008. During the period from September 24,2007 through September 30, 2007, Barnwell repurchased 10,000 shares for anaggregate purchase price of $155,000 or approximately $15.50 per share pursuantto the plan. The remaining 100,000 shares of the 250,000 shares of common stockoriginally authorized may be purchased in the open market or in privatelynegotiated transactions.

 

At September 30, 2007, Barnwell had $10,107,000in cash and cash equivalents and $749,000 in working capital. Available creditunder the credit facility with the Royal Bank of Canada was approximately $5,550,000.In addition, in December 2007, a joint venture 80% owned by Barnwell refinanceda portion of its $6,845,000 of borrowings as of September 30, 2007. Borrowingsrefinanced under the new $16,000,000 credit facility in December were$6,600,000, leaving $9,400,000 of available credit as of the date of thisfiling; the remaining $245,000 of borrowings as of September 30, 2007 thatwas not refinanced is expected to be repaid to the financial institution thatprovided the previous credit facility in fiscal 2008.

 

Barnwell believes itscurrent cash balances, future cash flows from operations, land investment segmentproceeds from the sale of development rights and percentage of sales payments,and available credit will be sufficient to fund its estimated capitalexpenditures and operations for the next 12 

 

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months, fund theaforementioned stock repurchases, fund scheduled debt repayments and interestand settle incentive compensation liabilities in cash if necessary. However, thetiming and amount of land investment segment percentage of sales proceeds isunpredictable, may be sporadic, and is not under Barnwell’s control;Barnwell is reliant upon these percentage of sales proceeds as a source ofliquidity. If estimated cash inflows do not occur on a timely basis or are lessthan current expectations, and/or if Barnwell’s credit facility with theCanadian bank is reduced below the current level of borrowings under thefacility after the April 2008 review, Barnwell may be required to discontinuestock repurchases, reduce oil and natural gas capital expenditures and other expenditures,possibly significantly, and seek alternative sources of financing or liquidateinvestments and/or operating assets to make any required cash outflows.

 

*RealEstate Development Capital Expenditures*

 

In fiscal 2007, Barnwellcommenced operations in real estate development. Barnwell’s real estatedevelopment segment capital expenditures in fiscal 2007 totaled $4,868,000 fortwo lots and related development costs.

 

The planning process isnearly complete for construction to begin on the two residences for resale. Permitswere received and site work has been substantially completed to expand thebuilding envelope on the two lots. The plans for the two houses have receivedpreliminary approval from the Kukio design review committee and have been filedwith the County of Hawaii for building permits. Construction is scheduled tocommence on the first house upon receipt of the building permit and iscurrently anticipated to begin in January 2008.

 

Additionally, Barnwell,through its interest in Kaupulehu 2007, has secured the right to purchaseresidential parcels which it intends to hold for investment or on which itintends to develop turnkey single-family homes. Barnwell believes proceeds fromthe future sale of the parcels acquired to date would be sufficient to repaythe balance of loan borrowings as of the date of this filing. If Barnwellacquires the remaining four residential lots, future cash outflows will be asfollows: $2,178,000 for one parcel by December 30, 2007, $2,178,000 forone parcel in March 2008, $2,178,000 for one parcel in June 2008 and$2,178,000 for one parcel in September 2008. As of the date of thisfiling, Barnwell has not yet secured financing for the potential purchases in March 2008through September 2008.

 

*Oil andNatural Gas Capital Expenditures*

 

Barnwell’s oil and natural gas capital expenditures,including accrued capital expenditures, decreased $11,785,000 (45%) from $25,949,000in fiscal 2006 to $14,164,000 in fiscal 2007. Barnwell participated indrilling 32 gross (6.7 net) wells, of which 29 gross (5.6 net) wells wereinitially deemed by management to be successful, and replaced 65% of oilproduction (including natural gas liquids and excluding revisions of previousestimates) and 42% of natural gas production (excluding revisions of previousestimates). Of these 32 gross wells in fiscal 2007, Barnwell initiated 16 gross(5.2 net) wells. Of the $14,164,000 total oil and natural gas propertiesinvestments for fiscal 2007, $1,187,000 (8%) was for acquisition of oil andnatural gas leases and lease rentals, $1,428,000 (10%) was for geological andgeophysical costs, $8,846,000 (63%) was for intangible drilling costs, $2,410,000(17%) was for production equipment, and $293,000 (2%) was for future siterestoration and abandonment and other costs. The major areas of investments infiscal 2007 were in the Progress, Pouce Coupe South, Dunvegan, Bonanza/Balsam,Boundary Lake, Wood River, Cecil and Doris areas of Alberta.

 

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The following table setsforth the gross and net numbers of oil and natural gas wells Barnwellparticipated in drilling for each of the last three fiscal years:

 
| ** **                             | ** ** | **2007**  | ** ** | **2006** | ** ** | **2005**  | ** ** |
|----------------------------------------|------------|-----------|------------|----------|------------|-----------|------------|
| ** **                             | ** ** | **Gross** | ** ** | **Net**  | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
|                                   |       |      |       |     |       |      |       |   |   |   |   |   |   |
| Exploratory oil and natural gas wells  | ** ** | **2**     | ** ** | **0.9**  |       | 7         |       | 2.4 |   | 10 |   | 2.9 |   |
|                                   |       |      |       |     |       |      |       |   |   |   |   |   |   |
| Development oil and natural gas wells  | ** ** | **30**    | ** ** | **5.8**  |       | 40        |       | 11.1 |   | 70 |   | 10.6 |   |
|                                   |       |      |       |     |       |      |       |   |   |   |   |   |   |
| Successful oil and natural gas wells   | ** ** | **29**    | ** ** | **5.6**  |       | 40        |       | 11.2 |   | 69 |   | 10.3 |   |
|                                   |       |      |       |     |       |      |       |   |   |   |   |   |   |
| Unsuccessful oil and natural gas wells | ** ** | **3**     | ** ** | **1.1**  |       | 7         |       | 2.3 |   | 11 |   | 3.2 |   |

 

Barnwell estimates thatoil and natural gas capital expenditures for fiscal 2008 will range from $15,000,000to $18,000,000. This estimated amount may increase or decrease as dictatedby cash flows and management’s assessment of the oil and natural gasenvironment and prospects.

 

*SubsequentEvents*

 

In October 2007,Barnwell received a $1,927,000 development rights option payment for a portionof the seventh payment due on December 31, 2007. This development rightsoption payment will be recognized in Barnwell’s first quarter of fiscal 2008.

 

In December 2007,Kaupulehu 2007 obtained a $16,000,000 revolving line of credit facility andrefinanced $6,600,000 of its borrowings. Refer to Note 11 of “Notes to Consolidated Financial Statements” inItem 8 for further discussion.

 

In December 2007,WB sold a lot in Increment I and paid Kaupulehu Developments a percentage ofsales payment of $540,000. This receipt will be recognized in Barnwell’s firstquarter of fiscal 2008.

 

In December 2007,Barnwell declared a cash dividend of $0.05 per share payable January 22,2008, to stockholders of record on January 7, 2008.

 

In October and November 2007,Barnwell repurchased 106,500 shares of its common stock for $1,597,000, orapproximately $15.00 per share. Of these amounts, 71,500 shares were purchasedfor $1,063,000, or approximately $14.87 per share, on the open market under theSeptember 20, 2007 authorization, and 35,000 shares were purchased forapproximately $534,000, or $15.26 per share, the closing market price on thedate of the transaction, in a privately negotiated transaction. Theserepurchases, in combination with the 10,000 shares purchased in September 2007,leave 68,500 shares available for repurchase under the September 20, 2007authorization and 65,000 shares available for repurchase under the previousauthorization, as of November 30, 2007.

 

**ITEM7A.****                                           ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The primary objective of thefollowing information is to provide forward-looking quantitative andqualitative information about our exposure to certain market risks. The term “marketrisk” refers to the risk of loss arising from adverse fluctuations in commodityprices, interest rates and foreign currency exchange rates. This forward-lookinginformation provides indicators of how we view our exposures to certain marketrisks.

 

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*CommodityPrice Market Risk*

 

Realized pricing of our oil,natural gas and natural gas liquids (“NGL”) production is primarily driven bythe prevailing worldwide price for crude oil and North American spot marketprices applicable to our Canadian natural gas and NGL production. Pricing foroil, natural gas and NGL production has historically been volatile andunpredictable, and such volatility is expected to continue. Essentially all ofBarnwell’s oil and natural gas revenue were from products sold at spot prices. Barnwellhas not entered into hedging or other transactions utilizing derivative orother commodity instruments, and as such, Barnwell does not bear materialcommodity price market risk related to such instruments.

 

*InterestRate Market Risk*

 

Barnwell is exposed tochanges in U.S. and Canadian interest rates, primarily resulting from itsborrowing activities used to fund capital expenditures, operations and maintainliquidity. Barnwell has revolving credit facilities that carry variableinterest rates tied to market indices. The Royal Bank of Canada creditfacility, which was renewed in May 2007, is available in U.S. dollars atthe London Interbank Offer Rate (“LIBOR”) plus 1.5%, at U.S. prime plus 0.25%,or in Canadian dollars at Canadian prime plus 0.25%. In each of the last threefiscal years, Barnwell has borrowed at either the one-month LIBOR rate plus 11⁄2 or2% or the floating prime rate plus 0.25% or 1%. During fiscal 2007, Barnwell’sreal estate development segment obtained a credit facility and borrowed fundsprimarily at the one-month LIBOR plus 1.75%. Based on the amount of outstandingdebt under our credit facilities on September 30, 2007, a 1% increase inour average interest rate would result in a decrease in our annual pre-tax netincome of approximately $219,000. As Barnwell’s interest rates follow changesin market interest rates within a period of approximately one month and asBarnwell has not entered into hedging or other transactions utilizingderivative or other financial instruments, Barnwell does not bear materialinterest rate market risk related to such instruments.

 

*ForeignCurrency Exchange Market Risk*

 

Barnwell’s oil and natural gas operations areconducted in Canada. Barnwell has not entered into hedging or othertransactions utilizing derivative or other foreign exchange instruments, and assuch, Barnwell does not bear material foreign currency exchange market riskrelated to such instruments.

 

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**ITEM 8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**Report of Independent RegisteredPublic Accounting Firm**

 

The Board of Directors and Stockholders

Barnwell Industries, Inc.:

 

We have audited the accompanying consolidatedbalance sheets of Barnwell Industries, Inc. and subsidiaries as of September30, 2007 and 2006, and the related consolidated statements of earnings,stockholders’ equity and comprehensive income, and cash flows for each of theyears in the three-year period ended September 30, 2007. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 financialstatements referred to above present fairly, in all material respects, thefinancial position of Barnwell Industries, Inc. and subsidiaries as ofSeptember 30, 2007 and 2006, and the results of their operations and their cashflows for each of the years in the three-year period ended September 30, 2007,in conformity with U.S. generally accepted accounting principles.

 

As discussed in note 4 to the consolidated financialstatements, effective October 1, 2005, the Company changed its method ofaccounting for share-based payments.

 

As discussed in note 14 to the consolidatedfinancial statements, effective September 30, 2007, the Company adopted therecognition and disclosure provisions of Statement of Financial AccountingStandards No. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and132(R).”

 

 

/s/KPMG LLP

 

Honolulu, Hawaii

December 21, 2007

 

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BARNWELLINDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                        | ** ** | **September 30,** | ** **      |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------|-----------------|
| ** **                                                                                                        | ** ** | **2007**               | ** **      | **2006** | ** ** |
| ASSETS                                                                                                            |       |                   |            |   |   |
| CURRENT ASSETS:                                                                                                   |       |                   |            |   |   |
| Cash and cash  equivalents                                                                                        | ** ** | **$**                  | **10,107,000**  | ** ** | $ | 11,972,000 |   |
| Accounts  receivable, net                                                                                         | ** ** | **7,131,000**          | ** **      | 5,965,000 |   |
| Deferred income  taxes                                                                                            | ** ** | **2,171,000**          | ** **      | 4,173,000 |   |
| Current taxes  receivable                                                                                         | ** ** | **1,040,000**          | ** **      | 1,787,000 |   |
| Other current  assets                                                                                             | ** ** | **1,030,000**          | ** **      | 1,441,000 |   |
| TOTAL CURRENT  ASSETS                                                                                             | ** ** | **21,479,000**         | ** **      | 25,338,000 |   |
| DEPOSITS ON  RESIDENTIAL PARCELS                                                                                  | ** ** | **800,000**            | ** **      | — |   |
| RESIDENTIAL LOTS  UNDER DEVELOPMENT                                                                               | ** ** | **5,009,000**          | ** **      | — |   |
| INVESTMENT IN  RESIDENTIAL PARCEL                                                                                 | ** ** | **2,383,000**          | ** **      | — |   |
| INVESTMENT IN  JOINT VENTURES                                                                                     | ** ** | **2,765,000**          | ** **      | — |   |
| INVESTMENT IN  LAND INTERESTS                                                                                     | ** ** | **1,450,000**          | ** **      | 50,000 |   |
| PROPERTY AND  EQUIPMENT, NET                                                                                      | ** ** | **90,679,000**         | ** **      | 79,167,000 |   |
|                                                                                                              | ** ** | ** **             | ** **      |   |   |
| TOTAL ASSETS                                                                                                      | ** ** | **$**                  | **124,565,000** | ** ** | $ | 104,555,000 |   |
|                                                                                                              | ** ** | ** **             | ** **      | ** ** |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                        |       |                   | ** **      |   |   |
| CURRENT  LIABILITIES:                                                                                             |       |                   | ** **      |   |   |
| Accounts payable                                                                                                  | ** ** | **$**                  | **5,983,000**   | ** ** | $ | 3,628,000 |   |
| Accrued capital  expenditures                                                                                     | ** ** | **2,774,000**          | ** **      | 4,832,000 |   |
| Accrued stock  appreciation rights                                                                                | ** ** | **1,672,000**          | ** **      | 3,326,000 |   |
| Accrued  incentive plan costs                                                                                     | ** ** | **2,029,000**          | ** **      | 1,650,000 |   |
| Other accrued  compensation costs                                                                                 | ** ** | **3,228,000**          | ** **      | 4,096,000 |   |
| Drilling  advances                                                                                                | ** ** | **1,407,000**          | ** **      | 1,971,000 |   |
| Payable to joint  interest owners                                                                                 | ** ** | **1,123,000**          | ** **      | 803,000 |   |
| Current portion  of long-term debt                                                                                | ** ** | **354,000**            | ** **      | — |   |
| Other current  liabilities                                                                                        | ** ** | **2,160,000**          | ** **      | 1,806,000 |   |
| TOTAL CURRENT  LIABILITIES                                                                                        | ** ** | **20,730,000**         | ** **      | 22,112,000 |   |
| LONG-TERM DEBT                                                                                                    | ** ** | **22,104,000**         | ** **      | 11,735,000 |   |
| LIABILITY FOR  RETIREMENT BENEFITS                                                                                | ** ** | **2,387,000**          | ** **      | — |   |
| ASSET RETIREMENT  OBLIGATION                                                                                      | ** ** | **4,734,000**          | ** **      | 3,753,000 |   |
| DEFERRED INCOME  TAXES                                                                                            | ** ** | **19,299,000**         | ** **      | 16,350,000 |   |
| MINORITY  INTEREST                                                                                                | ** ** | **707,000**            | ** **      | — |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                    |       |                   | ** **      |   |   |
| STOCKHOLDERS’  EQUITY:                                                                                       |       |                   | ** **      |   |   |
| Common stock,  par value $0.50 per share:                                                                         |       |                   | ** **      |   |   |
| Authorized,  20,000,000 shares;   8,280,060 issued at September 30, 2007   8,169,060 issued at September 30, 2006 |       | **4,140,000**          | ** **      | 4,085,000 |   |
| Additional  paid-in capital                                                                                       | ** ** | **738,000**            | ** **      | 144,000 |   |
| Retained  earnings                                                                                                | ** ** | **44,988,000**         | ** **      | 43,524,000 |   |
| Accumulated  other comprehensive income, net                                                                      | ** ** | **4,933,000**          | ** **      | 2,852,000 |   |
| Treasury stock,  at cost, 11,900 shares at September 30, 2007                                                     | ** ** | **(195,000**           | **)**           | — |   |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                  | ** ** | **54,604,000**         | ** **      | 50,605,000 |   |
|                                                                                                              | ** ** | ** **             | ** **      |   |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                  | ** ** | **$**                  | **124,565,000** | ** ** | $ | 104,555,000 |   |

 

See Notes toConsolidated Financial Statements

 

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BARNWELLINDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

 
| ** **                                                                     | ** ** | **Year ended September 30,** | ** **     |
|--------------------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                                     | ** ** | **2007**                                    | ** **     | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                                      |       |                                        |           |   |   |   |   |
| Oil and natural  gas                                                           | ** ** | **$**                                       | **34,599,000** | ** ** | $ | 37,904,000 |   | $ | 32,724,000 |   |
| Contract  drilling                                                             | ** ** | **5,993,000**                               | ** **     | 5,866,000 |   | 7,644,000 |   |
| Sale of interest  in leasehold land, net                                       | ** ** | **3,370,000**                               | ** **     | 9,637,000 |   | 550,000 |   |
| Sale of  development rights, net                                               | ** ** | **2,292,000**                               | ** **     | 2,702,000 |   | 2,497,000 |   |
| Gas processing  and other                                                      | ** ** | **1,182,000**                               | ** **     | 1,151,000 |   | 795,000 |   |
| Gain on sale of  drill rig                                                     | ** ** | **—**                                  | ** **     | 700,000 |   | — |   |
|                                                                           |       |                                        | ** **     |   |   |   |   |
| ** **                                                                     |       | **47,436,000**                              |           | 57,960,000 | ** ** | 44,210,000 |   |
|                                                                           |       |                                        | ** **     |   |   |   |   |
| Costs and  expenses:                                                           |       |                                        | ** **     |   |   |   |   |
| Oil and natural  gas operating                                                 | ** ** | **10,203,000**                              | ** **     | 8,217,000 |   | 6,899,000 |   |
| Contract  drilling operating                                                   | ** ** | **4,939,000**                               | ** **     | 4,709,000 |   | 5,765,000 |   |
| General and  administrative                                                    | ** ** | **10,457,000**                              | ** **     | 11,644,000 |   | 11,731,000 |   |
| Depreciation,  depletion and amortization                                      | ** ** | **13,174,000**                              | ** **     | 11,577,000 |   | 8,788,000 |   |
| Interest  expense, net                                                         | ** ** | **999,000**                                 | ** **     | 833,000 |   | 616,000 |   |
| Minority  interest in earnings                                                 | ** ** | **988,000**                                 | ** **     | 2,783,000 |   | 417,000 |   |
|                                                                           |       |                                        | ** **     |   |   |   |   |
| ** **                                                                     |       | **40,760,000**                              |           | 39,763,000 | ** ** | 34,216,000 |   |
|                                                                           |       |                                        | ** **     |   |   |   |   |
| Earnings before  income taxes and equity in earnings  of real estate affiliate |       | **6,676,000**                               | ** **     | 18,197,000 |   | 9,994,000 |   |
|                                                                           |       |                                        | ** **     |   |   |   |   |
| Provision for  income taxes                                                    | ** ** | **(3,160,000**                              | **)**          | (4,455,000 | ) | (3,967,000 | ) |
|                                                                           |       |                                        | ** **     |   |   |   |   |
| Equity in  earnings of real estate affiliate, net of tax                       | ** ** | **—**                                  | ** **     | 895,000 |   | — |   |
|                                                                           |       |                                        | ** **     |   |   |   |   |
| NET EARNINGS                                                                   | ** ** | **$**                                       | **3,516,000**  | ** ** | $ | 14,637,000 |   | $ | 6,027,000 |   |
|                                                                           |       |                                        | ** **     |   |   |   |   |
| BASIC EARNINGS  PER COMMON SHARE                                               | ** ** | **$**                                       | **0.43**       | ** ** | $ | 1.79 |   | $ | 0.74 |   |
|                                                                           | ** ** | ** **                                  | ** **     |   |   |   |   |
| DILUTED EARNINGS  PER COMMON SHARE                                             | ** ** | **$**                                       | **0.41**       | ** ** | $ | 1.68 |   | $ | 0.70 |   |
|                                                                           |       |                                        | ** **     |   |   |   |   |
| WEIGHTED-AVERAGE  NUMBER OF COMMON SHARES  OUTSTANDING:                        |       |                                        | ** **     |   |   |   |   |
|                                                                           |       |                                        | ** **     |   |   |   |   |
| BASIC                                                                          | ** ** | **8,208,189**                               | ** **     | 8,169,060 |   | 8,152,531 |   |
|                                                                           | ** ** | ** **                                  | ** **     |   |   |   |   |
| DILUTED                                                                        | ** ** | **8,608,759**                               | ** **     | 8,698,405 |   | 8,643,032 |   |

 

See Notes toConsolidated Financial Statements

 

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BARNWELLINDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
| ** **                                                                            | ** ** | **Year ended September 30,** | ** **     |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                                            | ** ** | **2007**                                    | ** **     | **2006** | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                |       |                                        | ** **     |   |   |   |   |
| Net earnings                                                                          | ** ** | **$**                                       | **3,516,000**  | ** ** | $ | 14,637,000 |   | $ | 6,027,000 |   |
| Adjustments to  reconcile net earnings to net  cash provided by operating activities: |       |                                        | ** **     |   |   |   |   |
| Depreciation,  depletion and amortization                                             | ** ** | **13,174,000**                              | ** **     | 11,577,000 |   | 8,788,000 |   |
| Minority  interest in earnings                                                        | ** ** | **988,000**                                 | ** **     | 2,783,000 |   | 417,000 |   |
| Deferred income  taxes                                                                | ** ** | **1,456,000**                               | ** **     | 1,162,000 |   | (1,587,000 | ) |
| Accretion of  asset retirement obligation                                             | ** ** | **232,000**                                 | ** **     | 199,000 |   | 140,000 |   |
| Asset retirement  obligation payments                                                 | ** ** | **(42,000**                                 | **)**          | (20,000 | ) | — |   |
| Share-based  compensation, net of payments                                            | ** ** | **(1,562,000**                              | **)**          | (1,066,000 | ) | 3,036,000 |   |
| Sale of  development rights, net                                                      | ** ** | **(2,292,000**                              | **)**          | (2,702,000 | ) | (2,497,000 | ) |
| Sale of interest  in leasehold land, net                                              | ** ** | **(3,370,000**                              | **)**          | (9,637,000 | ) | (550,000 | ) |
| Additions to  residential lots under development                                      | ** ** | **(4,868,000**                              | **)**          | — |   | — |   |
| Gain on sale of  drill rig                                                            | ** ** | **—**                                  | ** **     | (700,000 | ) | — |   |
| Increase from  changes in current assets and liabilities                         | ** ** | **1,560,000**                               | ** **     | 1,896,000 |   | 439,000 |   |
|                                                                                  |       |                                        | ** **     |   |   |   |   |
| Net cash  provided by operating activities                                            | ** ** | **8,792,000**                               | ** **     | 18,129,000 |   | 14,213,000 |   |
|                                                                                  |       |                                        | ** **     |   |   |   |   |
| Cash flows from  investing activities:                                                |       |                                        | ** **     |   |   |   |   |
| Proceeds from  sale of interest in leasehold land, net                                | ** ** | **3,370,000**                               | ** **     | 12,620,000 |   | 550,000 |   |
| Proceeds from  sale of development rights, net                                        | ** ** | **2,292,000**                               | ** **     | 2,702,000 |   | 2,497,000 |   |
| Return of  capital distribution from joint venture                                    | ** ** | **525,000**                                 | ** **     | — |   | — |   |
| Proceeds from  gas over bitumen royalty adjustments                                   | ** ** | **248,000**                                 | ** **     | 347,000 |   | 558,000 |   |
| Proceeds from  matured certificates of deposit                                        | ** ** | **—**                                  | ** **     | 1,700,000 |   | 3,087,000 |   |
| Proceeds from  sale of drill rig                                                      | ** ** | **—**                                  | ** **     | 712,000 |   | — |   |
| Deposits on  residential parcels                                                      | ** ** | **(800,000**                                | **)**          | — |   | — |   |
| Purchase of lot  acquisition rights                                                   | ** ** | **(1,400,000**                              | **)**          | — |   | — |   |
| Investment in  residential parcel                                                     | ** ** | **(2,383,000**                              | **)**          | — |   | — |   |
| Investment in  joint ventures                                                         | ** ** | **(3,290,000**                              | **)**          | — |   | — |   |
| Investment in  certificates of deposit                                                | ** ** | **—**                                  | ** **     | — |   | (3,400,000 | ) |
| Capital  expenditures                                                                 | ** ** | **(16,597,000**                             | **)**          | (25,385,000 | ) | (16,715,000 | ) |
|                                                                                  |       |                                        | ** **     |   |   |   |   |
| Net cash used in  investing activities                                                | ** ** | **(18,035,000**                             | **)**          | (7,304,000 | ) | (13,423,000 | ) |
|                                                                                  |       |                                        | ** **     |   |   |   |   |
| Cash flows from  financing activities:                                                |       |                                        | ** **     |   |   |   |   |
| Proceeds from  long-term debt borrowings                                              | ** ** | **9,486,000**                               | ** **     | — |   | 1,116,000 |   |
| Contributions  from minority interest partner                                         | ** ** | **751,000**                                 | ** **     | — |   | — |   |
| Proceeds from  exercise of stock options                                              | ** ** | **329,000**                                 | ** **     | — |   | 197,000 |   |
| Repayments of  long-term debt                                                         | ** ** | **(52,000**                                 | **)**          | — |   | — |   |
| Purchases of  common stock for treasury                                               | ** ** | **(155,000**                                | **)**          | — |   | — |   |
| Distributions to  minority interest partners                                          | ** ** | **(1,032,000**                              | **)**          | (3,095,000 | ) | (513,000 | ) |
| Payment of  dividends                                                                 | ** ** | **(2,052,000**                              | **)**          | (1,430,000 | ) | (802,000 | ) |
|                                                                                  |       |                                        | ** **     |   |   |   |   |
| Net cash  provided by (used in) financing activities                                  | ** ** | **7,275,000**                               | ** **     | (4,525,000 | ) | (2,000 | ) |
|                                                                                  |       |                                        | ** **     |   |   |   |   |
| Effect of  exchange rate changes on cash  and cash equivalents                        |       | **103,000**                                 | ** **     | 180,000 |   | 207,000 |   |
|                                                                                  |       |                                        | ** **     |   |   |   |   |
| Net (decrease)  increase in cash and cash equivalents                                 | ** ** | **(1,865,000**                              | **)**          | 6,480,000 |   | 995,000 |   |
|                                                                                  |       |                                        | ** **     |   |   |   |   |
| Cash and cash  equivalents at beginning of year                                  | ** ** | **11,972,000**                              | ** **     | 5,492,000 |   | 4,497,000 |   |
|                                                                                  |       |                                        | ** **     |   |   |   |   |
| Cash and cash  equivalents at end of year                                             | ** ** | **$**                                       | **10,107,000** | ** ** | $ | 11,972,000 |   | $ | 5,492,000 |   |

 

See Notes toConsolidated Financial Statements

 

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Years ended September 30, 2005, 2006and 2007

 
| ** **                                                                               | ** ** | ** **      | ** ** | ** ** | ** ** | ** **     | ** ** | ** **        | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** **             | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|----------------|------------|-------------------|------------|--------------|------------|-------------------|------------|--------------|------------|------------------------|------------|
| ** **                                                                               | ** ** | ** **      | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **        | ** ** | ** **   | ** ** | **Other**         | ** ** | ** **   | ** ** | **Total**              | ** ** |
| ** **                                                                               | ** ** | **Shares**      | ** ** | **Common** | ** ** | **Paid-In**    | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                               | ** ** | **Outstanding** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Income**        | ** ** | **Earnings** | ** ** | **Income**        | ** ** | **Stock**    | ** ** | **Equity**             | ** ** |
|                                                                                     |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| Balance at  September 30, 2004                                                           |       | 7,992,060       |       | $          | 3,996,000  |           | $          | —            |       |         |       | $                 | 24,984,000 |         | $          | 169,000                |       | $ | — |   | $ | 29,149,000 |   |
|                                                                                     |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| Exercise of stock  options, 177,000 shares net of 30,000 tendered and placed in treasury |       | 177,000         |       | 89,000     |       | 345,000        |       |              |       |         |       |              |       | (237,000     | )          | 197,000                |       |
|                                                                                     |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| Effect on current  period activity of stock dividends issued to effect stock split       |       |            |       |       |       | (345,000       | )          |              |       | 108,000      |       |              |       | 237,000      |       | —                 |       |
|                                                                                     |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| Dividends  declared, $0.10 per share                                                     |       |            |       |       |       |           |       |              |       | (802,000     | )          |              |       |         |       | (802,000               | )          |
|                                                                                     |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| Comprehensive  income:                                                                   |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| Net earnings                                                                             |       |            |       |       |       |           |       | $                 | 6,027,000  |         | 6,027,000  |              |       |         |       |                   | 6,027,000  |   |
| Other  comprehensive income (loss):                                                      |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| Foreign currency  translation adjustments, net of $1,277,000 of taxes                    |       |            |       |       |       |           |       | 1,543,000         |       |         |       | 1,543,000         |       |         |       | 1,543,000              |       |
| Minimum pension  liability adjustment, net of $44,000 tax benefit                        |       |            |       |       |       |           |       | (88,000           | )          |         |       | (88,000           | )          |         |       | (88,000                | )          |
| Total  comprehensive income                                                              |       |            |       |       |       |           |       | $                 | 7,482,000  |         |       |              |       |         |       |                   |       |   |
|                                                                                     |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| At September 30,  2005                                                                   |       | 8,169,060       |       | $          | 4,085,000  |           | $          | —            |       |         |       | $                 | 30,317,000 |         | $          | 1,624,000              |       | $ | — |   | $ | 36,026,000 |   |

 

(Continued On NextPage)

 

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Years ended September 30, 2005, 2006and 2007

 

(continued from previous page)

 
| ** **                                                          | ** ** | ** **      | ** ** | ** ** | ** ** | ** **     | ** ** | ** **        | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** **             | ** ** |
|---------------------------------------------------------------------|------------|-----------------|------------|------------|------------|----------------|------------|-------------------|------------|--------------|------------|-------------------|------------|--------------|------------|------------------------|------------|
| ** **                                                          | ** ** | ** **      | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **        | ** ** | ** **   | ** ** | **Other**         | ** ** | ** **   | ** ** | **Total**              | ** ** |
| ** **                                                          | ** ** | **Shares**      | ** ** | **Common** | ** ** | **Paid-In**    | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | **Stockholders’** | ** ** |
| ** **                                                          | ** ** | **Outstanding** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Income**        | ** ** | **Earnings** | ** ** | **Income**        | ** ** | **Stock**    | ** ** | **Equity**             | ** ** |
|                                                                |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| Balance at  September 30, 2005                                      |       | 8,169,060       |       | $          | 4,085,000  |           | $          | —            |       |         |       | $                 | 30,317,000 |         | $          | 1,624,000              |       | $ | — |   | $ | 36,026,000 |   |
|                                                                |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| Share-based  compensation costs                                     |       |            |       |       |       | 144,000        |       |              |       |         |       |              |       |         |       | 144,000                |       |
|                                                                |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| Dividends  declared, $0.175 per share                          |       |            |       |       |       |           |       |              |       | (1,430,000   | )          |              |       |         |       | (1,430,000             | )          |
|                                                                |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| Comprehensive  income:                                              |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| Net earnings                                                        |       |            |       |       |       |           |       | $                 | 14,637,000 |         | 14,637,000 |              |       |         |       |                   | 14,637,000 |   |
| Other  comprehensive income:                                        |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| Foreign currency  translation adjustments, net of $641,000 of taxes |       |            |       |       |       |           |       | 1,140,000         |       |         |       | 1,140,000         |       |         |       | 1,140,000              |       |
| Minimum pension  liability adjustment, net of $44,000 of taxes      |       |            |       |       |       |           |       | 88,000            |       |         |       | 88,000            |       |         |       | 88,000                 |       |
| Total  comprehensive income                                         |       |            |       |       |       |           |       | $                 | 15,865,000 |         |       |              |       |         |       |                   |       |   |
|                                                                |       |            |       |       |       |           |       |              |       |         |       |              |       |         |       |                   |       |
| At September 30,  2006                                              |       | 8,169,060       |       | $          | 4,085,000  |           | $          | 144,000           |       |         |       | $                 | 43,524,000 |         | $          | 2,852,000              |       | $ | — |   | $ | 50,605,000 |   |

 

(Continued On NextPage)

 

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Years ended September 30, 2005, 2006and 2007

 

(continued from previous page)

 
| ** **                                                                                               | ** ** | ** **      | ** ** | ** ** | ** **    | ** **     | ** ** | ** **        | ** ** | ** **   | ** ** | **Accumulated**   | ** **     | ** **   | ** ** | ** **             | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|---------------|----------------|------------|-------------------|------------|--------------|------------|-------------------|----------------|--------------|------------|------------------------|------------|
| ** **                                                                                               | ** ** | ** **      | ** ** | ** ** | ** **    | **Additional** | ** ** | ** **        | ** ** | ** **   | ** ** | **Other**         | ** **     | ** **   | ** ** | **Total**              | ** ** |
| ** **                                                                                               | ** ** | **Shares**      | ** ** | **Common** | ** **    | **Paid-In**    | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | **Comprehensive** | ** **     | **Treasury** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                                               | ** ** | **Outstanding** | ** ** | **Stock**  | ** **    | **Capital**    | ** ** | **Income**        | ** ** | **Earnings** | ** ** | **Income**        | ** **     | **Stock**    | ** ** | **Equity**             | ** ** |
|                                                                                                     |       |            |       |       |          |           |       |              |       |         |       |              |           |         |       |                   |       |
| Balance at  September 30, 2006                                                                           |       | 8,169,060       |       | $          | 4,085,000     |           | $          | 144,000           |       |         |       | $                 | 43,524,000     |         | $          | 2,852,000              |       | $ | — |   | $ | 50,605,000 |   |
|                                                                                                     |       |            |       |       |          |           |       |              |       |         |       |              |           |         |       |                   |       |
| Exercise of stock  options, 111,000 shares net of 1,900 shares tendered and placed in treasury           |       | 109,100         |       | 55,000     |          | 314,000        |       |              |       |         |       |              |           | (40,000      | )          | 329,000                |       |
|                                                                                                     |       |            |       |       |          |           |       |              |       |         |       |              |           |         |       |                   |       |
| Share-based  compensation costs                                                                          |       |            |       |       |          | 77,000         |       |              |       |         |       |              |           |         |       | 77,000                 |       |
|                                                                                                     |       |            |       |       |          |           |       |              |       |         |       |              |           |         |       |                   |       |
| Tax benefit from  employee stock option transactions                                                     |       |            |       |       |          | 203,000        |       |              |       |         |       |              |           |         |       | 203,000                |       |
|                                                                                                     |       |            |       |       |          |           |       |              |       |         |       |              |           |         |       |                   |       |
| Purchases of  10,000 common shares for treasury                                                          |       | (10,000         | )          |       |          |           |       |              |       |         |       |              |           | (155,000     | )          | (155,000               | )          |
|                                                                                                     |       |            |       |       |          |           |       |              |       |         |       |              |           |         |       |                   |       |
| Dividends  declared, $0.25 per share                                                                |       |            |       |       |          |           |       |              |       | (2,052,000   | )          |              |           |         |       | (2,052,000             | )          |
|                                                                                                     |       |            |       |       |          |           |       |              |       |         |       |              |           |         |       |                   |       |
| Comprehensive  income:                                                                                   |       |            |       |       |          |           |       |              |       |         |       |              |           |         |       |                   |       |
| Net earnings                                                                                             |       |            |       |       |          |           |       | $                 | 3,516,000  |         | 3,516,000  |              |           |         |       |                   | 3,516,000  |   |
| Other  comprehensive income – foreign currency translation adjustments, net of  $2,883,000 of taxes |       |            |       |       |          |           |       | 3,316,000         |       |         |       | 3,316,000         |           |         |       | 3,316,000              |       |
| Total  comprehensive income                                                                              |       |            |       |       |          |           |       | $                 | 6,832,000  |         |       |              |           |         |       |                   |       |   |
|                                                                                                     |       |            |       |       |          |           |       |              |       |         |       |              |           |         |       |                   |       |
| Adjustment for  initial adoption of SFAS No. 158, net of $636,000 tax benefit                            |       |            |       |       |          |           |       |              |       |         |       | (1,235,000        | )              |         |       | (1,235,000             | )          |
|                                                                                                     |       |            |       |       |          |           |       |              |       |         |       |              |           |         |       |                   |       |
| **At  September 30, 2007**                                                                               | ** ** | **8,268,160**   | ** ** | **$**      | **4,140,000** | ** **     | **$**      | **738,000**       | ** ** | ** **   | ** ** | **$**             | **44,988,000** | ** **   | **$**      | **4,933,000**          | ** ** | **$** | **(195,000** | **)** | **$** | **54,604,000** | ** ** |

 

See Notes to Consolidated Financial Statements

 

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**BARNWELL INDUSTRIES, INC.**

 

**AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**YEARS ENDED SEPTEMBER 30, 2007,2006 AND 2005**

 

**1.****                                      DESCRIPTIONOF THE REPORTING ENTITY AND BUSINESS**

 

The consolidatedfinancial statements include the accounts of Barnwell Industries, Inc. andall majority-owned subsidiaries, including an indirect 77.6%-owned landinvestment general partnership and two 80%-owned joint ventures, (collectivelyreferred to herein together with its subsidiaries as “Barnwell,” “we,” “our,” “us,”or the “Company”). All significant intercompany accounts and transactions havebeen eliminated. Investments in companies over which Barnwell has the abilityto exercise significant influence, but not control, are accounted for using theequity method.

 

During its last threefiscal years, Barnwell was engaged in the following lines of business:1) exploring for, developing, producing and selling oil and natural gas inCanada, 2) investment in leasehold land and other real estate interests inHawaii, 3) acquisition of property for investment and development of homesfor sale in Hawaii (established January 2007), and 4) drilling wellsand installing and repairing water pumping systems in Hawaii. Barnwell’s oiland natural gas activities comprise its largest business segment. Approximately73% of Barnwell’s revenues and 92% of Barnwell’s capital expenditures for thefiscal year ended September 30, 2007 were attributable to its oil andnatural gas activities. Barnwell’s land investment segment revenues accountedfor 12% of fiscal 2007 revenues; Barnwell’s contract drilling activitiesaccounted for 13% of fiscal 2007 revenues; and other revenues comprised 2% offiscal 2007 revenues. There were no revenues generated by Barnwell’s realestate development segment during fiscal 2007.

 

**2.****                                      SIGNIFICANTACCOUNTING POLICIES**

 

*Cash and Cash Equivalents*

 

Cashand cash equivalents include cash on hand, demand deposits and short-terminvestments with original maturities of three months or less.

 

*Trade Accounts Receivable*

 

Tradeaccounts receivable are recorded at the invoiced amount and do not bearinterest. The allowance for doubtful accounts is Barnwell’s best estimate ofthe amount of probable credit losses in Barnwell’s existing accounts receivableand is based on historical write-off experience. Account balances are chargedoff against the allowance after all means of collection have been exhausted andthe potential for recovery is considered remote. Barnwell does not have anyoff-balance sheet credit exposure related to its customers.

 

72

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*Oil and Natural Gas Properties*

 

Barnwelluses the full cost method of accounting under which all costs incurred in theacquisition, exploration and development of oil and natural gas reserves,including costs related to unsuccessful wells and estimated future siterestoration and abandonment, are capitalized until such time as the aggregateof such costs net of accumulated depletion and oil and gas related deferredincome taxes, on a country-by-country basis, equals the sum of 1) thediscounted present value (at 10%), using prices as of the end of each reportingperiod on a constant basis, of Barnwell’s estimated future net cash flows fromestimated production of proved oil and natural gas reserves as determined byindependent petroleum engineers, less estimated future expenditures to beincurred in developing and producing the proved reserves but excluding futurecash outflows associated with settling asset retirement obligations accrued onthe balance sheet; plus 2) the cost of major development projects andunproven properties not subject to depletion, if any; plus 3) the lower ofcost or estimated fair value of unproven properties included in costs subjectto depletion; less 4) related income tax effects. If net capitalized costsexceed this limit, the excess is expensed unless subsequent market pricechanges eliminate or reduce the indicated write-down in accordance with U.S.Securities and Exchange Commission Staff Accounting Bulletin Topic 12D. Depletionis computed using the units-of-production method whereby capitalized costs, netof salvage values, plus estimated future costs to develop proved reserves andsatisfy asset retirement obligations, are amortized over the total estimated provedreserves on a country-by-country basis. Investments in major developmentprojects are not depleted until either proved reserves are associated with theprojects or impairment has been determined. At September 30, 2007 and2006, Barnwell had no investments in major oil and natural gas developmentprojects that were not being depleted. General and administrative costs relatedto oil and natural gas operations are expensed as incurred. Proceeds from thedisposition of minor producing oil and natural gas properties are credited tothe cost of oil and natural gas properties. Gains or losses are recognized onthe disposition of significant oil and natural gas properties.

 

Revenuesassociated with the sale of oil, natural gas and natural gas liquids are recognizedin the Consolidated Statements of Earnings when the oil, natural gas andnatural gas liquids are delivered and title has passed to the customer.

 

Barnwell’ssales reflect its gross working interest share. Barnwell’s production isdelivered and sold at the plant gate and Barnwell does not hold anytransportation contracts with pipelines. Additionally, Barnwell does not havecontractual obligations related to the physical amount of natural gas to bedelivered nor does Barnwell have natural gas imbalances related to naturalgas-balancing arrangements with its partners.

 

*Investment in Land Interests*

 

Barnwellaccounts for sales of development rights under option and the Increment Iand Increment II leasehold land interest sales under the full accrual methodpursuant to the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 66, “Accounting for Sales of Real Estate.”  Gains from such sales are recognized when thebuyer’s investments are adequate to demonstrate a commitment to pay for the property,risks and rewards of ownership have been transferred to the buyer, and Barnwelldoes not have a substantial continuing involvement with the property sold. Thecash proceeds received by Barnwell for the sales of development rights andleasehold land interests were adequate to demonstrate a commitment to pay forthe property, and Barnwell conveyed the related development rights andleasehold land interests upon consummation of the sales with no substantialcontinuing involvement with the property. With regard to the sales ofIncrement I and 

 

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Increment IIleasehold land interests, in accordance with SFAS No. 66, the percentageof sales payments are contingent future profits which will be recognized whenthey are realized, and all costs of the sales were recognized at the time ofsale and none were deferred to future periods when any contingent profits willbe recognized. Costs incurred for the acquisition and improvement of leaseholdland interests and lot acquisition rights not yet sold are included in theConsolidated Balance Sheets under the caption “Investment in Land Interests.”  Investment in land interests is reported atthe lower of the asset carrying value or fair value and is evaluated for impairmentwhenever events or changes in circumstances indicate that the recordedinvestment balance may not be fully recoverable.

 

*Residential Lots UnderDevelopment, Investment in Residential Parcel and Deposits*

 

Residential lots underdevelopment, investment in residential parcel and deposits on residentialparcels are reported at the lower of the asset carrying value or fairvalue.  The recorded balances areevaluated for impairment whenever events or changes in circumstances indicatethat the balance may not be fully recoverable.

 

Residential lots underdevelopment, which include the costs of acquiring land, development andconstruction costs, interest, property taxes and general and administrativeexpenses related to the development of land and home construction, arecapitalized. Costs that relate to a specific lot or home are assigned to thatlot or home while common costs related to multiple lots or homes will beallocated to each in proportion to their anticipated sales value.

 

Barnwell capitalizes interestcosts during development and construction and intends to include these costs incost of sales when homes are sold.

 

*Investment in Affiliate*

 

Barnwell accounts forits investment in unconsolidated affiliates under the equity method whenBarnwell’s ownership interest is more than 20% but no more than 50% andBarnwell does not exercise direct or indirect control over the investee. Factorsthat are considered in determining whether or not Barnwell exercises controlinclude rights of partners regarding significant strategic and operationaldecisions. Under the equity method, the investmentis carried at cost and Barnwell’s share of the affiliate’s earnings or loss isrecognized as earned.

 

*Contract Drilling*

 

Revenues,costs and profits applicable to contract drilling contracts are included in theConsolidated Statements of Earnings using the percentage of completion method,principally measured by the percentage of labor dollars incurred to date foreach contract to total estimated labor dollars for each contract. Contractlosses are recognized in full in the period the losses are identified. Theperformance of drilling contracts may extend over more than one year and,in the interim periods, estimates of total contract costs and profits are usedto determine revenues and profits earned for reporting the results of contractdrilling operations. Revisions in the estimates required by subsequentperformance and final contract settlements are included as adjustments to theresults of operations in the period such revisions and settlements occur. Contractsare normally less than one year in duration.

 

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*Income Taxes*

 

Deferredincome taxes are determined using the asset and liability method. Deferred taxassets and liabilities are recognized for the estimated future tax impacts ofdifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets andliabilities are measured using enacted tax rates in effect for the year inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date.

 

Avaluation allowance is provided when it is more likely than not that someportion or all of the deferred tax asset will not be realized. Barnwell hasestablished a valuation allowance primarily for the U.S. tax effect of deferredCanadian taxes, accrued expenses and state of Hawaii net operating losscarryforwards which may not be realizable in future years as there can beno assurance of any specific level of earnings or that the timing of U.S.taxable income will coincide with the payment of Canadian taxes to enableCanadian taxes to be fully deducted (or recoverable) for U.S. tax purposes.

 

*Retirement Plans*

 

Barnwellsponsors a noncontributory defined benefit pension plan covering substantiallyall of its U.S. employees, with benefits based on years of service and theemployee’s highest consecutive five-year average earnings. Additionally,Barnwell sponsors a Supplemental Employee Retirement Plan (“SERP”), anoncontributory supplemental retirement benefit plan which covers certaincurrent and former employees of Barnwell for amounts exceeding the limitsallowed under the pension plan. In December 2006, Barnwell adopted apostretirement medical insurance benefits plan covering certain U.S. employees.

 

Barnwellaccounts for its defined benefit pension plan and SERP in accordance with SFAS No. 87,“Employers’ Accounting for Pensions” and its postretirement medical insurancebenefits plan in accordance with SFAS No. 106, “Employers’ Accounting forPostretirement Benefits Other Than Pensions.” As of September 30, 2007, Barnwell adopted the recognition anddisclosure provisions of SFAS No. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans – an amendment of FASBStatements No. 87, 88, 106, and 132(R)” for its retirement plans. SFAS No. 158requires an employer to recognize the over-funded or under-funded status ofdefined benefit pension and other postretirement plans (other than amultiemployer plan) as an asset or liability in its statement of financialposition and to recognize changes in that funded status in the year in whichthe changes occur through comprehensive income. SFAS No. 158 also requiresthe measurement of retirement plan assets and obligations as of the date of theemployer’s fiscal year-end statement of financial position (with limitedexceptions). See further discussion at Note 14 below.

 

*Long-lived Assets*

 

Long-livedassets to be held and used, other than oil and natural gas properties, areevaluated for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be fully recoverable. If thefuture cash flows expected to result from use of the asset (undiscounted andwithout interest charges) are less than the carrying amount of the asset, animpairment loss is recognized. Such impairment loss is measured as the amountby which the carrying amount of the asset exceeds the fair value of the asset. Long-livedassets to be disposed of are reported at the lower of the asset carrying valueor fair value, less cost to sell.

 

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Drillingrigs, premises and other property and equipment are depreciated using thestraight-line method based on estimated useful lives.

 

*Inventories*

 

Inventoriesare comprised of drilling materials and are valued at the lower ofweighted-average cost or market value.

 

*Environmental*

 

Barnwellis subject to extensive environmental laws and regulations. These laws, whichare constantly changing, regulate the discharge of materials into the environmentand maintenance of surface conditions and may require Barnwell to removeor mitigate the environmental effects of the disposal or release of petroleumor chemical substances at various sites. Environmental expenditures areexpensed or capitalized depending on their future economic benefit. Expendituresthat relate to an existing condition caused by past operations and that have nofuture economic benefits are expensed. Liabilities for expenditures of anoncapital nature are recorded when environmental assessment and/or remediationis probable, and the costs can be reasonably estimated.

 

*Asset Retirement Obligation*

 

Barnwell accounts for asset retirement obligationsin accordance with SFAS No. 143, “Accounting for Asset RetirementObligations,” and FASB Interpretation No. 47, “Accounting for ConditionalAsset Retirement Obligations - an interpretation of FASB Statement No. 143,”which requires that the fair value of a liability for an asset retirementobligation be recognized in the period in which it is incurred if a reasonableestimate of fair value can be made. Barnwell’s estimated site restoration andabandonment costs of its oil and natural gas properties are capitalized as part ofthe carrying amount of oil and natural gas properties and depleted over thelife of the related reserves. The liability is accreted at the end of eachperiod through charges to oil and natural gas operating expense. If anobligation is settled for other than the carrying amount of the liability,Barnwell will recognize a gain or loss on settlement.

 

*Earnings Per Common Share*

 

In December 2004,Barnwell’s Board of Directors declared a two-for-one stock split in the form ofa 100% stock dividend. The shares were distributed on January 28, 2005 toall stockholders of record as of January 11, 2005.

 

In October 2005,Barnwell’s Board of Directors declared a three-for-one stock split in the form ofa 200% stock dividend. The shares were distributed on November 14, 2005 toall stockholders of record as of October 28, 2005.

 

All information in this Form 10-Khas been adjusted where necessary to reflect the stock splits for all periodspresented.

 

Basicearnings per share excludes dilution and is computed by dividing net earningsby the weighted-average number of common shares outstanding for the period. Dilutedearnings per share includes the potentially dilutive effect of outstandingcommon stock options.

 

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Reconciliations betweenthe numerator and denominator of the basic and diluted earnings per sharecomputations for the years ended September 30, 2007, 2006 and 2005 are asfollows:

 
| ** **                                           | ** ** | **September 30, 2007** | ** **    |
|------------------------------------------------------|------------|----------------------------------|---------------|
| ** **                                           | ** ** | **Net Earnings**            | ** **    | **Shares** | ** ** | **Per-Share** | ** ** |
| ** **                                           | ** ** | **(Numerator)**                  | ** **    | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic earnings per share                             | ** ** | **$**                            | **3,516,000** | ** ** | **8,208,189** | ** ** | **$** | **0.43** | ** ** |
| Effect of dilutive securities - common stock options | ** ** | **—**                       | ** **    | **400,570** | ** ** | ** ** | ** ** |
| Diluted earnings per share                           | ** ** | **$**                            | **3,516,000** | ** ** | **8,608,759** | ** ** | **$** | **0.41** | ** ** |

 
| ** **                                           | ** ** | **September 30, 2006** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **Net Earnings**            | ** ** | **Shares** | ** ** | **Per-Share** | ** ** |
| ** **                                           | ** ** | **(Numerator)**                  | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic earnings per share                             |       | $                                | 14,637,000 |   | 8,169,060 |   | $ | 1.79 |   |
| Effect of dilutive securities - common stock options |       | —                           |       | 529,345 |   |   |   |
| Diluted earnings per share                           |       | $                                | 14,637,000 |   | 8,698,405 |   | $ | 1.68 |   |

 
| ** **                                           | ** ** | **September 30, 2005** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **Net Earnings**            | ** ** | **Shares** | ** ** | **Per-Share** | ** ** |
| ** **                                           | ** ** | **(Numerator)**                  | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic earnings per share                             |       | $                                | 6,027,000  |   | 8,152,531 |   | $ | 0.74 |   |
| Effect of dilutive securities - common stock options |       | —                           |       | 490,501 |   |   |   |
| Diluted earnings per share                           |       | $                                | 6,027,000  |   | 8,643,032 |   | $ | 0.70 |   |

 

*Share-Based Compensation*

 

Effective October 1,2005, Barnwell adopted the provisions of SFAS No. 123(R), “Share-BasedPayment,” and Securities and Exchange Commission Staff Accounting Bulletin No. 107,“Share-Based Payment,” for its share-based compensation plans using themodified prospective method. Under SFAS No. 123(R), share-basedcompensation cost is measured at fair value. Under the modified prospectivetransition method, compensation cost recognized in the years ended September 30,2007 and 2006 include the cost for equity-classified share options vestedduring the period and all vested liability-classified share-based awardsgranted prior to October 1, 2005, as determined under the provisions ofSFAS No. 123(R). The cumulative effect, net of income taxes, of the impactof adoption of SFAS No. 123(R) on liability-classified awards on October 1,2005, was not material to the consolidated financial statements. Results forprior periods have not been restated.

 

Prior to adopting SFAS No. 123(R),Barnwell accounted for these plans under the recognition and measurementprinciples of Accounting Principles Board Opinion (“APB”) No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations and disclosurerequirements established by SFAS No. 123, “Accounting for Stock-Based Compensation,”as amended by SFAS No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure.”  Under APB No. 25,no 

 

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compensationexpense was recorded for Barnwell’s stock options issued under the qualifiedplan. The pro forma effects on net earnings and earnings per share forqualified stock options were instead disclosed in a footnote to the financialstatements. Under APB No. 25, compensation expense for non-qualified stockoptions with stock appreciation rights features were recorded utilizing themarket price of Barnwell’s stock at each period-end to determine the vestedintrinsic value of the stock appreciation rights.

 

*Foreign Currency Translation*

 

Assets and liabilitiesof foreign operations and subsidiaries are translated at the year-end exchangerate and resulting translation gains or losses are accounted for in astockholders’ equity account entitled “Accumulated other comprehensive income,net.”  Operating results of foreign subsidiariesare translated at average exchange rates during the period. Realized foreigncurrency transaction gains or losses were not material in fiscal years 2007,2006, and 2005.

 

*Use of Estimates in thePreparation of Financial Statements*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses and the disclosure of contingent assets andliabilities. Actual results could differ significantly from those estimates. Significantassumptions are required in the valuation of deferred tax assets, assetretirement obligations, share-based payment arrangements, obligations forretirement plans, contract drilling estimated costs to complete, proved oil andnatural gas reserves, and the fair value of other assets, and such assumptions may impactthe amount at which such items are recorded.

 

*Recently Issued AccountingStandards*

 

In June 2006, the Financial AccountingStandards Board (the “FASB”) ratified the Emerging Issues Task Force (“EITF”)consensus on EITF Issue No. 06-3, “HowTaxes Collected from Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement.” The scope of EITF 06-3 includes any tax assessed by a governmentalauthority that is directly imposed on a revenue-producing transaction between aseller and a customer and may include, but is not limited to, sales, use,value added, Universal Service Fund contributions and some excise taxes. TheTask Force affirmed its conclusion that entities should present these taxes inthe income statement on either a gross or a net basis, based on theiraccounting policy, which should be disclosed pursuant to Accounting PrincipalBoard Opinion No. 22, “Disclosureof Accounting Policies.”  Barnwelladopted the provisions of EITF 06-3 on January 1, 2007. The adoption ofEITF 06-3 did not have a material impact on Barnwell’s financial statements. Barnwellpresents taxes within the scope of EITF 06-3 on both a net and gross basis,depending upon the nature of the tax. Amounts that are reported gross are notsignificant to Barnwell’s financial statements.

 

In September 2006, the United States Securitiesand Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.”  SAB No. 108provides guidance on the consideration of the effects of prior yearmisstatements in quantifying current year misstatements for the purpose of amateriality assessment. Barnwell adopted the provisions of SAB No. 108during the first quarter of fiscal 2007. Adoption had no material impact onBarnwell’s financial condition, results of operations, or cash flows.

 

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In June 2006, the FASB issued FASBInterpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes– an interpretation of FASB Statement No. 109.”  This interpretation prescribes a “more-likely-than-not”recognition threshold and measurement attribute (the largest amount of benefitthat is greater than 50% likely of being realized upon ultimate settlement withtax authorities) for the financial statement recognition and measurement of atax position taken or expected to be taken in a tax return. This interpretationalso provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. FIN No. 48is effective for fiscal years beginning after December 15, 2006. Adoptionof FIN No. 48 will not have a material impact on Barnwell’s results ofoperations, financial condition and liquidity.

 

In September 2006, the FASB issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, “Fair Value Measurements.”  SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements. SFASNo. 157 does not require any new fair value measurements, however, forsome entities, the application of SFAS No. 157 will change currentpractice. SFAS No. 157 is effective for fiscal years beginning after November 15,2007. Barnwell’s management is currently evaluating the effect of theseprovisions on Barnwell’s results of operations, financial condition andliquidity.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities –including an amendment of FASB Statement No. 115.”  SFAS No. 159 provides companies with anoption to report selected financial assets and financial liabilities at fairvalue. Unrealized gains and losses on items for which the fair value option hasbeen elected are reported in earnings at each subsequent reporting date. Upfrontcosts and fees related to items for which the fair value option is elected arerecognized in earnings as incurred. SFAS No. 159 is effective for fiscalyears beginning after November 15, 2007. Barnwell’s management iscurrently evaluating the effect of these provisions on Barnwell’s results ofoperations, financial condition and liquidity.

 

In June 2007, the FASB ratified the EITFconsensus on EITF Issue No. 06-11, “Accounting for Income Tax Benefits onDividends on Share-Based Payment Awards.” This EITF indicates that tax benefits of dividends on unvestedrestricted stock are to be recognized in equity as an increase in the pool ofexcess tax benefits. Should the related awards forfeit or no longer becomeexpected to vest, the benefits are to be reclassified from equity to the incomestatement. The EITF is effective for fiscal years beginning after December 15,2007. Barnwell will adopt the EITF as required and management does not expectit to have any impact on Barnwell’s results of operations, financial conditionor liquidity.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”  SFAS No. 141(R)establishes principles and requirements for how an acquirer in a businesscombination recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, any controlling interestin the acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements to enableusers of the financial statements to evaluate the nature and financial effectsof the business combination.  SFASNo. 141(R) applies to business combinations for which the acquisition dateis on or after December 15, 2008. Barnwell’s management is currently evaluating the impact of theseprovisions on Barnwell’s results of operations, financial condition andliquidity.

 

InDecember 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests inConsolidated Financial Statements – an amendment to Accounting ResearchBulletin No. 51.”  SFAS No. 160establishes accounting and reporting standards that require the ownershipinterest in subsidiaries held by parties other than the parent be clearlyidentified and presented in the Consolidated Balance Sheets within equity, butseparate from the parent’s equity; the amount of consolidated net incomeattributable to the parent and the noncontrolling interest be clearlyidentified and presented on the face of the Consolidated Statement of Earnings;and changes in a parent’s ownership interest while the parent retains itscontrolling financial interest in its subsidiary be accounted forconsistently.  This statement iseffective for fiscal years beginning on or after December 15, 2008.  Barnwell’s management is currently evaluatingthe impact of these provisions on Barnwell’s results of operations, financialcondition and liquidity.

 

**3.             ACCOUNTS RECEIVABLE AND CONTRACTCOSTS**

 

Accounts receivable arenet of allowances for doubtful accounts of $10,000 as of September 30,2007 and 2006. Included in accounts receivable are contract retainage balancesof $385,000 and $298,000 as of September 30, 2007 and 2006, respectively. Thesebalances are expected to be collected within one year, generally within 45 daysafter the related contracts have received final acceptance and approval.

 

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Costsand estimated earnings on uncompleted contracts are as follows:

 
| ** **                              | ** ** | **September 30,** | ** **    |
|-----------------------------------------|------------|------------------------|---------------|
| ** **                              | ** ** | **2007**               | ** **    | **2006** | ** ** |
| Costs incurred on uncompleted contracts | ** ** | **$**                  | **8,226,000** |   | $ | 10,616,000 |   |
| Estimated earnings                      | ** ** | **1,045,000**          |          | 1,963,000 |   |
| ** **                              |       | **9,271,000**          |          | 12,579,000 |   |
| Less billings to date                   | ** ** | **9,328,000**          |          | 12,179,000 |   |
| ** **                              |       | **$**                  | **(57,000**   | **)** | $ | 400,000 |   |

 

Costs and estimatedearnings on uncompleted contracts are included in the Consolidated BalanceSheets as follows:

 
| ** **                                                                                                           | ** ** | **September 30,** | ** **  |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|
| ** **                                                                                                           | ** ** | **2007**               | ** **  | **2006** | ** ** |
| Costs and estimated earnings in excess of billings on  uncompleted contracts (included in other current assets)      |       | **$**                  | **598,000** |   | $ | 783,000 |   |
| Billings in excess of costs and estimated earnings on uncompleted contracts (included  in other current liabilities) |       | **(655,000**           | **)**       | (383,000 | ) |
| ** **                                                                                                           |       | **$**                  | **(57,000** | **)** | $ | 400,000 |   |

 

**4.             SHARE-BASED PAYMENTS**

 

Barnwell has outstandingstock options issued to certain employees under both a qualified plan approvedby stockholders (the 1998 Stock Option Plan) and non-qualified plans. Thequalified options were granted in accordance with the 1998 Stock Option Planwith an exercise price equal to the closing market price of Barnwell’s stock onthe date preceding the date of grant (110% of the closing market price on thedate preceding the date of grant for options granted to affiliates), vestannually over four years of continuous service, and expire ten years from thedate of grant (five years from date of grant for options granted to affiliates).The qualified plan permits the grant of share options to employees for up to780,000 shares of common stock. A total of 774,000 share options have beengranted under this plan, leaving 6,000 option shares available for grant underthe qualified plan at September 30, 2007. The non-qualified options weregranted with an exercise price equal to the closing market price of Barnwell’sstock on the date of grant, vest annually over five years of continuousservice, and expire ten years from the date of grant. The non-qualified optionshave stock appreciation rights features that permit the holder to receivestock, cash or a combination thereof equal to the amount by which the fairmarket value, at the time of exercise of the option, exceeds the option price. Barnwellcurrently has a policy of issuing new shares to satisfy share option exercisesunder the qualified plan and under the non-qualified plans when the optioneerequests shares.

 

Effective October 1,2005, Barnwell adopted the provisions of SFAS No. 123(R), “Share-BasedPayment,” and Securities and Exchange Commission Staff Accounting Bulletin No. 107,“Share-Based Payment,” for its share-based compensation plans using themodified prospective method. Barnwell previously accounted for these plansunder the recognition and measurement principles of APB No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations and disclosurerequirements established by SFAS No. 123, “Accounting for Stock-Based Compensation,”as amended by SFAS No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure.”

 

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Under SFAS No. 123(R),share-based compensation cost is measured at fair value. Barnwell utilizes aclosed-form valuation model to determine the fair value of each optionaward. Expected volatilities are based on the historical volatility of Barnwell’sstock over a period consistent with that of the expected terms of the options. Theexpected terms of the options represent expectations of future employeeexercise and are estimated based on factors such as vesting periods,contractual expiration dates, historical trends in Barnwell’s stock price, andhistorical exercise behavior. The risk-free rates for periods within thecontractual life of the options are based on the yields of U.S. Treasuryinstruments with terms comparable to the estimated option terms. Expecteddividends are based on current and historical dividend payments. Share-basedcompensation expense recognized in earnings for the years ended September 30,2007, 2006 and 2005 are reflected in “General and administrative” expenses inthe Consolidated Statements of Earnings.

 

*Equity-classified Awards*

 

Compensation cost forequity-classified awards, such as Barnwell’s stock options issued under thequalified plan, is measured at the grant date based on the fair value of theaward and is recognized as an expense in earnings over the requisite serviceperiod using a graded vesting method.

 

A summary of theactivity in Barnwell’s equity-classified share options as of the beginning andend of the year ended September 30, 2007 is presented below:

 
| ** **                             | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|----------------------------------------|------------|------------|------------|---------------|------------|-----------------|------------|---------------|------------|
| ** **                             | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| **Options**                            | ** ** | **Shares** | ** ** | **Price**     | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| Outstanding at October 1, 2006    |       | 456,000    |       | $             | 5.32       |            |       |          |       |   |
| Granted                                |       | —     |       |          |       |            |       |          |       |
| Exercised                              |       | (111,000   | )          | $             | 3.33       |            |       |          |       |   |
| Forfeited/Expired                      |       | —     |       |          |       |            |       |          |       |
| Outstanding at September 30, 2007 |       | 345,000    |       | $             | 5.96       |            | 3.1        |          | $          | 3,685,000 |   |
|                                   |       |       |       |          |       |            |       |          |       |
| Exercisable at September 30, 2007 |       | 240,000    |       | $             | 4.53       |            | 2.8        |          | $          | 2,907,000 |   |

 

Total share-basedcompensation expense for equity-classified awards vested in the years ended September 30,2007 and 2006 was $77,000 and $144,000, respectively. There was no impact onincome taxes as the expense relates to qualified options. There was noshare-based compensation expense for equity-classified awards vested in theyear ended September 30, 2005.

 

During fiscal 2007,91,000 stock options were exercised resulting in a $45,000 increase in commonstock and a $284,000 increase in additional paid-in capital. An additional20,000 stock options were exercised by tendering 1,900 shares of Barnwell stockat an average market value of $21.09 per share, resulting in a $10,000 increasein common stock, a $30,000 increase in additional paid-in capital and a $40,000increase in treasury stock. There were no other equity-classified share optiongrants, exercises, forfeitures or expirations of unexercised options in theyear ended September 30, 2007.

 

The total intrinsicvalue of equity options exercised during the years ended September 30,2007, 2006 and 2005 was $1,733,000, nil and $1,384,000, respectively.

 

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Barnwell recorded a$203,000 tax benefit related to employees’ disqualification of qualified stockoptions. The tax benefit is reflected as an increase in additional paid-incapital in fiscal 2007. There were no stock option disqualifications in fiscal2006 and 2005.

 

*Liability-classified Awards*

 

Compensation cost forliability-classified awards, such as Barnwell’s non-qualified stock optionswith stock appreciation rights features, is remeasured at each period-end usinga closed-form valuation model based on current values and is recognized asan expense over the requisite service period.

 

The followingassumptions were used in estimating fair value for all liability-classifiedshare options previously granted prior to October 1, 2005 and outstandingduring the years ended September 30, 2007 and 2006 (there were no optionsgranted in fiscal 2007 and 2006):

 
| ** **                  | ** ** | **Year ended September 30,** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|
| ** **                  | ** ** | **2007**                          | ** ** | **2006** | ** ** |
|                        |       |                              |       |   |   |
| Expected volatility range   |       | 35.0% to 35.2%                    |       | 28.4% to 42.0% |   |
| Weighted-average volatility |       | 35.2%                             |       | 33.0% |   |
| Expected dividends          |       | 1.2% to 1.3%                      |       | 1.0% |   |
| Expected term (in years)    |       | 0.7 to 4.8                        |       | 0.8 to 6.0 |   |
| Risk-free interest rate     |       | 4.1% to 4.2%                      |       | 4.7% to 4.9% |   |
| Expected forfeitures        |       | None                              |       | None |   |

 

The application of alternative assumptions could producesignificantly different estimates of the fair value of stock-basedcompensation, and consequently, the related costs reported in theConsolidated Statements of Earnings.

 

A summary of theactivity in Barnwell’s liability-classified share options as of the beginningand end of the year ended September 30, 2007 is presented below:

 
| ** **                              | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|-----------------------------------------|------------|------------|------------|---------------|------------|-----------------|------------|---------------|------------|
| ** **                              | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                              | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                              | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| **Options**                             | ** ** | **Shares** | ** ** | **Price**     | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| Outstanding at October 1,  2006    |       | 300,000    |       | $             | 6.32       |            |       |          |       |   |
| Granted                                 |       | —     |       |          |       |            |       |          |       |
| Exercised                               |       | (104,000   | )          | $             | 4.03       |            |       |          |       |   |
| Forfeited/Expired                       |       | —     |       |          |       |            |       |          |       |
| Outstanding at September 30,  2007 |       | 196,000    |       | $             | 7.54       |            | 5.9        |          | $          | 1,784,000 |   |
|                                    |       |       |       |          |       |            |       |          |       |
| Exercisable at September 30,  2007 |       | 70,000     |       | $             | 5.26       |            | 3.5        |          | $          | 797,000 |   |

 

Total share-based compensation expense forliability-classified awards was $385,000 and $439,000 for the years ended September 30, 2007 and 2006, respectively. The relatedincome tax benefits were $133,000 and $146,000 for the years ended September 30, 2007 and 2006, respectively. 

 

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Includedin share-based compensation for liability-classified awards for fiscal 2007 and2006 was $331,000 and $740,000, respectively, of compensation expense relatedto shares that vested during each respective period and a $54,000 expense and a$301,000 benefit, respectively, due to remeasurement at September 30, 2007 and 2006 of the fair value ofpreviously vested shares.

 

In fiscal 2007, the stock appreciation rightsfeature of 104,000 shares of non-qualified options were exercised and$2,024,000 representing the difference between the exercise prices and theclosing prices per share on the days prior to the dates of exercise were paidin cash by Barnwell. The tax benefit realized for the tax deduction of theexercised options was $705,000 for the year ended September 30, 2007. Therewere no other liability-classified share option grants, exercises, expirations,or forfeitures in the year ended September 30, 2007.

 

During fiscal 2006, the stock appreciation rightsfeature of 90,000 shares of non-qualified options were exercised and $1,649,000representing the difference between the exercise prices and the closing pricesper share on the days prior to the dates of exercise were paid in cash byBarnwell. The tax benefit realized for the tax deduction of the exercisedoptions was $577,000 for the year ended September 30, 2006. There were noother liability-classified share option grants, exercises, expirations, orforfeitures in the year ended September 30, 2006.

 

*Summary*

 

As of September 30,2007, there was $340,000 of total unrecognized compensation cost related tononvested equity-classified and liability-classified share options. That costis expected to be recognized over 1.8 years. Total share-based compensationexpense related to the vesting of awards in the years ended September 30,2007 and 2006 was $408,000 and $884,000, respectively. Total share-basedcompensation expense for all awards, including the impact of changes in fairvalues for liability-classified awards, was $462,000 and $583,000 for fiscal2007 and 2006, respectively. The income tax benefit on total compensationexpense for all awards for fiscal 2007 and 2006 was $133,000 and $146,000,respectively.

 

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The following tableillustrates the effect on net earnings and earnings per share as if thefair-value recognition provisions of SFAS No. 123 were applied to all ofits share-based compensation awards for fiscal 2005:

 
| ** **                                                                                                                                                            | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Net earnings, as reported                                                                                                                                             |       | $          | 6,027,000  |   |
|                                                                                                                                                                  |       |       |       |
| Add: Share-based employee compensation expense of $3,500,000, less  $1,256,000 of related taxes, included in reported net earnings                                    |       | 2,244,000  |       |
|                                                                                                                                                                  |       |       |       |
| Deduct: Total share-based employee compensation expense determined  under the fair-value based method for all awards of $3,697,000, less  $1,323,000 of related taxes |       | (2,374,000 | )          |
|                                                                                                                                                                  |       |       |       |
| Pro forma net earnings                                                                                                                                                |       | $          | 5,897,000  |   |
|                                                                                                                                                                  |       |       |       |
| Basic Earnings Per Share:                                                                                                                                             |       |       |       |
| As reported                                                                                                                                                           |       | $          | 0.74       |   |
| Pro forma                                                                                                                                                             |       | $          | 0.72       |   |
|                                                                                                                                                                  |       |       |       |
| Diluted Earnings Per Share:                                                                                                                                           |       |       |       |
| As reported                                                                                                                                                           |       | $          | 0.70       |   |
| Pro forma                                                                                                                                                             |       | $          | 0.68       |   |

 

Fair value measurementof options without stock appreciation rights that are included in fiscal 2005pro forma net earnings was based on an option-pricing model which includedassumptions of a weighted-average expected life of 5.57 years, expectedvolatility of 25%, risk-free interest rate of 4%, and an expected dividendyield of 1%.

 

*Summary of Stock Awards*

 

In March 1995,Barnwell granted 120,000 stock options under a non-qualified plan at a purchaseprice of $3.27 per share (market price on date of grant). These options hadstock appreciation rights that permitted the holder to receive stock, cash or acombination thereof equal to the amount by which the fair market value, at thetime of exercise of the option, exceeds the option price. During the year endedSeptember 30, 2005, the stock appreciation rights feature of 42,000 sharesof these options, the remaining unexercised amount, were exercised and $464,000,the difference between the exercise price and the closing price per share onthe day prior to the date of exercise, was paid by Barnwell. Barnwellrecognized $275,000 of compensation cost relating to these options in the yearended September 30, 2005.

 

In June 1998,Barnwell granted 180,000 stock options under a non-qualified plan at a purchaseprice of $2.60 per share (market price on date of grant). These options havestock appreciation rights that permit the holder to receive stock, cash or a combinationthereof equal to the amount by which the fair market value, at the time ofexercise of the option, exceeds the option price. During the years ended September 30,2007 and 2006, the stock appreciation rights feature on 80,000 shares and60,000 shares, respectively, of these options were exercised and thedifferences between the exercise price and 

 

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the closing prices pershare on the days prior to the dates of exercise were paid by Barnwell. The remaining40,000 options expire in May 2008. Barnwell recognized compensationexpense of $229,000 and $2,223,000 relating to these options in fiscals 2007and 2005, respectively, and compensation benefit of $359,000 in fiscal 2006.

 

In December 1999,Barnwell granted qualified stock options to acquire 582,000 shares of Barnwell’scommon stock at a weighted-average exercise price per share of $2.04 (based ongrants at market price and 110% of market price at date of grant). Theseoptions were fully vested prior to fiscal 2005. A portion of these optionsexpired in December 2004 and the remaining portion of options expire in December 2009.During the years ended September 30, 2007 and 2005, Barnwell issued 91,000shares and 207,000 shares, respectively, of its common stock resulting fromexercises of these qualified stock options; no shares were issued during theyear ended September 30, 2006. No compensation cost was recognized forthese options for the years ended September 30, 2007, 2006, and 2005.

 

InDecember 2004, Barnwell granted qualified stock options to acquire 210,000shares of Barnwell’s common stock at a weighted-average exercise price pershare of $9.23 (based on grants at market price and 110% of market price at thedate of grant). These options vest annually over four years commencing one yearfrom the date of grant and expire in December 2014 and December 2009(for options granted to affiliates). During the year ended September 30,2007, Barnwell issued 20,000 shares of its common stock resulting fromexercises of these stock options. During the years ended September 30,2006 and 2005, no shares were issued. No compensation cost was recognized foroptions granted under this plan for the years ended September 30, 2007,2006 and 2005. At September 30, 2007, 6,000 shares were available forgrant under the qualified option plan.

 

In December 2004,Barnwell granted stock options to acquire 210,000 shares of Barnwell’s commonstock under a non-qualified plan at a purchase price of $8.80 per share (marketprice on date of grant). These options vest annually over five years commencingone year from the date of grant and expire in December 2014. These optionshave stock appreciation rights that permit the holder to receive stock, cash ora combination thereof equal to the amount by which the fair market value, atthe time of exercise of the option, exceeds the option price. During the yearsended September 30, 2007 and 2006, the stock appreciation rights featureof 24,000 shares and 30,000 shares, respectively, of these options wereexercised and the differences between the exercise price and the closing pricesper share on the days prior to the dates of exercise were paid to by Barnwell. Barnwellrecognized $156,000, $798,000 and $1,001,000 of compensation cost relating tothese options in the years ended September 30, 2007, 2006 and 2005,respectively.

 

In December 2005,Barnwell’s Board of Directors authorized the purchase of up to 250,000 sharesof its common stock from time to time in the open market or in privatelynegotiated transactions, depending on market conditions. On September 20, 2007, the Board ofDirectors authorized a stock repurchase program in the open market of up to150,000 shares of these 250,000 shares during the period commencing on September 24,2007 and ending on March 24, 2008. During the period from September 24,2007 through September 30, 2007, Barnwell repurchased 10,000 shares for anaggregate purchase price of $155,000 or approximately $15.50 per share pursuantto the plan. The remaining 100,000 shares of the 250,000 shares of common stockoriginally authorized may be purchased in the open market or in privatelynegotiated transactions.

 

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**5.****                                      DEPOSITSON RESIDENTIAL PARCELS, INVESTMENT IN RESIDENTIAL PARCEL AND RESIDENTIAL LOTSUNDER DEVELOPMENT**

 

During the second quarter of fiscal 2007, Kaupulehu2007, LLLP (“Kaupulehu 2007”), a Hawaii limited liability limited partnership80%-owned by Barnwell and 20%-owned by Nearco, Inc., a company controlledby Mr. Terry Johnston, a director of Barnwell and minority interest ownerin certain of Barnwell’s business ventures (see further discussion on relatedparty interests at Note 9 below), was established for the purpose ofacquiring house lots for investment and to construct turnkey single-familyhomes for future sale. Also during the second quarter of fiscal 2007, Kaupulehu2007 made nonrefundable initial deposits of $200,000 each to secure the right topurchase seven parcels in the Lot 4A Increment I area of Kaupulehu,North Kona, Hawaii from WB KD Acquisition, LLC (“WB”), an unrelated entity. WBis affiliated with RP-Hualalai Investors, LLC, a managing member of HualalaiInvestors, owners and current developers of Hualalai Resort, and WestbrookPartners, developers of Kuki’o Resort located adjacent to Hualalai Resort. Each lot under contract has a purchase priceof $2,378,000 and the deposit for each lot will be applied to the purchaseprice of each lot. If any of the parcels are not purchased, the deposit relatedto any such parcels will be forfeited and Barnwell will incur an expense as aresult of the write-off of its 80% share of any forfeited deposits.

 

InApril 2007, Kaupulehu 2007 purchased two of the aforementioned parcels andpaid $4,356,000 for the balance of the purchase price of those parcels.$400,000 of the previously paid deposits was applied to the purchase price ofthe parcels. As Kaupulehu 2007 purchased the parcels for the purpose of constructinghomes for future sale, the residential parcels acquired are classified as “ResidentialLots Under Development” on the Consolidated Balance Sheet at September 30,2007.

 

In September 2007, Kaupulehu 2007 purchased oneadditional parcel and paid $2,178,000 for the balance of the purchase price ofthat parcel. $200,000 of the previously paid deposits was applied to thepurchase price of the parcel. As of September 30, 2007, Barnwell estimatesthat it will develop two residences for sale on two parcels and that this thirdparcel will be held for investment purposes. Accordingly, the third residentialparcel acquired is classified as “Investment in Residential Parcel” on theConsolidated Balance Sheet at September 30, 2007.

 

The purchase of each of the remaining four lots isscheduled to close in December 2007, March 2008, June 2008 and September 2008.The deposits on the remaining four lots Kaupulehu 2007 has agreed to acquireare classified as “Deposits on Residential Parcels” on the Consolidated BalanceSheet at September 30, 2007.

 

Included in the Consolidated Balance Sheet as of September 30, 2007 under thecaption “Residential Lots Under Development” are capitalized costs, which include the costs of acquiring land,development and construction costs, interest, property taxes and general andadministrative expenses related to the development of land and homeconstruction. Kaupulehu 2007 capitalizes interest costs during development andconstruction and intends to include these costs in cost of sales when homes aresold. These capitalized interest costs totaled $142,000 for the year ended September 30,2007.

 

As of the date of this filing, Kaupulehu 2007 is negotiating agreementswith a project management company affiliated with Mr. Johnston and an independentbuilding contractor for home building services for Kaupulehu 2007’s lots. It isanticipated that a significant provision of such agreements will be that eachsuch service provider will receive 20% of the profit on the sale of each lot onwhich a house is constructed. In addition, Kaupulehu 2007 intends to enter intocontracts, one with the project management company affiliated with Mr. Johnstonand one with the building contractor, wherein each will be granted the right topurchase from WB one of the four remaining lots Kaupulehu 

 

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2007 has agreed to acquire. It is anticipated thatany such agreement will specify the lot that will be acquired by such serviceprovider and require such service provider to reimburse Kaupulehu 2007 for boththe $200,000 deposit on such lot and interest costs incurred by Kaupulehu 2007related to the initial deposit on such lot.

 

**6.****                                      INVESTMENTIN JOINT VENTURES**

 

In November 2006,Kaupulehu Investors, LLC (“Kaupulehu Investors”), a limited liability companythen wholly-owned by Barnwell, invested $2,379,000 in Hualalai Investors JV,LLC, and $621,000 in Hualalai Investors II, LLC, two limited liabilitycompanies unrelated to Barnwell (hereinafter referred to as “Hualalai Investors”)to acquire a 1.5% passive minority interest in Hualalai Resort, located atKaupulehu, North Kona, Hawaii. The Hualalai Resort property includes the FourSeasons Resort Hualalai at Historic Ka’upulehu, two golf courses and aclubhouse, undeveloped residential property, and approximately 5,000 acres ofagricultural-zoned leasehold land in the upland area of Kaupulehu situated between the QueenKaahumanu Highway and the Mamalahoa Highway.The $3,000,000 investment was reduced by a $525,000 cash distribution in December 2006from Hualalai Investors representing a return of capital.

 

In May 2007,Kaupulehu Investors invested $290,000 in Kona Village Investors, LLC (“KonaVillage Investors”), a limited liability company unrelated to Barnwell, to acquirea 1.5% passive minority interest in Kona Village Resort, an oceanfront hotelproperty situated on an 80-acre area adjacent to Hualalai Resort and KaupulehuLot 4A. The partners of Kona Village Investors are ostensibly the same as thepartners of Hualalai Investors.

 

In June 2007,Nearco, Inc., a company controlled by Mr. Terry Johnston, a directorof Barnwell andminority interest owner in certain of Barnwell’s business ventures (see further discussion on related party interests atNote 9 below), paid Barnwell $553,000 to acquire a 20% minority interestin Kaupulehu Investors. No gain or loss was recognized by Barnwell on this saleand Barnwell’s interest in Kaupulehu Investors was reduced to 80% as a resultof this transaction.

 

Kaupulehu Investors accountsfor its 1.5% passive investments in Hualalai Investors and Kona VillageInvestors under the cost method. The investments are evaluated for impairment whenever eventsor changes in circumstances indicate that the recorded investment balance may notbe fully recoverable. The investments inHualalai Investors and Kona Village Investors are reflected in the ConsolidatedBalance Sheet as of September 30, 2007 as “Investment in Joint Ventures.”

 

**7.****                                      INVESTMENTIN LAND INTERESTS**

 

*Background*

 

Barnwellowns a 77.6% controlling interest in Kaupulehu Developments, a Hawaii generalpartnership that owns interests in leasehold land and development rights forproperty located approximately six miles north of the Kona InternationalAirport in the North Kona District of the Island of Hawaii.

 

Between1986 and 1989, Kaupulehu Developments obtained the state and county zoningchanges necessary to permit development of the Four Seasons Resort Hualalai atHistoric Ka’upulehu 

 

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and Hualalai Golf Club,which opened in 1996, a second golf course, and single-family and multi-familyresidential units. These projects were developed on leasehold land acquiredfrom Kaupulehu Developments by Kaupulehu Makai Venture, an unrelated entity,which was subsequently acquired in June 2006 by Hualalai Investors, anunrelated entity in which Barnwell acquired a 1.5% passive minority interest inthe first quarter of fiscal 2007 (see further discussion in Note 6 above).

 

Between1993 and 2001, Kaupulehu Developments obtained the state and county zoningchanges necessary to permit resort/residential development of approximately 870acres.

 

*Development Rights Under Option*

 

The development rights held by KaupulehuDevelopments are for residentially-zoned leasehold land within and adjacent tothe Hualalai Golf Club and are under option to Hualalai Investors. In December 2004,Kaupulehu Developments received a payment of $2,656,250 representing thedevelopment rights option due on December 31, 2004. In November 2005,Kaupulehu Developments received a payment of $2,875,000 representing payment ofthe development rights option due on December 31, 2005 of $2,656,250 and a$218,750 portion of its development rights option due on December 31, 2006.In December 2006, Hualalai Investorspaid Kaupulehu Developments $2,437,500 upon exercising the balance of itsdevelopment rights option due on December 31, 2006. Revenue from thedevelopment rights sales received in fiscal years 2005, 2006 and 2007 werereduced by $159,000, $173,000 and $146,000, respectively, of fees related tothe sales, resulting in net revenues of $2,497,000, $2,702,000 and $2,292,000,respectively. Operating profits, after minority interest, from the developmentrights sales were $1,950,000, $2,111,000, and $1,791,000 in fiscal years 2005,2006 and 2007, respectively. All capitalized costs associated with KaupulehuDevelopments’ development rights were expensed in previous years. Thedevelopment rights option revenues, net of related fees, are recorded in theConsolidated Statement of Earnings as “Sale of development rights, net.”  The total amount of remaining future optionreceipts, if all options are fully exercised, was $10,625,000 as of September 30,2007, comprised of four payments of $2,656,250 due on each December 31 ofyears 2007 to 2010. In October 2007, Kaupulehu Developments received a$1,927,000 development rights option payment for a portion of the seventhpayment due on December 31, 2007. This development rights option paymentwill be recognized in Barnwell’s first quarter of fiscal 2008. If any annualoption payment is not made, the then remaining development right options willexpire. There is no assurance that any portion of the remaining options will beexercised.

 

*Lot 4A Increments I and II*

 

In February 2004,Kaupulehu Developments entered into a Purchase and Sale Agreement with WB KDAcquisition, LLC (“WB”), an unrelated entity. WB is affiliated with RP-HualalaiInvestors, LLC, a managing member of Hualalai Investors, owners and currentdevelopers of Hualalai Resort, and Westbrook Partners, developers of Kuki’oResort located adjacent to Hualalai Resort. Under the terms of the Purchase andSale Agreement, Kaupulehu Developments transferred its leasehold interest inapproximately 870 acres zoned for resort/residential development, in twoincrements (“Increment I” and “Increment II”), to WB. Increment Iis an area planned for approximately 80 single-family lots and a beach club onthe portion of the property bordering the Pacific Ocean. The purchasers of the80 single-family lots will have the right to apply for membership in the Kuki’oResort Golf and Beach Club, which is located adjacent to and south of the FourSeasons Resort Hualalai at Historic Ka’upulehu. Increment II is theremaining portion of the approximately 870-acre property and is zoned forsingle-family and multi-family residential units and a golf course andclubhouse.

 

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With respect toIncrement I, Kaupulehu Developments received an $11,550,000 payment in February 2004and is entitled to receive payments from WB based on the following percentagesof the gross receipts from WB’s sales of single-family residential lots inIncrement I: 9% of the gross proceeds from single-family lot sales up toaggregate gross proceeds of $100,000,000; 10% of such aggregate gross proceedsgreater than $100,000,000 but less than $300,000,000; and 14% of such aggregategross proceeds in excess of $300,000,000. WB sold a total of five single-familylots and paid Kaupulehu Developments $3,660,000 in percentage of sales paymentsduring the year ended September 30, 2006. The revenue from the fiscal 2006percentage of sales payments was reduced by $220,000 of fees related to thesales, resulting in net revenues of $3,440,000 and a $2,688,000 operatingprofit, after minority interest. WB sold an additional seven single-family lotsduring the year ended September 30, 2007 and paid Kaupulehu Developments$3,585,000 in percentage of sales payments. Three of the seven lots sold by WBwere purchased by Kaupulehu 2007 (see further discussion in Note 5 above).The lots purchased by Kaupulehu 2007 were made under a lot purchase contractexecuted in January 2007. WB is not affiliated with Barnwell, KaupulehuDevelopments or Kaupulehu 2007. Accordingly, the percentage of sales paymentsreceived from WB as a result of Kaupulehu 2007’s lot purchases have beenrecorded as revenues and have not been eliminated. Percentage of sales paymentsreceived as a result of Kaupulehu 2007’s lot purchases in fiscal 2007 totaled$642,000. Recognized revenues, net of fees, and operating profit, afterminority interest and before taxes, resulting from Kaupulehu 2007’s lotpurchases totaled $604,000 and $472,000, respectively, in fiscal 2007. Revenuefrom total fiscal 2007 percentage of sales payments was reduced by $215,000 offees related to the sales, resulting in net revenues of $3,370,000 and a$2,633,000 operating profit, after minority interest. There were no percentageof sales payments received during the year ended September 30, 2005. $3,370,000and $3,440,000 of percentage of sales payment revenues, net of fees, arerecorded in the Consolidated Statement of Earnings for the years ended September 30,2007 and 2006, respectively, as “Sale of interest in leasehold land, net.”  There is no assurance that any futurepayments will be received.

 

WBpaid Kaupulehu Developments $550,000 of fees during fiscal 2005 which isrecorded in the Consolidated Statement of Earnings for the year endedSeptember 30, 2005, as “Sale of interest in leasehold land, net.”

 

In June 2006,Kaupulehu Developments entered into an agreement with WB and WB KD AcquisitionII, LLC (“WBKD”), whereby Kaupulehu Developments sold its interest inIncrement II to WBKD (“Increment II Agreement”). There is noaffiliation between Kaupulehu Developments and WB or WBKD. WB and WBKD are bothaffiliates of RP-Hualalai Investors, LLC, a managing member of HualalaiInvestors, owners and current developers of Hualalai Resort, and WestbrookPartners, developers of Kuki’o Resort located adjacent to Hualalai Resort.Increment II of the approximately 870-acre property is zoned forsingle-family and multi-family residential units and a golf course andclubhouse. Pursuant to the Increment II Agreement, Kaupulehu Developmentsreceived a $10,000,000 closing payment and is entitled to receive futurepayments from WBKD based on a percentage of the sales prices of the residentiallots, ranging from 3.25% to 14%, to be determined in the future depending upona number of variables, including whether the lots are sold prior toimprovement. The revenue from the $10,000,000 Increment II closing paymentreceived in fiscal 2006 was reduced by $600,000 of fees related to the sale,$220,000 in other costs related to the sale, and approximately $2,983,000 ofpreviously capitalized costs relating to Increment II, resulting in netrevenues of $6,197,000 and a $4,621,000 operating profit, after minorityinterest. The $6,197,000 of net revenues from the Increment II closingpayment is recorded in the Consolidated Statement of Earnings for the yearended September 30, 2006, as “Sale of interest in leasehold land,net.”  No Increment II payments werereceived in fiscal 2005 or fiscal 2007. There is no assurance that any futurepayments will be received.

 

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The purchaser hascontinued to develop Lot 4A, including the mass grading of portions of the 42lots in the second phase of the 80 lot Increment I project, completion ofthe installation of most major onsite infrastructure and initial paving andlandscaping of the project. In late 2006, WB received final subdivisionapproval from the County of Hawaii for the 42 lots in the second phase ofIncrement I. The first home to be built in Increment I is underconstruction by an unrelated third party on two lots acquired by such thirdparty during fiscal 2006.

 

*Lot 4C*

 

Lot 4C is an area ofapproximately 1,000 acres of vacant leasehold land zoned conservation and is locatedadjacent to Lot 4A. Under the terms of the Increment II Agreement, WBKDhas the exclusive right to negotiate with Kaupulehu Developments with respectto Lot 4C. This right expires in June 2009 or, if before such dateWBKD completes any and all environmental assessments and surveys reasonablyrequired to support a petition to the Hawaii State Land Use Commission forreclassification of Lot 4C zoning, in June 2012.

 

*Investment in Lot AcquisitionRights*

 

During the first quarterof fiscal 2007, Kaupulehu Mauka Investors, LLC, a limited liability companywholly-owned by Barnwell, purchased 14 lot acquisition rights within theapproximately 5,000 acres of agricultural-zoned leasehold land in the uplandarea of Kaupulehu (“Mauka Lands”) situated between the Queen Kaahumanu Highwayand the Mamalahoa Highway at Kaupulehu, North Kona, Island and State of Hawaii,for $1,400,000. The lot acquisition rights give Barnwell the right to acquireresidential lots which may be developed on the Mauka Lands. The $1,400,000investment is recorded in the Consolidated Balance Sheet as of September 30,2007 as “Investment in Land Interests.” These lands are currently classified as agricultural by the State ofHawaii and, accordingly, the developer of these lands (Hualalai Investors) willneed to pursue both State and County of Hawaii approvals for reclassificationand rezoning to permit a residential subdivision and negotiate developmentterms. There is no assurance that the developer of the Mauka Lands will obtainthe necessary land use reclassification, rezoning, permits, approvals, anddevelopment terms and agreements needed to develop the Mauka Lands. Theinvestment is evaluated for impairment whenever events or changes incircumstances indicate that the recorded investment balance may not befully recoverable.

 

*Summary of Interests*

 

The land interests heldby Barnwell at September 30, 2007 include the development rights underoption, the rights to receive percentage of sales payments on Increment Iand Increment II of the aforementioned 870 acres, approximately 1,000acres of vacant leasehold land zoned conservation (“Lot 4C”) which is under aright of negotiation with WBKD, and lot acquisition rights inagricultural-zoned leasehold land. There is no assurance that any futuredevelopment rights option payments or percentage of sales payments will bereceived, nor is there any assurance that WBKD will enter into an agreementwith Kaupulehu Developments regarding Lot 4C. Furthermore, there is noassurance that the required land use reclassification and rezoning fromregulatory agencies will be obtained nor is there any assurance that thenecessary development terms and agreements will be successfully negotiated. Barnwell’scost of land interests is included in the September 30, 2007 and 2006Consolidated Balance Sheets under the caption “Investment in Land Interests”and consists of the following amounts:

 

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| ** **                                                           | ** ** | **September 30,** | ** **    |
|----------------------------------------------------------------------|------------|------------------------|---------------|
| ** **                                                           | ** ** | **2007**               | ** **    | **2006** | ** ** |
| Leasehold land interests:                                  | ** ** | ** **             |          |   |   |
| Zoned for resort/residential development – Lot 4A  Increment I  | ** ** | **$**                  | **—**    |   | $ | — |   |
| Zoned for resort/residential development – Lot 4A  Increment II | ** ** | **—**             |          | — |   |
| Zoned conservation – Lot 4C                                     | ** ** | **50,000**             |          | 50,000 |   |
| ** **                                                           |       | **50,000**             |          | 50,000 |   |
|                                                                 |       |                   |          |   |   |
| Lot acquisition rights – Mauka lands                            | ** ** | **1,400,000**          |          | — |   |
| Development rights under option                                      | ** ** | **—**             |          | — |   |
| Total investment in land interests                                   | ** ** | **$**                  | **1,450,000** |   | $ | 50,000 |   |

 

**8.****                                      INVESTMENTIN AFFILIATE**

 

Infiscal 2006, Barnwell entered into an agreement with Nearco, Inc. (“Nearco”)to form Mauka 3K, LLC (“Mauka 3K”), for the purpose of providingreal estate consulting services and investing in real estate. Barnwell andNearco each have a 50% voting interest in Mauka 3K. Nearco is a companycontrolled by Mr. Terry Johnston, a director of Barnwell and minorityinterest owner in certain of Barnwell’s business ventures (see furtherdiscussion on related party interests at Note 9 below).Barnwell does not have a controlling interest in Mauka 3K and thusaccounts for its investment utilizing the equity method of accounting. Underthe equity method of accounting, Barnwell’s proportionate share of itsaffiliate’s income is included in equity in earnings of real estate affiliate.

 

Infiscal 2006 Barnwell received net proceeds of $1,440,000 representing its shareof real estate consulting revenues, less related expenses. The net proceeds arereflected in the Consolidated Statements of Earnings for the year ended September 30,2006 as “Equity in earnings of real estate affiliate, net of tax.”  The tax provision related to equity inearnings of real estate affiliate was $545,000 in fiscal 2006. There was nosignificant activity in Mauka 3K during fiscal 2007.

 

Revenuesfrom real estate consulting services are recognized when services have beenrendered and the terms of the consulting agreement have been satisfied.

 

**9.****                                      RELATEDPARTY TRANSACTIONS**

 

This section discussescertain direct and indirect relationships and transactions involving Barnwelland Mr. Terry Johnston, a director of Barnwell and minority interest ownerin certain of Barnwell’s business ventures.

 

Mr. Johnston andhis affiliated entities own a direct financial interest in 19.3% of KaupulehuDevelopments, a general partnership in which Barnwell has a 77.6% controllinginterest. As discussed in Note 7 above, $146,000 in fees on developmentrights proceeds and $215,000 in fees on the percentage of sales paymentproceeds were paid during fiscal 2007; these fees were paid to Nearco, Inc.(“Nearco”), a company controlled by Mr. Terry Johnston. In fiscal 2006,$173,000 in fees on the development rights proceeds, $220,000 in fees on thepercentage of sales payment proceeds, and $600,000 in fees on theIncrement II closing payment were paid to Nearco. In addition, $159,000 in

 

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fees onthe development rights proceeds received during fiscal 2005 was also paid toNearco. Under an agreement entered into in 1987, prior to Mr. Johnston’selection to Barnwell’s Board of Directors, Barnwell is obligated to pay Nearco2% of Kaupulehu Developments’ gross receipts from real estate transactions, andCambridge Hawaii Limited Partnership, a 49.9% partner of Kaupulehu Developmentsin which Barnwell purchased a 55.2% interest in April 2001, is obligatedunder an agreement entered into in 1987 to pay Nearco 4% of KaupulehuDevelopments’ gross receipts from real estate transactions. The fees representcompensation for promotion and marketing of Kaupulehu Developments’ propertyand were determined at that time based on the estimated fair value of suchservices.

 

During fiscal 2007,Barnwell entered into a limited liability limited partnership, Kaupulehu 2007,LLLP (“Kaupulehu 2007”), with Nearco to acquire house lots for investment andto construct turnkey single-family homes. Nearco has a 20% ownership interestin Kaupulehu 2007. As noted in Note 5 above, Kaupulehu 2007 is negotiatingan agreement with an entity affiliated with Mr. Johnston to serve as theproject management company for its homebuilding project. It is anticipated thata significant provision of such agreement will be that in addition to a monthlyfee, the project manager will receive 20% of the profit on the sale of each loton which a house is constructed. In addition, Kaupulehu 2007 intends to enterinto a contract with a project management company affiliated with Mr. Johnston,wherein Mr. Johnston’s affiliate will be granted the right to purchasefrom WB one of the four remaining lots Kaupulehu 2007 has agreed to acquire. Itis anticipated that any such agreement will specify the lot that will beacquired by Mr. Johnston’s affiliate and require Mr. Johnston’saffiliate to reimburse Kaupulehu 2007 for both the $200,000 deposit on such lotand interest costs incurred by Kaupulehu 2007 related to the initial deposit onsuch lot. Kaupulehu 2007 has borrowings under a credit facility that isguaranteed jointly and severally by Barnwell and Mr. Johnston, with Mr. Johnston’sguarantee limited to 20% (see further discussion regarding the credit facilityat Note 11 below).

 

In September 2007,Nearco made a $525,000 loan to Kaupulehu 2007 to partially fund Kaupulehu 2007’sacquisition of a third residential lot. The loan plus accrued interest, at arate equivalent to the highest interest rate incurred by Kaupulehu 2007 on itsbank debt, is payable upon Kaupulehu 2007’s sale of its second completed home. Theloan balance may be reduced in the future by any contributions toKaupulehu 2007 by Barnwell that are not matched by Nearco in proportion to itsownership interest in Kaupulehu 2007.

 

Also during fiscal 2007,Nearco paid Barnwell $553,000 to acquire a 20% minority interest in KaupulehuInvestors from Barnwell (see discussion in Note 6 above). No gain or losswas recognized by Barnwell as a result of the transaction.

 

General and administrativeexpenses include fees paid to Nearco for consulting services related toKaupulehu Developments’ leasehold land and Kaupulehu 2007’s real estateprojects. Fees paid to Nearco totaled $171,000, $76,000 and $268,000, beforeminority interest, in fiscal 2007, 2006 and 2005, respectively.

 

In fiscal 2006, Barnwellentered into an agreement with Nearco to form Mauka 3K for thepurpose of providing real estate consulting services and investing in realestate. Barnwell and Nearco each have a 50% voting interest in Mauka 3K. Therewas no significant activity in Mauka 3K during fiscal 2007.

 

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**10.****                               PROPERTYAND EQUIPMENT AND ASSET RETIREMENT OBLIGATION**

 

Barnwell’sproperty and equipment is detailed as follows:

 
| ** **                                             | ** ** | ** **        | ** ** | ** **            | ** **      | **Accumulated**        | ** ** | ** **            | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|-----------------------|-----------------|------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **Estimated**     | ** ** | **Gross**             | ** **      | **Depreciation,**      | ** ** | **Net**               | ** ** |
| ** **                                             | ** ** | **Useful**        | ** ** | **Property and** | ** **      | **Depletion and** | ** ** | **Property and** | ** ** |
| ** **                                             | ** ** | **Lives**         | ** ** | **Equipment**         | ** **      | **Amortization**       | ** ** | **Equipment**         | ** ** |
| At September 30, 2007:                            |       |              |       |                  |            |                   |       |                  |       |
| Land                                                   |       |              |       | $                     | 365,000         |                   | $          | —                |       | $ | 365,000 |   |
| Oil and natural gas properties (full cost  accounting) |       |              |       | 192,054,000           |            | (104,706,000           | )          | 87,348,000            |       |
| Drilling rigs and equipment                            |       | 3 – 10 years |       | 5,192,000             |            | (3,736,000             | )          | 1,456,000             |       |
| Office                                                 |       | 40 years          |       | 857,000               |            | (81,000                | )          | 776,000               |       |
| Other property and equipment                           |       | 3 – 17 years |       | 3,874,000             |            | (3,140,000             | )          | 734,000               |       |
| Total                                                  | ** ** | ** **        | ** ** | **$**                 | **202,342,000** | ** **             | **$**      | **(111,663,000**      | **)**      | **$** | **90,679,000** | ** ** |
|                                                   |       |              |       |                  |            |                   |       |                  |       |
| At September 30, 2006:                            |       |              |       |                  |            |                   |       |                  |       |
| Land                                                   |       |              |       | $                     | 365,000         |                   | $          | —                |       | $ | 365,000 |   |
| Oil and natural gas properties (full cost  accounting) |       |              |       | 157,562,000           |            | (80,823,000            | )          | 76,739,000            |       |
| Drilling rigs and equipment                            |       | 3 – 10 years |       | 4,043,000             |            | (3,606,000             | )          | 437,000               |       |
| Office                                                 |       | 40 years          |       | 857,000               |            | (59,000                | )          | 798,000               |       |
| Other property and equipment                           |       | 3 – 17 years |       | 3,587,000             |            | (2,759,000             | )          | 828,000               |       |
| Total                                                  |       |              |       | $                     | 166,414,000     |                   | $          | (87,247,000           | )          | $ | 79,167,000 |   |

 

In October 2004,the Government of Alberta enacted amendments to the Natural Gas RoyaltyRegulation which provide a mechanism to reduce royalties calculated through theCrown royalty system for operators of gas wells which have been denied theright to produce by the Alberta Energy Utilities Board as a result of recentbitumen conservation decisions. In December 2004, royalty reductions wereeffected by the Alberta Department of Energy’s Information Letter 2004-36 whichsets out the details of the royalty adjustment, the impact on the existingtemporary assistance received to date by affected gas well operators, theprovisions for potential recapture of the royalty adjustments, and continuationof impacted petroleum and natural gas agreements. Barnwell received a total ofapproximately $248,000, $347,000 and $558,000 related to the aforementionedroyalty adjustments for wells in the Thornbury area in fiscal years 2007, 2006and 2005, respectively. It is Barnwell’s estimation that the subject Thornburywells will not recommence production, thus no returns to the Government ofAlberta of the royalty adjustments received would be required under therecapture provisions. Accordingly, the receipts are payments for deemed productionby the Government of Alberta to Barnwell for condemnation of the wells, andsuch receipts were credited to oil and natural gas properties for bookpurposes.

 

On October 1,2002, Barnwell adopted SFAS No. 143,“Accounting for Asset Retirement Obligations,” which requires that the fairvalue of a liability for an asset retirement obligation be recognized in theperiod in which it is incurred if a reasonable estimate of fair value can bemade. During fiscal 2006, the asset retirement obligation was increasedby $303,000 to reflect obligations incurred on new wells drilled, $302,000 forchanges in the timing and amount of estimated future expenditures, $199,000 foraccretion of the asset retirement obligation, and by $124,000 for changes inforeign currency translation rates. The changes due to the timing and amount ofestimated future

 

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expenditures primarilyresulted from an increase in the inflation-adjusted cost of abandonment andrestoration services, due in part to rises in oil and natural gas prices. Duringthe year ended September 30, 2007, the asset retirement obligation wasincreased by $300,000 to reflect obligations incurred on new wells drilled,decreased $7,000 for changes in the timing and amount of estimated futureexpenditures, increased $232,000 for accretion of the asset retirementobligation, decreased by $42,000 in payments, and increased by $498,000 forchanges in foreign currency translation rates.

 

**11.****                               LONG-TERMDEBT**

 

Asummary of Barnwell’s long-term debt (including the current portion) as of September 30,2007 and 2006 is as follows:

 
| ** **                               | ** ** | **September 30,** | ** **     |
|------------------------------------------|------------|------------------------|----------------|
| ** **                               | ** ** | **2007**               | ** **     | **2006** | ** ** |
| Revolving credit facility                | ** ** | **$**                  | **14,520,000** |   | $ | 11,735,000 |   |
| Credit facility due October 1, 2008 | ** ** | **6,845,000**          |           | — |   |
| Partner loan                             | ** ** | **525,000**            |           | — |   |
| Drill rig financing lease                | ** ** | **568,000**            |           | — |   |
| Total long-term debt                     | ** ** | **$**                  | **22,458,000** |   | $ | 11,735,000 |   |

 

Barnwellhas a credit facility at Royal Bank of Canada, a Canadian bank, for $20,000,000Canadian dollars, or approximately US$20,070,000 at September 30, 2007exchange rates. Borrowings under this facility were US$14,520,000 andUS$11,735,000 at September 30, 2007 and 2006, respectively, and areincluded in long-term debt. At September 30, 2007, Barnwell had unusedcredit available under this facility of approximately US$5,550,000.

 

Thefacility is available in U.S. dollars at the London Interbank Offer Rate plus1.5%, at U.S. prime plus 0.25%, or in Canadian dollars at Canadian prime plus0.25%. A standby fee of 0.25% per annum is charged on the unused facilitybalance. Under the financing agreement, the facility is reviewed annually, withthe next review planned for April 2008. Subject to that review, thefacility may be extended one year with no required debt repayments for oneyear or converted to a two-year term loan by the bank. The primary focus of theannual review is on the future cash flows that will be generated by Barnwell’sCanadian oil and natural gas properties. Additionally, Royal Bank of Canada may adjustthe total amount of the credit facility during its next review. If the facilityis converted to a two-year term loan, Barnwell has agreed to the followingrepayment schedule of the then outstanding loan balance:  first year of the term period – 20% (5% perquarter), and in the second year of the term period – 80% (5% per quarter forthe first three quarters and 65% in the final quarter).

 

Barnwell has the optionto change the currency denomination and interest rate applicable to the loan atperiodic intervals during the term of the loan. During the year ended September 30,2007, Barnwell paid interest at rates ranging from 6.250% to 7.326%. Theweighted-average interest rate on the facility at September 30, 2007 was6.850%. The facility is collateralized by a general security agreement on allof the assets of Barnwell’s oil and natural gas segment. The facility isguaranteed by Barnwell Industries, Inc. No compensating bank balances arerequired for this facility.

 

Thebank affirmed that it will not require any repayments under the facility beforeOctober 1, 2008. Accordingly, Barnwell has classified outstandingborrowings under the facility as long-term debt.

 

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As mentioned above in Note 5, Barnwell, throughits 80%-owned real estate joint venture (“Kaupulehu 2007”), financed theinitial deposits on seven parcels via a $1,400,000 loan from a financialinstitution. The loan bore interest at a rate of 7% and was guaranteedjointly and severally by Barnwell and Mr. Terry Johnston, a director ofBarnwell and minority interest owner in certain of Barnwell’s business ventures(see further discussion on related party interests at Note 9 above). In April 2007,Kaupulehu 2007 obtained a$7,500,000 credit facility from the same financial institution for the purposeof refinancing the $1,400,000 loan and to finance the acquisition of two of theaforementioned parcels and a portion of the initial home construction on thoseparcels. As of September 30, 2007, the interest rate on the borrowings wasprimarily a floating rate equal to the one-month London Interbank OfferRate plus 1.75%.

 

In December 2007, Kaupulehu 2007 refinanced$6,600,000 of its borrowings under the aforementioned facility with anotherfinancial institution. The new facility provides $16,000,000 of credit under arevolving line of credit for the purpose of refinancing the acquisition of twoof the aforementioned parcels plus a third parcel which was purchased in September 2007,financing the acquisition of a fourth parcel which is expected to be purchasedin December 2007, and financing costs of home construction on the saidfour lots. Under the terms of the facility, financing for home construction islimited to a maximum of two unsold homes under construction at any given time. Theterm of the loan is 36 months and advances shall not exceed: (i) 75% ofthe appraised as-is value of each parcel, or (ii) 80% of the appraisedvalue of the completed home and parcel for each home under construction. As ofthe date of this filing, the interest rate on the borrowings is primarily afloating rate equal to the financial institution’s floating base rate or theone-month London Interbank Offer Rate plus 2.50%. Kaupulehu 2007 will berequired to make a principal payment upon the sale of a home and lot in anamount equal to 100% of the net sales proceeds of the home and lot; the loanagreement defines net sales proceeds as the gross sales price of the home andlot, less reasonable real estate commissions, closing costs, and fees of thebuilding contractor and project manager, as approved by the financialinstitution. The credit facility, which is fully guaranteed by Barnwell andguaranteed 20% by Mr. Terry Johnston, is collateralized by 1) a validfirst mortgage lien on the parcels and homes to be built; 2) an assignmentof Kaupulehu 2007’s interest as landlord in any tenant leases and rentalagreements and the rents thereunder; 3) assignments of Kaupulehu 2007’sarchitectural and construction costs, development agreements, permits andlicenses, and all of Kaupulehu 2007’s contractual rights for the lots and homesto be built, and the plans and specifications in respect of the construction ofthe homes; 4) a security interest in Kaupulehu 2007’s furniture, fixturesand equipment used in the normal operation of the lots and homes to be built;and 5) an assignment of Kaupulehu 2007’s interest in and to all letters ofintent to purchase and sales contracts and sales proceeds relating to the saleof the homes and lots. Kaupulehu 2007 agreed to pay a 1%, $160,000, commitmentfee.

 

At September 30,2007, Kaupulehu 2007’s borrowings under the credit facility were $6,845,000. The portion of the outstanding loan balance at September 30, 2007that exceeds the $6,600,000 of refinanced borrowings, or $245,000, isclassified as a current liability on the Consolidated Balance Sheet at September 30,2007 as Kaupulehu 2007 expects to repay this amount in fiscal 2008. Therefinanced borrowings of $6,600,000 are due in December 2010. Accordingly,the $6,600,000 is classified as long-term debt on the Consolidated BalanceSheet at September 30, 2007 in accordance with SFAS No. 6,“Classification of Short-Term Obligations Expected to Be Refinanced.” However,as discussed above, a portion of the cash proceeds from the sales of completedhomes may be required to be applied to the facility balance if such salesoccur prior to December 2010. Based upon the builder’s estimated projecttimeline, Barnwell does not expect sales of homes to occur on or before September 30,2008.

 

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Kaupulehu2007 capitalizes interest costs during development and construction and intendsto include these costs in cost of sales when homes are sold. Capitalizedinterest costs totaled $142,000 for the year ended September 30, 2007.

 

In September 2007,Nearco, Inc. (“Nearco”), an entity controlled by Mr. Terry Johnston,a director of Barnwell and minority interest owner in certain of Barnwell’sbusiness ventures, made a $525,000 loan to Kaupulehu 2007 to partially fundKaupulehu 2007’s acquisition of a third residential lot. The loan plus accruedinterest, at a rate equivalent to the highest interest rate incurred byKaupulehu 2007 on its bank debt, is payable upon Kaupulehu 2007’s sale of itssecond completed home. Based upon the builder’s estimated project timeline,Barnwell does not expect sales of homes to occur on or before September 30,2008; accordingly, the $525,000 is classified as long-term debt on theConsolidated Balance Sheet at September 30, 2007. The loan balance may bereduced in the future by any contributions to Kaupulehu 2007 by Barnwell thatare not matched by Nearco in proportion to its ownership interest in Kaupulehu2007.

 

In March 2007,Barnwell completed an agreement to purchase a contract drilling rig for$731,000, $620,000 of which was financed by a bank loan. The loan was obtainedfor a term of five years commencing in April 2007 with payments of $13,000due monthly at an interest rate of 7.75% and is guaranteed in full by Barnwell.As of September 30, 2007, minimum future loan payments were as follows:fiscal 2008 - $150,000, fiscal 2009 - $150,000, fiscal 2010 - $150,000, fiscal2011 - $150,000, and thereafter $75,000.

 

Interestcosts for the fiscal years ended September 30, 2007, 2006 and 2005 aresummarized as follows:

 
| ** **                                                            | ** ** | **Year ended September 30,** | ** **    |
|-----------------------------------------------------------------------|------------|---------------------------------------------|---------------|
| ** **                                                            | ** ** | **2007**                                    | ** **    | **2006** | ** ** | **2005** | ** ** |
| Interest costs incurred                                               | ** ** | **$**                                       | **1,141,000** |   | $ | 833,000 |   | $ | 616,000 |   |
| Less interest costs capitalized on residential lots under development |       | **142,000**                                 |          | — |   | — |   |
| Interest expense                                                      | ** ** | **$**                                       | **999,000**   |   | $ | 833,000 |   | $ | 616,000 |   |

 

**12.****                               SEGMENTAND GEOGRAPHIC INFORMATION**

 

Barnwell operates foursegments: 1) exploring for, developing, producing and selling oil and naturalgas (oil and natural gas); 2) investment in leasehold land and other realestate interests in Hawaii (land investment); 3) acquisition of property forinvestment and development of homes for sale (real estate development,established January 2007); and 4) drilling wells and installing andrepairing water pumping systems in Hawaii (contract drilling). Barnwell’sreportable segments are strategic business units that offer different productsand services. They are managed separately as each segment requires differentoperational methods, operational assets and marketing strategies, and operatein different geographical locations. There were no real estate developmentsegment operating revenues or operating expenses during fiscal 2007, 2006 or2005.

 

Barnwelldoes not allocate general and administrative expenses, interest expense, interestincome or income taxes to segments, and there are no transactions betweensegments that affect segment profit or loss. Other primarily relates to gasprocessing.

 

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| ** **                                                                    | ** ** | **Year ended September 30,** | ** **     |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                                    | ** ** | **2007**                                    | ** **     | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                                     |       |                                        |           |   |   |   |   |
| Oil and natural gas                                                           | ** ** | **$**                                       | **34,599,000** |   | $ | 37,904,000 |   | $ | 32,724,000 |   |
| Land investment                                                               | ** ** | **5,662,000**                               |           | 12,339,000 |   | 3,047,000 |   |
| Contract drilling                                                             | ** ** | **5,993,000**                               |           | 5,866,000 |   | 7,644,000 |   |
| Other                                                                         | ** ** | **867,000**                                 |           | 765,000 |   | 652,000 |   |
| Total before gain on sale and interest income                            | ** ** | **47,121,000**                              |           | 56,874,000 |   | 44,067,000 |   |
| Gain on sale of drill rig                                                     | ** ** | **—**                                  |           | 700,000 |   | — |   |
| Interest income                                                               | ** ** | **315,000**                                 |           | 386,000 |   | 143,000 |   |
| Total revenues                                                                | ** ** | **$**                                       | **47,436,000** |   | $ | 57,960,000 |   | $ | 44,210,000 |   |
|                                                                          |       |                                        |           |   |   |   |   |
| Depreciation, depletion and amortization:                                     |       |                                        |           |   |   |   |   |
| Oil and natural gas                                                           | ** ** | **$**                                       | **12,753,000** |   | $ | 11,130,000 |   | $ | 8,447,000 |   |
| Contract drilling                                                             | ** ** | **224,000**                                 |           | 189,000 |   | 125,000 |   |
| Other                                                                         | ** ** | **197,000**                                 |           | 258,000 |   | 216,000 |   |
| Total                                                                         | ** ** | **$**                                       | **13,174,000** |   | $ | 11,577,000 |   | $ | 8,788,000 |   |
|                                                                          |       |                                        |           |   |   |   |   |
| Operating profit (before general and  administrative expenses):          |       |                                        |           |   |   |   |   |
| Oil and natural gas                                                           | ** ** | **$**                                       | **11,643,000** |   | $ | 18,557,000 |   | $ | 17,378,000 |   |
| Land investment, net of minority interest                                     | ** ** | **4,424,000**                               |           | 9,420,000 |   | 2,378,000 |   |
| Contract drilling                                                             | ** ** | **830,000**                                 |           | 968,000 |   | 1,754,000 |   |
| Other                                                                         | ** ** | **670,000**                                 |           | 507,000 |   | 436,000 |   |
| Total                                                                         | ** ** | **17,567,000**                              |           | 29,452,000 |   | 21,946,000 |   |
|                                                                          |       |                                        |           |   |   |   |   |
| General and administrative expenses,  net of minority interest                |       | **(10,207,000**                             | **)**          | (11,508,000 | ) | (11,479,000 | ) |
| Interest expense                                                              | ** ** | **(999,000**                                | **)**          | (833,000 | ) | (616,000 | ) |
| Interest income                                                               | ** ** | **315,000**                                 |           | 386,000 |   | 143,000 |   |
| Gain on sale of drill rig                                                     | ** ** | **—**                                  |           | 700,000 |   | — |   |
| Earnings before income taxes and equity in earnings  of real estate affiliate | ** ** | **$**                                       | **6,676,000**  |   | $ | 18,197,000 |   | $ | 9,994,000 |   |
|                                                                          |       |                                        |           |   |   |   |   |
| Capital expenditures:                                                         |       |                                        |           |   |   |   |   |
| Oil and natural gas                                                           | ** ** | **$**                                       | **14,164,000** |   | $ | 25,949,000 |   | $ | 18,229,000 |   |
| Contract drilling                                                             | ** ** | **1,230,000**                               |           | 247,000 |   | 242,000 |   |
| Other                                                                         | ** ** | **84,000**                                  |           | 178,000 |   | 406,000 |   |
| Total                                                                         | ** ** | **$**                                       | **15,478,000** |   | $ | 26,374,000 |   | $ | 18,877,000 |   |

 

Depletionper 1,000 cubic feet (“MCF”) of natural gas and natural gas equivalent (“MCFE”),converted at a rate of one barrel of oil and natural gas liquids to 5.8 MCFE,was $2.49 in fiscal 2007, $2.17 in fiscal 2006, and $1.66 in fiscal 2005. Theescalating depletion rate is the result of increased costs of finding anddeveloping proven reserves, as compared to prior years, as well as increases inthe average exchange rate of the Canadian dollar to the U.S. dollar of 3% infiscal 2007, as compared to fiscal 2006, and 7% in fiscal 2006, as compared tofiscal 2005.

 

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*Assets By Segment:*

 
| ** **                                              | ** ** | **September 30,** | ** **      |
|---------------------------------------------------------|------------|------------------------|-----------------|
| ** **                                              | ** ** | **2007**               | ** **      | **2006** | ** ** | **2005** | ** ** |
| Oil and natural gas (1)                                 | ** ** | **$**                  | **94,243,000**  | ** ** | **76** | **%** | $ | 84,584,000 |   | 81 | % | $ | 68,592,000 |   | 81 | % |
| Land investment (2)                                     | ** ** | **1,450,000**          | ** **      | **1** | **%** | 50,000 |   | 0 | % | 3,033,000 |   | 4 | % |
| Real estate development (2)                             | ** ** | **8,192,000**          | ** **      | **7** | **%** | — |   | 0 | % | — |   | 0 | % |
| Contract drilling (2)                                   | ** ** | **4,358,000**          | ** **      | **3** | **%** | 2,846,000 |   | 3 | % | 2,703,000 |   | 3 | % |
| Other:                                                  |       |                   |            |   | ** ** |   |   |   |   |   |   |   |   |
| Cash and cash equivalents, and  certificates of deposit |       | **10,107,000**         |            | **8** | **%** | 11,972,000 |   | 11 | % | 7,192,000 |   | 8 | % |
| Corporate and other                                     | ** ** | **6,215,000**          | ** **      | **5** | **%** | 5,103,000 |   | 5 | % | 3,457,000 |   | 4 | % |
| Total                                                   | ** ** | **$**                  | **124,565,000** | ** ** | **100** | **%** | $ | 104,555,000 |   | 100 | % | $ | 84,977,000 |   | 100 | % |

 

----

(1)Primarily located in the Province of Alberta,Canada.

(2)Located in Hawaii.

 

*Long-Lived Assets By GeographicArea:*

 
| ** **    | ** ** | **September 30,** | ** **     |
|---------------|------------|------------------------|----------------|
| ** **    | ** ** | **2007**               | ** **     | **2006** | ** ** | **2005** | ** ** |
| United States | ** ** | **$**                  | **4,484,000**  | ** ** | **5** | **%** | $ | 2,231,000 |   | 3 | % | $ | 5,192,000 |   | 8 | % |
| Canada        | ** ** | **87,645,000**         | ** **     | **95** | **%** | 76,986,000 |   | 97 | % | 59,702,000 |   | 92 | % |
| Total         | ** ** | **$**                  | **92,129,000** | ** ** | **100** | **%** | $ | 79,217,000 |   | 100 | % | $ | 64,894,000 |   | 100 | % |

 

*Revenue By Geographic Area:*

 
| ** **                                                       | ** ** | **Year ended September 30,** | ** **     |
|------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                       | ** ** | **2007**                                    | ** **     | **2006** | ** ** | **2005** | ** ** |
| United  States                                                   | ** ** | **$**                                       | **11,896,000** |   | $ | 18,425,000 |   | $ | 10,803,000 |   |
| Canada                                                           | ** ** | **35,225,000**                              |           | 38,449,000 |   | 33,264,000 |   |
| Total (excluding interest income and gain  on sale of drill rig) |       | **$**                                       | **47,121,000** |   | $ | 56,874,000 |   | $ | 44,067,000 |   |

 

**13.****                               TAXESON INCOME**

 

Thecomponents of earnings before income taxes are as follows:

 
| ** **                              | ** ** | **Year ended September 30,** | ** **    |
|-----------------------------------------|------------|---------------------------------------------|---------------|
| ** **                              | ** ** | **2007**                                    | ** **    | **2006** | ** ** | **2005** | ** ** |
| Earnings (loss) before income taxes in: |       |                                        |          |   |   |   |   |
| United States                           | ** ** | **$**                                       | **45,000**    |   | $ | 4,008,000 |   | $ | (2,091,000 | ) |
| Canada                                  | ** ** | **6,631,000**                               |          | 14,189,000 |   | 12,085,000 |   |
| ** **                              |       | **$**                                       | **6,676,000** |   | $ | 18,197,000 |   | $ | 9,994,000 |   |

 

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Thecomponents of the provision for income taxes related to the above earnings(loss) are as follows:

 
| ** **                    | ** ** | **Year ended September 30,** | ** **    |
|-------------------------------|------------|---------------------------------------------|---------------|
| ** **                    | ** ** | **2007**                                    | ** **    | **2006** | ** ** | **2005** | ** ** |
| Current provision:            |       |                                        |          |   |   |   |   |
| United States – Federal  | ** ** | **$**                                       | **260,000**   |   | $ | 723,000 |   | $ | 310,000 |   |
| United States – State    | ** ** | **1,000**                                   |          | 235,000 |   | — |   |
| ** **                    |       | **261,000**                                 |          | 958,000 |   | 310,000 |   |
| Canadian                      | ** ** | **1,443,000**                               |          | 2,335,000 |   | 5,244,000 |   |
| Total current                 | ** ** | **1,704,000**                               |          | 3,293,000 |   | 5,554,000 |   |
|                          |       |                                        |          |   |   |   |   |
| Deferred (benefit) provision: |       |                                        |          |   |   |   |   |
| United States                 | ** ** | **765,000**                                 |          | (555,000 | ) | (1,338,000 | ) |
| Canadian                      | ** ** | **691,000**                                 |          | 1,717,000 |   | (249,000 | ) |
| Total deferred                | ** ** | **1,456,000**                               |          | 1,162,000 |   | (1,587,000 | ) |
| ** **                    |       | **$**                                       | **3,160,000** |   | $ | 4,455,000 |   | $ | 3,967,000 |   |

 

Includedin the provision for income taxes for fiscal 2006 is a Canadian deferred taxbenefit of $1,094,000 resulting from reductions in Canadian tax rates. Alsoincluded in the provision for income taxes for fiscal 2006 is the recognitionof a deferred income tax benefit of $4,130,000 due to a reduction in thevaluation allowance for foreign tax credit carryforwards. The acceleration of Barnwell’s investments in Canadian oiland natural gas properties beginning in the first quarter of fiscal 2006,coupled with Kaupulehu Developments’ receipt of proceeds related toIncrement I, resulted in the determination that it was more likely thannot that fiscal 2006 and future years’ taxable income from Canadian operationsunder U.S. tax law would exceed taxable income from Canadian operations underCanadian tax law to a degree that will result in the utilization of foreign taxcredit carryforwards to reduce U.S. taxes. This is primarily attributable to differences in thestatutory deduction rates for Barnwell’s Canadian oil and natural gas capitalexpenditures under Canadian tax law as compared to such deductions under U.S.tax law. There were no reductions in the valuation allowance for foreign taxcredit carryforwards in fiscal 2007 or 2005. A minor reduction in Canadianfederal tax rates in fiscal 2007 resulted in a $100,000 reduction in netdeferred tax liabilities in fiscal 2007. There was no reduction in Canadian taxrates in fiscal 2005.

 

Infiscal 2007, Barnwell recorded a $203,000 tax benefit related to employees’disqualification of qualified stock options which was reflected as an increasein additional paid-in capital. There were no such tax benefits related to stockoption disqualifications in fiscal 2006 and 2005.

 

Effectivefor tax years beginning after December 31, 2004, the 90-percent limitationon using the alternative minimum tax foreign tax credit to offset alternative minimumtaxes was repealed by the American Jobs Creation Act of 2004. Accordingly,beginning in fiscal 2006, Barnwell is permitted to use the full alternativeminimum tax foreign tax credit to offset alternative minimum taxes on foreignsource income, notwithstanding any other limitations which may apply.

 

99

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Areconciliation between the reported provision for income taxes and the amountcomputed by multiplying the earnings before income taxes by the U.S. federaltax rate of 35% is as follows:

 
| ** **                                                                          | ** ** | **Year ended September 30,** | ** **    |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------|---------------|
| ** **                                                                          | ** ** | **2007**                                    | ** **    | **2006** | ** ** | **2005** | ** ** |
| Tax expense computed by applying statutory rate                                     |       | **$**                                       | **2,336,000** |   | $ | 6,369,000 |   | $ | 3,498,000 |   |
|                                                                                |       |                                        |          |   |   |   |   |
| Effect of reduction of Canadian tax rates on Canadian deferred  taxes               |       | **(100,000**                                | **)**         | (1,094,000 | ) | — |   |
| Effect of reduction of the valuation allowance for foreign tax credit carryforwards |       | **—**                                  |          | (4,130,000 | ) | — |   |
| Effect of foreign tax rate differential and valuation reserve                       |       | **672,000**                                 |          | 2,689,000 |   | 302,000 |   |
| State net operating losses (generated) utilized                                     |       | **—**                                  |          | 45,000 |   | (45,000 | ) |
| State income taxes                                                                  | ** ** | **1,000**                                   |          | 235,000 |   | — |   |
| Other                                                                               | ** ** | **251,000**                                 |          | 341,000 |   | 212,000 |   |
| ** **                                                                          |       | **$**                                       | **3,160,000** |   | $ | 4,455,000 |   | $ | 3,967,000 |   |

 

Equity in earnings ofreal estate affiliate is shown net of income taxes in the ConsolidatedStatement of Earnings for fiscal 2006. The tax provision relating to equity inearnings of real estate affiliate was $545,000 in fiscal 2006, representing a38% effective tax rate.

 

100

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The tax effects oftemporary differences that give rise to significant portions of the deferredtax assets and deferred tax liabilities at September 30, 2007 and 2006 areas follows:

 
| ** **                                                                                                  | ** ** | **September 30,** | ** **      |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------|-----------------|
| ** **                                                                                                  | ** ** | **2007**               | ** **      | **2006** | ** ** |
| Deferred income tax assets:                                                                                 | ** ** | ** **             |            |   |   |
| U.S. tax effect of deferred Canadian taxes                                                                  | ** ** | **$**                  | **4,662,000**   |   | $ | 3,934,000 |   |
| Foreign tax credit carryforwards                                                                            | ** ** | **290,000**            |            | 1,522,000 |   |
| Tax basis of investment in land  in excess of book basis                                                    |       | **473,000**            |            | 614,000 |   |
| Liabilities accrued for books but not  for tax under U.S. tax law                                      |       | **3,237,000**          | ** **      | 3,245,000 |   |
| Liabilities accrued for books but not  for tax under Canadian tax law                                       |       | **1,506,000**          | ** **      | 1,704,000 |   |
| Other                                                                                                       | ** ** | **506,000**            | ** **      | 569,000 |   |
| Total gross deferred tax assets                                                                             | ** ** | **10,674,000**         | ** **      | 11,588,000 |   |
| Less valuation allowance                                                                                    | ** ** | **(6,564,000**         | **)**           | (6,159,000 | ) |
| Net deferred income tax assets                                                                              | ** ** | **4,110,000**          | ** **      | 5,429,000 |   |
|                                                                                                        |       |                   | ** **      |   |   |
| Deferred income tax liabilities:                                                                            |       |                   | ** **      |   |   |
| Property and equipment accumulated tax  depreciation and depletion in excess of book under Canadian tax law |       | **(15,216,000**        | **)**           | (13,273,000 | ) |
| Property and equipment accumulated tax  depreciation and depletion in excess of book under U.S. tax law     |       | **(5,946,000**         | **)**           | (3,918,000 | ) |
| Other                                                                                                       | ** ** | **(76,000**            | **)**           | (415,000 | ) |
| Total deferred income tax liabilities                                                                       | ** ** | **(21,238,000**        | **)**           | (17,606,000 | ) |
|                                                                                                        |       |                   | ** **      |   |   |
| Net deferred income tax liability                                                                           | ** ** | **$**                  | **(17,128,000** | **)** | $ | (12,177,000 | ) |

 

Thetotal valuation allowance increased $405,000 for the year ended September 30,2007 and decreased $3,544,000 for the year ended September 30, 2006. The changein the valuation allowance in fiscal 2007 relates primarily to the U.S. taxeffect of an increase in deferred Canadian taxes. The change in the valuationallowance in fiscal 2006 relates primarily to the abovementioned reduction ofthe valuation allowance previously placed on foreign tax credit carryforwards,partially offset by an increase in the valuation allowance for the U.S. taxeffect of deferred Canadian taxes.

 

Avaluation allowance is provided when it is more likely than not that someportion or all of the deferred tax asset will not be realized. Barnwell hasestablished a valuation allowance primarily for the U.S. tax effect of deferredCanadian taxes, accrued expenses and state of Hawaii net operating losscarryforwards which may not be realizable in future years as there can beno assurance of any specific level of earnings or that the timing of U.S.taxable income will coincide with the payment of Canadian taxes to enableCanadian taxes to be fully deducted (or recoverable) for U.S. tax purposes.

 

Net deferred tax assets at September 30,2007 of $4,110,000 consists primarily of $3,334,000 related to expenses accruedfor book purposes but not for tax purposes, $473,000 related to the excess ofthe cost basis of investment in land for tax purposes over the cost basis ofinvestment in land for book purposes, and $290,000 for foreign tax creditcarryforwards. Canadian deferred tax assets related 

 

101

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toexpenses accrued for book purposes but not for tax purposes are estimated to berealized through future Canadian income tax deductions against future Canadianoil and natural gas earnings. U.S. deferred tax assets related to expensesaccrued for book purposes but not for tax purposes and the excess of the costbasis of investment in land for tax purposes over the cost basis of investmentin land for book purposes are estimated to be realized from deductions againstfuture U.S. earnings from percentage of sales payments, sales of interests inleasehold land, and sales of land development rights. Foreign tax credit carryforwardsare estimated to be utilized when U.S. federal income taxes otherwise due onCanadian source income in a given year exceeds the foreign tax credit generatedin that year. At September 30, 2007, foreign tax credit carryforwardstotaled $290,000 and expire in fiscal 2013; management currently estimates thatall of the foreign tax credit carryforwards will be utilized before expiration.The amount of deferred income tax assets considered realizable may bereduced if estimates of future taxable income are reduced.

 

**14.****                               RETIREMENTPLANS**

 

Barnwell sponsors anoncontributory defined benefit pension plan (“pension plan”) coveringsubstantially all of its U.S. employees, with benefits based on years ofservice and the employee’s highest consecutive five-year average earnings. Barnwell’sfunding policy is intended to provide for both benefits attributed to serviceto date and for those expected to be earned in the future. In addition,Barnwell sponsors a Supplemental Employee Retirement Plan (“SERP”), a noncontributorysupplemental retirement benefit plan which covers certain current and formeremployees of Barnwell for amounts exceeding the limits allowed under thedefined benefit pension plan. In December 2006, Barnwell adopted apostretirement medical insurance benefits plan (“postretirement medical”)covering U.S. employees who haveattained at least 20 years of service with Barnwell and served at least 10years at the position of Vice President or higher. Health benefits are alsoprovided to spouses and qualifying dependents of eligible officers.

 

In September 2006,the FASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans – an amendment of FASB Statements No. 87,88, 106, and 132(R).”  SFAS No. 158 requires an employer torecognize the over-funded or under-funded status of defined benefit pension andother postretirement plans (collectively referred to as “retirement plans”) asan asset or liability in its statement of financial position and to recognizechanges in that funded status in the year in which the changes occur throughcomprehensive income. SFAS No. 158 also requires the measurement ofretirement plan assets and obligations as of the date of the fiscal year-endstatement of financial position and provide additional disclosures. Barnwelladopted the recognition and disclosures provisions of SFAS No. 158 on September 30,2007. Prior to September 30, 2007, Barnwell had accounted for itsretirement plans according to the provisions of SFAS No. 87, Employers’Accounting for Pensions, and related interpretations, and therefore the fundedstatus of Barnwell’s retirement plans was not reflected in its ConsolidatedBalance Sheets.

 

102

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Theincremental effects of adopting the provisions of SFAS No. 158 on ourConsolidated Balance Sheet at September 30, 2007 are presented in thefollowing table. The adoption of SFAS No. 158 had no effect on ourConsolidated Statement of Earnings for the year ended September 30, 2007.

 
| ** **                                         | ** ** | **Before**                 | ** **  | **Effect of Adopting** | ** ** | **As Reported at** | ** ** |
|----------------------------------------------------|------------|----------------------------|-------------|----------------------------------|------------|------------------------------|------------|
| ** **                                         | ** ** | **Application of**    | ** **  | **SFAS No. 158**       | ** ** | **September 30,**       | ** ** |
| ** **                                         | ** ** | **SFAS No. 158** | ** **  | **Increase (Decrease)**     | ** ** | **2007**                     | ** ** |
|                                               |       |                       |        |                             |       |                         |       |   |   |   |
| Prepaid cost                                       |       | $                          | 228,000     |                             | $          | (228,000                     | )          | $ | — |   |
|                                               |       |                       |        |                             |       |                         |       |
| Total assets                                       |       | $                          | 124,793,000 |                             | $          | (228,000                     | )          | $ | 124,565,000 |   |
|                                               |       |                       |        |                             |       |                         |       |
| Liability for retirement benefits                  |       | $                          | 749,000     |                             | $          | 1,643,000                    |       | $ | 2,392,000 | (1) |
|                                               |       |                       |        |                             |       |                         |       |
| Deferred income taxes                              |       | $                          | 19,935,000  |                             | $          | (636,000                     | )          | $ | 19,299,000 |   |
|                                               |       |                       |        |                             |       |                         |       |
| Accumulated other comprehensive income, net of tax |       | $                          | 6,168,000   |                             | $          | (1,235,000                   | )          | $ | 4,933,000 |   |
|                                               |       |                       |        |                             |       |                         |       |
| Total stockholders’ equity                    |       | $                          | 55,839,000  |                             | $          | (1,235,000                   | )          | $ | 54,604,000 |   |

 

----

(1)                Amountincludes $5,000, which represents the current portion of Barnwell’s retirementbenefits liability, which is included in other current liabilities.

 

103

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Thefollowing tables detail the changes in benefit obligations, fair values of planassets and reconciliations of the funded status of the retirement plans:

 
| ** **                                               | ** ** | **Pension**            | ** **    | **SERP**   | ** ** | **Postretirement Medical** | ** **   |
|----------------------------------------------------------|------------|------------------------|---------------|------------|------------|---------------------------------|--------------|
| ** **                                               | ** ** | **September 30,** | ** **    |
| ** **                                               | ** ** | **2007**               | ** **    | **2006**   | ** ** | **2007**                        | ** **   | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| *Change in Projected Benefit Obligation:*                |       |                   |          |       |       |                            |         |   |   |   |   |   |   |
| * *                                                 |       |                   |          |       |       |                            |         |   |   |   |   |   |   |
| Benefit obligation at beginning of year                  |       | **$**                  | **4,558,000** |       | $          | 4,412,000                       |         | **$** | **655,000** |   | $ | 774,000 |   | **$** | **—** |   | $ | — |   |
| Service cost                                             | ** ** | **214,000**            | ** **    | 206,000    |       | **35,000**                      | ** **   | 36,000 |   | **9,000** | ** ** | — |   |
| Interest cost                                            | ** ** | **260,000**            | ** **    | 226,000    |       | **40,000**                      | ** **   | 39,000 |   | **43,000** | ** ** | — |   |
| Plan amendment                                           | ** ** | **—**             | ** **    | —     |       | **—**                      | ** **   | — |   | **942,000** | ** ** | — |   |
| Actuarial gain                                           | ** ** | **(192,000**           | **)**         | (244,000   | )          | **(2,000**                      | **)**        | (64,000 | ) | **(133,000** | **)** | — |   |
| Benefits paid                                            | ** ** | **(130,000**           | **)**         | (166,000   | )          | **(6,000**                      | **)**        | (5,000 | ) | **—** | ** ** | — |   |
| Administrative expenses paid                             | ** ** | **(8,000**             | **)**         | (1,000     | )          | **—**                      | ** **   | — |   | **—** | ** ** | — |   |
| Statutory change                                         | ** ** | **—**             | ** **    | 125,000    |       | **—**                      | ** **   | (125,000 | ) | **—** | ** ** | — |   |
| Benefit obligation at end of year                        | ** ** | **4,702,000**          | ** **    | 4,558,000  |       | **722,000**                     | ** **   | 655,000 |   | **861,000** | ** ** | — |   |
|                                                     |       |                   | ** **    |       |       |                            | ** **   |   |   |   | ** ** |   |   |
| *Change in Plan Assets:*                                 |       |                   | ** **    |       |       |                            | ** **   |   |   |   | ** ** |   |   |
| * *                                                 |       |                   | ** **    |       |       |                            | ** **   |   |   |   | ** ** |   |   |
| Fair value of plan assets at beginning of year           |       | **3,415,000**          | ** **    | 2,329,000  |       | **—**                      | ** **   | — |   | **—** | ** ** | — |   |
| Actual return on plan assets                             | ** ** | **366,000**            | ** **    | 203,000    |       | **—**                      | ** **   | — |   | **—** | ** ** | — |   |
| Employer contribution                                    | ** ** | **250,000**            | ** **    | 1,050,000  |       | **6,000**                       | ** **   | 5,000 |   | **—** | ** ** | — |   |
| Benefits paid                                            | ** ** | **(130,000**           | **)**         | (166,000   | )          | **(6,000**                      | **)**        | (5,000 | ) | **—** | ** ** | — |   |
| Administrative expenses paid                             | ** ** | **(8,000**             | **)**         | (1,000     | )          | **—**                      | ** **   | — |   | **—** | ** ** | — |   |
| Fair value of plan assets at end of year                 |       | **3,893,000**          | ** **    | 3,415,000  |       | **—**                      | ** **   | — |   | **—** | ** ** | — |   |
|                                                     |       |                   | ** **    |       |       |                            | ** **   |   |   |   | ** ** |   |   |
| *Net amount recognized in Consolidated Balance  Sheets:* | * *   | * *               | *** ***  | * *   | * *   | * *                        | *** *** | * * | * * | * * | *** *** | * * | * * |
| * *                                                 | * *   | * *               | *** ***  | * *   | * *   | * *                        | *** *** | * * | * * | * * | *** *** | * * | * * |
| Funded status                                            | ** ** | **(809,000**           | **)**         | (1,143,000 | )          | **(722,000**                    | **)**        | (655,000 | ) | **(861,000** | **)** | — |   |
| Unrecognized prior service cost (credit)                 |       | **—**             | ** **    | 125,000    |       | **—**                      | ** **   | (71,000 | ) | **—** | ** ** | — |   |
| Unrecognized actuarial loss                              | ** ** | **—**             | ** **    | 1,252,000  |       | **—**                      | ** **   | 227,000 |   | **—** | ** ** | — |   |
| Net amount recognized                                    | ** ** | **$**                  | **(809,000**  | **)**      | $          | 234,000                         |         | **$** | **(722,000** | **)** | $ | (499,000 | ) | **$** | **(861,000** | **)** | $ | — |   |

 

104

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| ** **                                                           | ** ** | **Pension**            | ** **    | **SERP**   | ** ** | **Postretirement Medical** | ** **   |
|----------------------------------------------------------------------|------------|------------------------|---------------|------------|------------|---------------------------------|--------------|
| ** **                                                           | ** ** | **September 30,** | ** **    |
| ** **                                                           | ** ** | **2007**               | ** **    | **2006**   | ** ** | **2007**                        | ** **   | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| * *                                                             | * *   | * *               | * *      | * *   | * *   | * *                        | * *     | * * | * * | * * | * * | * * | * * |
| *Amounts recognized in the Consolidated Balance  Sheets consist of:* | * *   | * *               | * *      | * *   | * *   | * *                        | * *     | * * | * * | * * | * * | * * | * * |
| * *                                                             | * *   | * *               | * *      | * *   | * *   | * *                        | * *     | * * | * * | * * | * * | * * | * * |
| Current assets                                                       | ** ** | **$**                  | **—**    | ** ** | $          | 234,000                         | ** **   | **$** | **—** | ** ** | $ | — |   | **$** | **—** | ** ** | $ | — |   |
|                                                                 | ** ** | ** **             | ** **    | ** ** |       |                            | ** **   | ** ** | ** ** | ** ** |   |   |   | ** ** | ** ** | ** ** |   |   |   |
| Current liabilities                                                  | ** ** | **—**             | ** **    | —     | ** ** | **(5,000**                      | **)**        | (499,000 | ) | **—** | ** ** | — |   |
|                                                                 | ** ** | ** **             | ** **    |       | ** ** | ** **                      | ** **   |   |   | ** ** | ** ** |   |   |
| Noncurrent liabilities                                               | ** ** | **(809,000**           | **)**         | —     | ** ** | **(717,000**                    | **)**        | — |   | **(861,000** | **)** | — |   |
|                                                                 | ** ** | ** **             | ** **    |       | ** ** | ** **                      | ** **   |   |   | ** ** | ** ** |   |   |
| Asset (liability)                                                    | ** ** | **$**                  | **(809,000**  | **)**      | $          | 234,000                         | ** **   | **$** | **(722,000** | **)** | $ | (499,000 | ) | **$** | **(861,000** | **)** | $ | — |   |
|                                                                 |       |                   | ** **    |       |       |                            | ** **   |   |   |   | ** ** |   |   |
| *Amounts recognized in accumulated other  comprehensive loss:*       | * *   | * *               | *** ***  | * *   | * *   | * *                        | *** *** | * * | * * | * * | *** *** | * * | * * |
| * *                                                             | * *   | * *               | *** ***  | * *   | * *   | * *                        | *** *** | * * | * * | * * | *** *** | * * | * * |
| Net loss (gain)                                                      | ** ** | **$**                  | **917,000**   | ** ** | $          | —                          | ** **   | **$** | **214,000** | ** ** | $ | — |   | **$** | **(133,000** | **)** | $ | — |   |
|                                                                 | ** ** | ** **             | ** **    | ** ** |       |                            | ** **   | ** ** | ** ** | ** ** |   |   |   | ** ** | ** ** | ** ** |   |   |   |
| Prior service cost (credit)                                          | ** ** | **120,000**            | ** **    | —     | ** ** | **(75,000**                     | **)**        | — |   | **828,000** | ** ** | — |   |
|                                                                 | ** ** | ** **             | ** **    |       | ** ** | ** **                      | ** **   |   |   | ** ** | ** ** |   |   |
| Accumulated other comprehensive loss                                 |       | **$**                  | **1,037,000** | ** ** | $          | —                          |         | **$** | **139,000** | ** ** | $ | — |   | **$** | **695,000** | ** ** | $ | — |   |

 

Forthe fiscal years ended September 30, 2007 and 2006, the followingweighted-average assumptions were used to determine benefit obligations at theend of the fiscal years:

 
| ** **                                                                | ** ** | **Pension**            | ** ** | **SERP** | ** ** | **Postretirement Medical** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|----------|------------|---------------------------------|------------|
| ** **                                                                | ** ** | **September 30,** | ** ** |
| ** **                                                                | ** ** | **2007**               | ** ** | **2006** | ** ** | **2007**                        | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| * *                                                                  | * *   | * *               | * *   | * * | * *   | * *                        | * *   | * * | * * | * * | * * | * * | * * |
| *Assumptions used to determine the fiscal year-end  benefit obligations:* | * *   | * *               | * *   | * * | * *   | * *                        | * *   | * * | * * | * * | * * | * * | * * |
| * *                                                                  | * *   | * *               | * *   | * * | * *   | * *                        | * *   | * * | * * | * * | * * | * * | * * |
| Discount rate                                                             | ** ** | **6.00**               | **%**      | 5.50     | %          | **6.00**                        | **%**      | 5.50 | % | **6.00** | **%** | N/A |   |
|                                                                      | ** ** | ** **             | ** ** |     |       | ** **                      | ** ** |   |   | ** ** | ** ** |   |   |
| Rate of compensation increase                                             | ** ** | **5.00**               | **%**      | 5.00     | %          | **5.00**                        | **%**      | 5.00 | % | **N/A** |   | N/A |   |

 

Theoverall investment objective of the defined benefit pension plan is to providegrowth in the assets of the plan to fund future benefit obligations whilemanaging risk in order to meet current benefit obligations. To develop theexpected long-term rate of return on assets assumption, historical returns andthe future expectations for returns for each asset class were considered. Generally,principal repayments and interest received on government mortgage securitiesprovide cash flows to fund current benefit obligations. Longer-term obligationsare generally estimated to be provided for by growth in equity securities. Theplan assets at September 30, 2007 were invested as follows: 12% in cash,38% in debt securities, and 50% in equity securities. The plan assets at September 30,2006 were invested as follows: 1% in cash, 18% in certificates of deposit, 28%in debt securities, and 53% in equity securities. Target asset allocations arenot used, and allocations are adjusted from time to time as dictated by currentand anticipated market conditions and required cash flows.

 

Barnwell contributed $250,000 to the pension plan infiscal 2007. Barnwell estimates that it will make approximately $5,000 inbenefit payments under the SERP and $250,000 in contributions to the pensionplan during fiscal 2008. Barnwell does not expect to make any benefit paymentsunder the postretirement medical plan during fiscal 2008. Fluctuations inactual equity market returns as well as changes in general interest rates willresult in changes in the market value of plan assets and may result inincreased or decreased retirement benefits costs and contributions in futureperiods.

 

105

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Forthe fiscal years ended September 30, 2007, 2006 and 2005, the followingweighted-average assumptions were used to determine net periodic benefit costfor the fiscal years shown:

 
| ** **                                                      | ** ** | **Pension**                                 | ** ** | **SERP** | ** ** | **Postretirement Medical** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------|------------|----------|------------|---------------------------------|------------|
| ** **                                                      | ** ** | **Year ended September 30,** | ** ** |
| ** **                                                      | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005**                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| * *                                                        | * *   | * *                                    | * *   | * * | * *   | * *                        | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| *Assumptions used to determine the net periodic  benefit cost:* | * *   | * *                                    | * *   | * * | * *   | * *                        | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| * *                                                        | * *   | * *                                    | * *   | * * | * *   | * *                        | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Discount rate                                                   | ** ** | **5.50**                                    | **%**      | 5.25     | %          | 5.75                            | %          | **5.50** | **%** | 5.25 | % | 5.75 | % | **5.50** | **%** | N/A |   | N/A |   |
|                                                            | ** ** | ** **                                  | ** ** |     |       |                            |       | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |
| Expected return on plan assets                                  |       | **8.00**                                    | **%**      | 8.00     | %          | 8.00                            | %          | **N/A** | ** ** | N/A |   | N/A |   | **N/A** | ** ** | N/A |   | N/A |   |
|                                                            |       | ** **                                  | ** ** |     |       |                            |       | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |
| Rate of compensation increase                                   |       | **5.00**                                    | **%**      | 5.00     | %          | 5.00                            | %          | **5.00** | **%** | 5.00 | % | 5.00 | % | **N/A** | ** ** | N/A |   | N/A |   |

 

The components of net periodic benefit cost are asfollows:

 
| ** **                                | ** ** | **Pension**                                 | ** **  | **SERP**   | ** ** | **Postretirement Medical** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|-------------|------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Year ended September 30,** | ** **  |
| ** **                                | ** ** | **2007**                                    | ** **  | **2006**   | ** ** | **2005**                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| *Net periodic benefit cost for the year:* |       |                                        |        |       |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| * *                                  |       |                                        |        |       |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost                              | ** ** | **$**                                       | **214,000** | ** ** | $          | 206,000                         |       | $ | 161,000 |   | **$** | **35,000** |   | $ | 36,000 |   | $ | 32,000 | ** ** | **$** | **9,000** |   | $ | — |   | $ | — |   |
| Interest cost                             | ** ** | **260,000**                                 | ** **  | 226,000    |       | 213,000                         |       | **40,000** |   | 39,000 |   | 36,000 | ** ** | **43,000** |   | — |   | — |   |
| Expected return on plan assets            | ** ** | **(268,000**                                | **)**       | (182,000   | )          | (171,000                        | )          | **—** | ** ** | — | ** ** | — | ** ** | **—** | ** ** | — | ** ** | — | ** ** |
| Amortization of prior service cost        | ** ** | **5,000**                                   | ** **  | 1,000      | ** ** | 6,000                           |       | **4,000** | ** ** | 10,000 | ** ** | 10,000 | ** ** | **114,000** | ** ** | — | ** ** | — | ** ** |
| Amortization of net actuarial loss        | ** ** | **45,000**                                  | ** **  | 48,000     | ** ** | 40,000                          |       | **10,000** | ** ** | 10,000 | ** ** | 7,000 | ** ** | **—** | ** ** | — | ** ** | — | ** ** |
|                                      | ** ** | ** **                                  | ** **  |       | ** ** |                            |       | ** ** | ** ** |   | ** ** |   | ** ** | ** ** | ** ** |   | ** ** |   | ** ** |
| Net periodic benefit cost                 | ** ** | **$**                                       | **256,000** | ** ** | $          | 299,000                         | ** ** | $ | 249,000 |   | **$** | **89,000** | ** ** | $ | 95,000 | ** ** | $ | 85,000 | ** ** | **$** | **166,000** | ** ** | $ | **—** | ** ** | $ | **—** | ** ** |

 

The amounts that are estimated to be amortized fromaccumulated other comprehensive loss into net periodic benefit cost in the nextfiscal year are as follows:

 
| ** **         | ** ** | ** **  | ** ** | ** ** | ** ** | **Postretirement** | ** ** |
|--------------------|------------|-------------|------------|------------|------------|--------------------|------------|
| ** **         | ** ** | **Pension** | ** ** | **SERP**   | ** ** | **Medical**        | ** ** |
|               |       |        |       |       |       |               |       |
| Prior service cost |       | $           | 5,000      |       | $          | 4,000              |       | $ | 136,000 |   |
| Net loss (gain)    |       | 20,000      |       | 6,000      |       | (4,000             | )          |
|               |       |        |       |       |       |               |       |
|               |       | $           | 25,000     |       | $          | 10,000             |       | $ | 132,000 |   |

 

The accumulatedbenefit obligation differs from the projected benefit obligation in that itassumes future compensation levels will remain unchanged. The accumulatedbenefit obligation for the pension plan was $3,165,000 and $2,992,000 at September 30,2007 and 2006, respectively. The accumulated benefit obligation for the SERPwas $406,000 and $397,000 at September 30, 2007 and 2006, respectively.

 

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Thebenefits expected to be paid under the retirement plans as of September 30,2007 are as follows:

 
| ** **                                                | ** ** | ** **  | ** ** | ** ** | ** ** | **Postretirement** | ** ** |
|-----------------------------------------------------------|------------|-------------|------------|------------|------------|--------------------|------------|
| ** **                                                | ** ** | **Pension** | ** ** | **SERP**   | ** ** | **Medical**        | ** ** |
| *Expected Benefit Payments:*                              | * *   | * *    | * *   | * *   | * *   | * *           | * *   |
| Fiscal year ending September 30, 2008                |       | $           | 136,000    |       | $          | 5,000              |       | $ | — |   |
| Fiscal year ending September 30, 2009                |       | $           | 136,000    |       | $          | 5,000              |       | $ | — |   |
| Fiscal year ending September 30, 2010                |       | $           | 136,000    |       | $          | 5,000              |       | $ | — |   |
| Fiscal year ending September 30, 2011                |       | $           | 136,000    |       | $          | 5,000              |       | $ | — |   |
| Fiscal year ending September 30, 2012                |       | $           | 136,000    |       | $          | 5,000              |       | $ | — |   |
| Fiscal years ending September 30, 2013 through  2017 |       | $           | 922,000    |       | $          | 25,000             |       | $ | 83,000 |   |

 

The following provides the assumed health care costtrend rates related to Barnwell’s postretirement medical obligations at September 30,2007 and 2006.

 
| ** **                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Health care cost trend rates assumed for next year | ** ** | **9**    | **%**      | N/A      |       |
| Ultimate cost trend rate                           | ** ** | **6**    | **%**      | N/A      |       |
| Year that the rate reaches the ultimate trend rate | ** ** | **2010** | ** ** | N/A      |       |

 

Theassumed health care cost trend rates have a significant effect on the amountsreported for the postretirement medical obligations. A one-percentage-pointchange in the assumed health care cost trend rates would have the followingeffects [increase / (decrease)]:

 
| ** **                                                | ** ** | **1-Percentage**        | ** ** | **1-Percentage**        | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                | ** ** | **Point Increase** | ** ** | **Point Decrease** | ** ** |
| Effect on total service and interest cost components      |       | $                       | 9,000      |                    | $          | (8,000 | ) |
| Effect on accumulated postretirement benefit  obligations |       | $                       | 131,000    |                    | $          | (110,000 | ) |

 

In 2003, the Medicare Prescription Drug, Improvementand Modernization Act of 2003 (“Act”) was signed into law. The Act introduced aprescription drug benefit under Medicare as well as a potential federal subsidyto sponsors of retiree health care benefit plans that provide a benefit that isat least actuarially equivalent to Medicare Part D to help offset thecosts of participant prescription drug benefits. Any measures of theaccumulated postretirement benefit obligation or net periodic postretirementbenefit cost in the consolidated financial statements or accompanying notes forfiscal 2007 do not reflect the effects of the Act on the postretirement medicalinsurance benefits plan.

 

**15.****                               COMMITMENTSAND CONTINGENCIES**

 

In November 2007,Barnwell paid the President of Barnwell of Canada, Limited, $507,000 satisfyingall obligations under an incentive compensation plan created in 1998 and basedon Barnwell’s oil and natural gas segment’s net income and the change in thevalue of Barnwell’s oil and gas reserves since 1998.

 

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Barnwell has alsocommitted to compensate certain Canadian personnel pursuant to an incentivecompensation plan, the value of which directly relates to Barnwell’s oil andnatural gas segment’s net income and the value of Barnwell’s oil and gasreserves discovered, commencing in fiscal 2002, for projects developed by suchpersonnel.  Barnwell recognizedapproximately $495,000, $359,000 and $90,000 of costs pursuant to this plan infiscal 2007, 2006 and 2005, respectively.

 

Barnwell has several non-cancelable operatingleases for office space and leasehold land. Rental expense was $598,000 in 2007, $528,000 in 2006, and $481,000 in2005.  Barnwell is committed under theseleases for minimum rental payments summarized by fiscal year as follows: 2008 -$590,000, 2009 - $544,000, 2010 - $544,000, 2011 - $538,000, 2012 - $525,000and thereafter through 2026 an aggregate of $1,709,000.  The lease payments for land were subject torenegotiation as of January 1, 2006. Per the lease agreement, the lease payments will remain unchangedpending an appraisal, whereupon the lease rent could be adjusted to fair marketvalue.  Barnwell does not know the amountof the new lease payments which could be effective upon performance of the appraisal;they may remain unchanged or increase, and Barnwell currently expects theadjustment, if any, to not be material. The future rental payment disclosures above assume the minimum leasepayments for land in effect at December 31, 2005 remain unchanged through December 2025,the end of the lease term.

 

Barnwell is committed to pay commissions toNearco, Inc. (“Nearco”), a company controlled by Mr. Terry Johnston,a director of Barnwell and minority interest owner in certain of Barnwell’sbusiness ventures (see further discussion on related party interests atNote 9 above).  Under an agreemententered into in 1987, prior to Mr. Johnston’s election to Barnwell’s Boardof Directors, Barnwell is obligated to pay Nearco 2% of Kaupulehu Developments’gross receipts from real estate transactions, and Cambridge Hawaii LimitedPartnership, a 49.9% partner of Kaupulehu Developments in which Barnwellpurchased a 55.2% interest in April 2001, is obligated under an agreemententered into in 1987 to pay Nearco 4% of Kaupulehu Developments’ gross receiptsfrom real estate transactions.  The feesrepresent compensation for promotion and marketing of Kaupulehu Developments’property and were determined based on the estimated fair value of suchservices.

 

In conjunction with the closing of theIncrement II transaction in fiscal 2006, Kaupulehu Developments enteredinto an agreement to pay its external real estate legal counsel 1.5% of allIncrement II percentage of sales payments received by KaupulehuDevelopments for services provided by its external real estate legal counsel inthe negotiation and closing of the Increment II transaction.  No amounts were paid pursuant to thisarrangement in fiscal 2007 and 2006.

 

In January 2007, Kaupulehu 2007 enteredinto a lot purchase contract with WB to purchase seven parcels in theLot 4A Increment I area of Kaupulehu, North Kona, Hawaii.  As of September 30, 2007, three of theparcels have been purchased.  Thepurchase of each of the remaining four lots is scheduled to close in December 2007,March 2008, June 2008 and September 2008.  If any of the parcels are not purchased, thedeposit related to any such parcels will be forfeited and Barnwell will incuran expense as a result of the write-off of its 80% share of any forfeiteddeposits.

 

As of the date of this filing, Kaupulehu 2007 isnegotiating agreements with a project management company affiliated with Mr. Johnstonand an independent building contractor for home building services for Kaupulehu2007’s lots.  It is anticipated that asignificant provision of such agreements will be that each such serviceprovider will receive 20% of the profit on the sale of each lot on which ahouse is constructed.  In addition,Kaupulehu 2007 intends to enter into contracts, one with the project managementcompany affiliated with Mr. Johnston and one with the building contractor,

 

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wherein each will be granted the right topurchase from WB one of the four remaining lots Kaupulehu 2007 has agreed toacquire.  It is anticipated that any suchagreement will specify the lot that will be acquired by such service providerand require such service provider to reimburse Kaupulehu 2007 for both the$200,000 deposit on such lot and interest costs incurred by Kaupulehu 2007related to the initial deposit on such lot.

 

Barnwell is occasionally involved in routinelitigation and is subject to governmental and regulatory controls that areincidental to the ordinary course of business. Barnwell’s management believes that all claims and litigation involvingBarnwell are not likely to have a material adverse effect on its results ofoperations, financial position or liquidity.

 

**16.****                              ****FAIR VALUE OF FINANCIALINSTRUMENTS**

 

The carrying amounts of cash and cashequivalents, accounts receivable, and accounts payable approximate fair valuebecause of the short maturity of these instruments.  The carrying value of long-term debtapproximates fair value as the terms approximate current market terms forsimilar debt instruments of comparable risk and maturities.

 

The differences between the estimated fairvalues and carrying values of Barnwell’s financial instruments are notmaterial.

 

**17.****                              ****CONCENTRATIONS OF CREDITRISK**

 

Barnwell’s oil andnatural gas segment derived 63% of its oil and natural gas revenues in fiscal2007 from four individually significant customers, ProGas Limited (27%),Glencoe Resources Ltd. (17%), Plains Marketing Canada, L.P. (10%), and SeminoleCanada Gas Company (9%).  At September 30,2007, Barnwell had a total of $1,557,000 in receivables from these fourcustomers.  In fiscal 2006 Barnwellderived 69% of its oil and natural gas revenues from four individuallysignificant customers, ProGas Limited (30%), Glencoe Resources Ltd. (15%),Plains Marketing Canada, L.P. (14%), and Seminole Canada Gas Company(10%).  In fiscal2005 Barnwell derived 62% of its oil and natural gas revenues from fourindividually significant customers, ProGas Limited (25%), Glencoe Resources Ltd.(15%), Coral Energy Canada Inc. (11%), and Plains Marketing Canada, L.P. (11%).

 

Barnwell’s contract drilling subsidiary derived47%, 37%, and 63% of its contract drilling revenues in fiscal 2007, 2006, and2005, respectively, pursuant to federal, State of Hawaii and countycontracts.  At September 30, 2007,Barnwell had accounts receivables from the federal, State of Hawaii and countyentities totaling approximately $696,000. Barnwell has lien rights on wells drilled and pumps installed forfederal, State of Hawaii, county and private entities.

 

Historically, Barnwellhas not incurred significant credit related losses on its trade receivables,and management does not believe significant credit risk related to these tradereceivables exists at September 30, 2007.

 

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**18.****                              ****SUPPLEMENTAL STATEMENTSOF CASH FLOWS INFORMATION**

 

Thefollowing details the effect of changes in current assets and liabilities onthe Consolidated Statements of Cash Flows, and presents supplemental cash flowinformation:

 
| ** **                                                                   | ** **   | **Year ended September 30,** | ** **    |
|------------------------------------------------------------------------------|--------------|---------------------------------------------|---------------|
| ** **                                                                   | ** **   | **2007**                                    | ** **    | **2006** | ** ** | **2005** | ** ** |
| *Increase  (decrease) from changes in:*                                      |         |                                        |          |   |   |   |   |
| Receivables                                                                  | ** **   | **$**                                       | **(904,000**  | **)** | $ | 2,519,000 |   | $ | (2,450,000 | ) |
| Other current  assets                                                        | ** **   | **1,322,000**                               | ** **    | (1,664,000 | ) | 151,000 |   |
| Accounts payable                                                             | ** **   | **1,717,000**                               | ** **    | (2,291,000 | ) | 2,204,000 |   |
| Accrued  incentive plan andother compensation costs                          |         | **(320,000**                                | **)**         | 511,000 |   | 1,745,000 |   |
| Other current  liabilities                                                   | ** **   | **(255,000**                                | **)**         | 2,821,000 |   | (1,211,000 | ) |
|                                                                         |         |                                        | ** **    |   |   |   |   |
| Increase from  changes in current assets and liabilities                     | ** **   | **$**                                       | **1,560,000** | ** ** | $ | 1,896,000 |   | $ | 439,000 |   |
|                                                                         | ** **   | ** **                                  | ** **    |   |   |   |   |
| *Supplemental disclosure of cash flow information:* | ** **   | ** **                                  | ** **    | ** ** | ** ** | ** ** | ** ** |
| Cash paid during  the year for:                                              | ** **   | ** **                                  | ** **    |   |   |   |   |
| Interest, net of  amount capitalized                                         | ** **   | **$**                                       | **1,000,000** | ** ** | $ | 833,000 |   | $ | 616,000 |   |
| Income taxes                                                                 | ** **   | **$**                                       | **859,000**   | ** ** | $ | 5,273,000 |   | $ | 5,293,000 |   |
|                                                                         | ** **   | ** **                                  | ** **    |   |   |   |   |
| *Supplemental disclosure of non-cash investing and  financing activities:*   | *** *** | * *                                    | * *      | * * | * * |
| Debt assumed in  purchase of drilling rig                                    | ** **   | **$**                                       | **620,000**   | ** ** | $ | — |   | $ | — |   |
| Interest  financed but not paid in cash                                      | ** **   | **$**                                       | **141,000**   | ** ** | $ | — |   | $ | — |   |

 

Duringthe year ended September 30, 2007, 20,000 stock options were exercised bytendering 1,900 shares of Barnwell stock at an average market value of $21.09per share, resulting in a $10,000 increase in common stock, a $30,000 increasein additional paid-in capital and a $40,000 increase in treasury stock.

 

Duringthe years ended September 30, 2007 and 2006, capital expenditure accrualsrelated to oil and natural gas asset retirement obligations increased $276,000and $598,000, respectively. Additionally, capital expenditure accruals related to oil and naturalgas exploration and development decreased $2,039,000 and increased $396,000during the years ended September 30, 2007 and 2006, respectively.

 

**19.****                              ****SUBSEQUENT EVENTS**

 

In October 2007, Kaupulehu Developments receiveda $1,927,000 development rights option payment for a portion of the seventhpayment due on December 31, 2007. This development rights option payment will be recognized in Barnwell’sfirst quarter of fiscal 2008.

 

In December 2007, Kaupulehu 2007 obtained a$16,000,000 revolving line of credit facility and refinanced $6,600,000 of itsborrowings.  Refer to Note 11 abovefor further discussion.

 

In December 2007, WB sold a lot in Increment I andpaid Kaupulehu Developments a percentage of sales payment of $540,000. Thisreceipt will be recognized in Barnwell’s first quarter of fiscal 2008.

 

In December 2007,Barnwell declared a cash dividend of $0.05 per share payable January 22,2008, to stockholders of record on January 7, 2008.

 

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In October and November 2007, Barnwellrepurchased 106,500 shares of its common stock for $1,597,000, or approximately$15.00 per share.  Of these amounts,71,500 shares were purchased for $1,063,000, or approximately $14.87 per share,on the open market under the September 20, 2007 authorization, and 35,000shares were purchased for approximately $534,000, or $15.26 per share, theclosing market price on the date of the transaction, in a privately negotiatedtransaction.  These repurchases, incombination with the 10,000 shares purchased in September 2007, leave68,500 shares available for repurchase under the September 20, 2007authorization and 65,000 shares available for repurchase under the previousauthorization, as of November 30, 2007.

 

**20.****                              ****SUMMARYOF SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**

 

Thefollowing is a summary of unaudited quarterly results of operations for theyears ended September 30, 2007 and 2006:

 

*Fiscal 2007:*

* *
| ** **                             | ** ** | **Quarter ended** | ** **     |
|----------------------------------------|------------|------------------------|----------------|
| ** **                             | ** ** | **December 31**   | ** **     | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
|                                   |       | ** **             | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                               |       | **$**                  | **13,268,000** | ** ** | **$** | **11,163,000** | ** ** | **$** | **11,813,000** | ** ** | **$** | **11,192,000** | ** ** |
|                                   |       | ** **             | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating profit                       |       | **$**                  | **5,664,000**  | ** ** | **$** | **4,223,000** | ** ** | **$** | **4,035,000** | ** ** | **$** | **3,645,000** | ** ** |
|                                   |       | ** **             | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings                           |       | **$**                  | **1,114,000**  | ** ** | **$** | **1,258,000** | ** ** | **$** | **743,000** | **(2)** | **$** | **401,000** | ** ** |
|                                   |       | ** **             | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic earnings  per common share (1)   |       | **$**                  | **0.14**       | ** ** | **$** | **0.15** | ** ** | **$** | **0.09** | ** ** | **$** | **0.05** | ** ** |
|                                   |       | ** **             | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Diluted earnings  per common share (1) |       | **$**                  | **0.13**       | ** ** | **$** | **0.15** | ** ** | **$** | **0.09** | ** ** | **$** | **0.05** | ** ** |

 

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*Fiscal 2006:*

* *
|                                   |   | **Quarter ended** |       |
|----------------------------------------|--------|------------------------|------------|
|                                   |   | **December 31**   |       | **March 31** |   | **June 30** |   | **September 30** |   |
|                                   |   |                   |       |   |   |   |   |   |   |
| Revenues                               |   | $                      | 17,601,000 |   | $ | 13,467,000 |   | $ | 17,147,000 |   | $ | 9,745,000 |   |
|                                   |   |                   |       |   |   |   |   |   |   |
| Operating profit                       |   | $                      | 10,427,000 |   | $ | 6,838,000 |   | $ | 9,317,000 |   | $ | 2,870,000 |   |
|                                   |   |                   |       |   |   |   |   |   |   |
| Net earnings                           |   | $                      | 6,340,000  |   | $ | 3,423,000 |   | $ | 3,032,000 |   | $ | 1,842,000 | (3) |
|                                   |   |                   |       |   |   |   |   |   |   |
| Basic earnings per  common share (1)   |   | $                      | 0.78       |   | $ | 0.42 |   | $ | 0.37 |   | $ | 0.23 |   |
|                                   |   |                   |       |   |   |   |   |   |   |
| Diluted earnings  per common share (1) |   | $                      | 0.73       |   | $ | 0.39 |   | $ | 0.35 |   | $ | 0.21 |   |
|                                        |        |                        |            |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (1)    |   | Due to the use  of the weighted-average number of shares of common shares outstanding for  each quarter for computing earnings per share, the sum of the quarterly per  share amounts may not equal the per share amount for the year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (2)    |   | The estimated  annual effective income tax rate was adjusted in the quarter ended  June 30, 2007. The impact of the revision resulted in an approximately  $120,000 increase in income tax expense during the three and nine months  ended June 30, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (3)    |   | Prior to the end of the  quarter ended September 30, 2006, a holder of stock appreciation rights  represented his intention to exercise a portion of those rights in stock in  the future. Stock appreciation rights payments made in cash are deductible  for Canadian income tax purposes. However, payments of stock appreciation  rights in shares of Barnwell’s stock are not deductible for Canadian income  tax purposes, thus a deferred tax valuation allowance was recorded for the  portion of stock appreciation rights represented to be exercised in stock. During  the three months ended September 30, 2006, the holder of these stock  appreciation rights exercised a portion of his stock appreciation rights in  cash and subsequently represented that he intends to exercise the remaining  outstanding stock appreciation rights in cash. Accordingly, Barnwell recorded  an approximately $350,000 deferred tax benefit in the three months ended  September 30, 2006 related to the reduction of the valuation allowance  for stock appreciation rights for Canadian income tax purposes to zero. |

 

**21.****                              ****SUPPLEMENTARY OIL ANDNATURAL GAS INFORMATION (UNAUDITED)**

 

The following tables summarize informationrelative to Barnwell’s oil and natural gas operations, which are substantiallyconducted in Canada.  Proved reserves arethe estimated quantities of crude oil, condensate and natural gas whichgeological and engineering data demonstrate with reasonable certainty to berecoverable in future years from known reservoirs under existing economic andoperating conditions.  Proved producingoil and natural gas reserves are reserves that can be expected to be recoveredthrough existing wells with existing equipment and operating methods.  The estimated net interests in total provedand proved producing reserves are based upon subjective engineering judgmentsand may be affected by the limitations inherent in such estimations.  The process of estimating reserves is subjectto continual revision as additional information becomes available as a resultof drilling, testing, reservoir studies and production history.  There can be no assurance that such estimateswill not be materially revised in subsequent periods.

 

On October 25, 2007,the Alberta Government announced increases to the royalty rates on oil, naturalgas liquids and natural gas production beginning on January 1, 2009.  The new plan also intends to simplifyroyalties and eliminate “old” and “new” classifications of oil and natural gaswith 

 

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current maximum royaltyrates of 35% with new royalty rates up to 50%. The new proposed 50% royalty rate is reached for oil when oil is sellingat or above $120.00 Canadian dollars per barrel and for natural gas whennatural gas is selling at or above $17.50 Canadian dollars per MCF.  Barnwell is awaiting clarification from theAlberta Government on the new program and is in the process of assessing itsimpact.  The new program may reduceBarnwell’s natural gas and oil reserve volumes, reported net production, andestimated future revenues and estimated future cash flows from natural gas andoil reserves.  The new program may alsomaterially impact the economics of oil and natural gas exploration in theAlberta area.  However, the magnitude ofthe potential impact, which will depend on the final form of legislation uponenactment, cannot be reasonably estimated at this time.

 

*(A)**                             **Oil and Natural Gas Reserves*

 

Thefollowing table, based on information prepared by independent petroleumengineers, Paddock Lindstrom & Associates Ltd., summarizes changes inthe estimates of Barnwell’s net interests in total proved reserves of crude oiland natural gas liquids (“NGL”) and natural gas (“MCF” means 1,000 cubic feetof natural gas) which are all in Canada:

 
| ** **                                                                                   | ** ** | **OIL & NGL** | ** ** | **GAS**        | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------|------------|
| ** **                                                                                   | ** ** | **(Barrels)**               | ** ** | **(MCF)**      | ** ** |
| Balance at  September 30, 2004                                                          |       | 1,304,000                   |       | 26,825,000     |       |
|                                                                                         |       |                        |       |           |       |
| Revisions of  previous estimates                                                             |       | 76,000                      |       | (1,236,000     | )          |
| Extensions,  discoveries and other additions                                                 |       | 179,000                     |       | 3,266,000      |       |
| Less production                                                                              |       | (253,000                    | )          | (3,621,000     | )          |
| Balance at  September 30, 2005                                                          |       | 1,306,000                   |       | 25,234,000     |       |
|                                                                                         |       |                        |       |           |       |
| Revisions of  previous estimates – due to discontinuation of Alberta Royalty Tax Credit |       | (24,000                     | )          | (378,000       | )          |
| Revisions of  previous estimates – due to other                                         |       | 91,000                      |       | (865,000       | )          |
| Extensions,  discoveries and other additions                                                 |       | 190,000                     |       | 4,464,000      |       |
| Less production                                                                              |       | (260,000                    | )          | (3,629,000     | )          |
| Balance at  September 30, 2006                                                          |       | 1,303,000                   |       | 24,826,000     |       |
|                                                                                         |       |                        |       |           |       |
| Revisions of  previous estimates                                                             |       | 176,000                     |       | 1,279,000      |       |
| Extensions,  discoveries and other additions                                                 |       | 168,000                     |       | 1,528,000      |       |
| Less production                                                                              |       | (260,000                    | )          | (3,615,000     | )          |
| **Balance  at September 30, 2007**                                                      | ** ** | **1,387,000**               | ** ** | **24,018,000** | ** ** |

 
| ** **                                       | ** ** | **OIL & NGL** | ** ** | **GAS**        | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|----------------|------------|
| **Proved producing reserves at:** | ** ** | **(Barrels)**               | ** ** | **(MCF)**      | ** ** |
| September 30,  2004                         |       | 1,135,000                   |       | 21,614,000     |       |
| September 30,  2005                         |       | 1,102,000                   |       | 21,842,000     |       |
| September 30,  2006                         |       | 1,069,000                   |       | 18,558,000     |       |
| **September 30,  2007**                     | ** ** | **1,095,000**               | ** ** | **18,858,000** | ** ** |

 

113

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*(B)**                             **Capitalized Costs Relating to Oil and Natural Gas Producing Activities*

 
| ** **                                   | ** ** | **September 30,** | ** **      |
|----------------------------------------------|------------|------------------------|-----------------|
| ** **                                   | ** ** | **2007**               | ** **      | **2006** | ** ** | **2005** | ** ** |
| Proved  properties                           | ** ** | **$**                  | **179,404,000** |   | $ | 146,542,000 |   | $ | 117,995,000 |   |
| Unproved  properties                         | ** ** | **12,650,000**         |            | 11,020,000 |   | 8,110,000 |   |
| Total  capitalized costs                     | ** ** | **192,054,000**        |            | 157,562,000 |   | 126,105,000 |   |
| Accumulated  depletion and depreciation | ** ** | **104,706,000**        |            | 80,823,000 |   | 66,705,000 |   |
| Net capitalized  costs                       | ** ** | **$**                  | **87,348,000**  |   | $ | 76,739,000 |   | $ | 59,400,000 |   |

 

*(C)**                            **Costs Incurred in Oil and Natural Gas Property Acquisition, Explorationand Development*

 
| ** **                  | ** ** | **Year ended September 30,** | ** **    |
|-----------------------------|------------|---------------------------------------------|---------------|
| ** **                  | ** ** | **2007**                                    | ** **    | **2006** | ** ** | **2005** | ** ** |
| Acquisition of  properties: |       |                                        |          |   |   |   |   |
| Unproved                    | ** ** | **$**                                       | **968,000**   |   | $ | 3,052,000 |   | $ | 2,561,000 |   |
|                        |       |                                        |          |   |   |   |   |
| Proved                      | ** ** | **$**                                       | **—**    |   | $ | — |   | $ | — |   |
|                        |       |                                        |          |   |   |   |   |
| Exploration  costs          | ** ** | **$**                                       | **4,406,000** |   | $ | 8,935,000 |   | $ | 3,448,000 |   |
|                        |       |                                        |          |   |   |   |   |
| Development  costs          | ** ** | **$**                                       | **8,790,000** |   | $ | 13,962,000 |   | $ | 12,220,000 |   |

 

*(D)**                            **The Results of Operations of Barnwell’s Oil and Natural Gas ProducingActivities*

 
| ** **                      | ** ** | **Year ended September 30,** | ** **     |
|---------------------------------|------------|---------------------------------------------|----------------|
| ** **                      | ** ** | **2007**                                    | ** **     | **2006** | ** ** | **2005** | ** ** |
| Gross revenues                  | ** ** | **$**                                       | **44,759,000** |   | $ | 51,197,000 |   | $ | 43,931,000 |   |
| Royalties, net  of credit       | ** ** | **10,160,000**                              |           | 13,293,000 |   | 11,207,000 |   |
| Net revenues                    | ** ** | **34,599,000**                              |           | 37,904,000 |   | 32,724,000 |   |
| Production costs                | ** ** | **10,203,000**                              |           | 8,217,000 |   | 6,899,000 |   |
| Depletion and  depreciation     | ** ** | **12,753,000**                              |           | 11,130,000 |   | 8,447,000 |   |
| Pre-tax results  of operations* | ** ** | **11,643,000**                              |           | 18,557,000 |   | 17,378,000 |   |
| Estimated income  tax expense   | ** ** | **4,424,000**                               |           | 7,423,000 |   | 8,341,000 |   |
| Results of  operations*         | ** ** | **$**                                       | **7,219,000**  |   | $ | 11,134,000 |   | $ | 9,037,000 |   |

 

----

*                       Before general and administrativeexpenses, interest expense, and foreign exchange gains and losses.

 

*(E)**                             **Standardized Measure, Including Year-to-Year Changes Therein, ofEstimated Discounted Future Net Cash Flows*

 

The following tables havebeen developed pursuant to procedures prescribed by SFAS No. 69, “Disclosuresabout Oil and Gas Producing Activities - an amendment of FASBStatements 19, 25, 33, and 39,” and utilize reserve and production dataestimated by petroleum engineers.  Theinformation may be useful for certain comparison purposes but should not besolely relied upon in evaluating Barnwell or its performance.  Moreover, the projections should not beconstrued as realistic estimates of future cash flows, nor should thestandardized measure be viewed as representing current value.

 

114

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The estimated future cashflows are based on sales prices, costs, and statutory income tax rates inexistence at the dates of the projections. Material revisions to reserve estimates may occur in the future,development and production of the oil and natural gas reserves may not occur inthe periods assumed and actual prices realized and actual costs incurred areexpected to vary significantly from those used. Management does not rely upon this information in making investment andoperating decisions; rather, those decisions are based upon a wide range offactors, including estimates of probable reserves as well as proved reservesand price and cost assumptions different than those reflected herein.

 

StandardizedMeasure of Estimated Discounted Future Net Cash Flows

 
| ** **                                                          | ** ** | **As of September 30,** | ** **      |
|---------------------------------------------------------------------|------------|----------------------------------------|-----------------|
| ** **                                                          | ** ** | **2007**                               | ** **      | **2006** | ** ** | **2005** | ** ** |
| Future cash  inflows                                                | ** ** | **$**                                  | **224,114,000** | ** ** | $ | 147,246,000 |   | $ | 299,383,000 |   |
|                                                                |       |                                   | ** **      |   |   |   |   |
| Future  production costs                                            | ** ** | **(75,216,000**                        | **)**           | (53,961,000 | ) | (52,253,000 | ) |
|                                                                |       |                                   | ** **      |   |   |   |   |
| Future  development costs                                           | ** ** | **(4,775,000**                         | **)**           | (5,024,000 | ) | (2,430,000 | ) |
|                                                                |       |                                   | ** **      |   |   |   |   |
| Future net cash  flows before income taxes                          | ** ** | **144,123,000**                        | ** **      | 88,261,000 |   | 244,700,000 |   |
|                                                                |       |                                   | ** **      |   |   |   |   |
| Future income  tax expenses                                         | ** ** | **(35,416,000**                        | **)**           | (20,552,000 | ) | (73,367,000 | ) |
|                                                                |       |                                   | ** **      |   |   |   |   |
| Future net cash  flows                                              | ** ** | **108,707,000**                        | ** **      | 67,709,000 |   | 171,333,000 |   |
|                                                                |       |                                   | ** **      |   |   |   |   |
| 10% annual  discount for timing of cash flows                       | ** ** | **(30,407,000**                        | **)**           | (17,786,000 | ) | (51,571,000 | ) |
|                                                                |       |                                   | ** **      |   |   |   |   |
| Standardized  measure of estimated discounted future net cash flows | ** ** | **$**                                  | **78,300,000**  | ** ** | $ | 49,923,000 |   | $ | 119,762,000 |   |

 

115

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Changesin the Standardized Measure of Estimated Discounted Future Net Cash Flows

 
| ** **                                                                       | ** ** | **Year ended September 30,** | ** **     |
|----------------------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                                       | ** ** | **2007**                                    | ** **     | **2006** | ** ** | **2005** | ** ** |
|                                                                             |       |                                        |           |   |   |   |   |
| Beginning of  year                                                               | ** ** | **$**                                       | **49,923,000** | ** ** | $ | 119,762,000 |   | $ | 61,010,000 |   |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Sales of oil and  natural gas produced, net of production costs                  | ** ** | **(24,299,000**                             | **)**          | (29,735,000 | ) | (25,727,000 | ) |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Net changes in  prices and production costs, net of royalties and wellhead taxes | ** ** | **29,674,000**                              | ** **     | (85,254,000 | ) | 68,770,000 |   |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Extensions and  discoveries                                                      | ** ** | **8,775,000**                               | ** **     | 11,356,000 |   | 29,958,000 |   |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Revisions of  previous quantity estimates                                        | ** ** | **9,681,000**                               | ** **     | (5,006,000 | ) | (4,881,000 | ) |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Net change in  Canadian dollar translation rate                                  | ** ** | **3,165,000**                               | ** **     | 4,189,000 |   | 4,050,000 |   |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Changes in the  timing of future production and other                            | ** ** | **6,411,000**                               | ** **     | (385,000 | ) | 100,000 |   |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Net change in  income taxes                                                      | ** ** | **(10,619,000**                             | **)**          | 22,529,000 |   | (20,159,000 | ) |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Accretion of  discount                                                           | ** ** | **5,589,000**                               | ** **     | 12,467,000 |   | 6,641,000 |   |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Net change                                                                       | ** ** | **28,377,000**                              | ** **     | (69,839,000 | ) | 58,752,000 |   |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| End of year                                                                      | ** ** | **$**                                       | **78,300,000** | ** ** | $ | 49,923,000 |   | $ | 119,762,000 |   |

 
| **ITEM 9.** | ** ** | **CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|------------|-------------------------------------------------------------------------------------------|

 

None.

 
| **ITEM 9A.** | **CONTROLS AND PROCEDURES** |
|--------------|-----------------------------|

 

As of September 30,2007, an evaluation was carried out by Barnwell’s Chief Executive Officer andChief Financial Officer of the effectiveness of Barnwell’s disclosure controlsand procedures.  Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that Barnwell’s disclosure controls and procedures are effective toensure that information required to be disclosed by Barnwell in reports that itfiles or submits under the Securities and Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Act of 1934 and the rules thereunder.  There was no change in Barnwell’s internalcontrol over financial reporting during the quarter ended September 30,2007, that materially affected, or is reasonably likely to materially affect,Barnwell’s internal control over financial reporting.

 

116

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**ITEM9B.****                                           ****OTHERINFORMATION**

 

On September 28,2007, Barnwell filed a Form 8-K to report the passing of Mr. ErikHazelhoff-Roelfzema on September 26, 2007. Mr. Hazelhoff-Roelfzema was a member of Barnwell’s Board ofDirectors since 1977 and was also a member of its Executive Committee.  Barnwell also reported in this Form 8-Kthat its Executive Committee voted to remove Warren D. Steckley from hisposition as Vice President, Canadian Operations, and as such Mr. Steckleyis no longer an executive officer of Barnwell.

 

OnOctober 17, 2007, Barnwell filed a Form 8-K to report the Board ofDirectors appointed Mr. Robert J. Inglima, Jr. to serve on its Boardof Directors, effective immediately.  TheBoard of Directors has determined that Mr. Inglima is independent asdefined in Section 121(A) of the American Stock Exchange listingstandards.  Mr. Inglima is anattorney in private practice in New Jersey and is a member of the New JerseyState Bar Association and District of Columbia Bar Association.  From 1995 to 1998, he was a member of the NewJersey Supreme Court Fee Arbitration Committee (District II-A), and he servedas District Chairman in 1999.  There isno arrangement or understanding pursuant to which Mr. Inglima was selectedas a director.  As of the date of thisfiling, Mr. Inglima has not been appointed to any committees of the Boardof Directors, and the Board of Directors has not yet determined to which, ifany, committees Mr. Inglima will be appointed in the immediate future.

 

**PART III**

 

**ITEM10.****                                             ****DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

The information requiredis omitted pursuant to General Instruction G(3) of Form 10-K, sincethe Registrant will file its definitive proxy statement for the 2008 AnnualMeeting of Stockholders no later than 120 days after the close of its fiscalyear ended September 30, 2007, which proxy statement is incorporatedherein by reference.

 

Barnwell adopted a Codeof Ethics that applies to its chief executive officer and the chief financialofficer.  This Code of Ethics has beenposted on Barnwell’s website at www.brninc.com.

 

**ITEM11.****                                             ****EXECUTIVECOMPENSATION**

 

The information requiredis omitted pursuant to General Instruction G(3) of Form 10-K, sincethe Registrant will file its definitive proxy statement for the 2008 AnnualMeeting of Stockholders no later than 120 days after the close of its fiscalyear ended September 30, 2007, which proxy statement is incorporatedherein by reference.

 

117

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| **ITEM 12.** | ** ** | **SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|------------|-----------------------------------------------------------------------------------------------------|

 

The information requiredis omitted pursuant to General Instruction G(3) of Form 10-K, sincethe Registrant will file its definitive proxy statement for the 2008 AnnualMeeting of Stockholders no later than 120 days after the close of its fiscalyear ended September 30, 2007, which proxy statement is incorporatedherein by reference.

 

*Equity Compensation Plan Information*

 

The following table provides information aboutBarnwell’s common stock that may be issued upon exercise of options and rightsunder all of Barnwell’s existing equity compensation plans as of September 30,2007:

 
| **Plan Category**                                      | ** ** | **(a)  Number of  securities  to be issued  upon exercise  of outstanding  options, warrants  and rights** | ** ** | **(b)  Weighted-  average  price of  outstanding  options,  warrants  and rights** | ** ** | **(c)  Number of securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  |
| ** **                                                  |
| ** **                                                  |
| ** **                                                  |
| ** **                                                  |
| ** **                                                  |
| ** **                                                  |
| Equity  compensation plans approved by security holders     |       | 345,000                                                                                                                                       |       | $                                                                                            | 5.96       |                                                                                                                                                                                                              | 6,000      |   |
| Equity  compensation plans not approved by security holders |       | 196,000                                                                                                                                       |       | $                                                                                            | 7.54       |                                                                                                                                                                                                              | —     |   |
| Total                                                       |       | 541,000                                                                                                                                       |       | $                                                                                            | 6.53       |                                                                                                                                                                                                              | 6,000      |   |

 

Equity compensation plansnot approved by security holders are comprised of the following awards:

 

In June 1998,Barnwell granted 180,000 stock options under a non-qualified plan at a purchaseprice of $2.60 per share (market price on date of grant).  These options are fully vested and have stockappreciation rights that permit the holder to receive stock, cash or acombination thereof equal to the amount by which the fair market value, at thetime of exercise of the option, exceeds the option price.  During the years ended September 30,2007 and 2006, the stock appreciation rights feature on 80,000 shares and60,000 shares, respectively, of these options were exercised.  The remaining 40,000 options expire in May 2008.

 

In December 2004,Barnwell granted stock options to acquire 210,000 shares of Barnwell’s commonstock under a non-qualified plan at a purchase price of $8.80 per share (marketprice on date of grant).  These optionshave stock appreciation rights that permit the holders to receive stock, cashor a combination thereof equal to the amount by which the fair market value, atthe time of exercise of the option, exceeds the option price.  These options vest annually over five yearscommencing one year from the date of grant and expire in December 2014.  During the years ended September 30,2007 and 2006, the stock appreciation rights feature on 24,000 shares and30,000 shares, respectively, of these options were exercised.

 

118

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**ITEM13.****                                             ****CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

The information requiredis omitted pursuant to General Instruction G(3) of Form 10-K, sincethe Registrant will file its definitive proxy statement for the 2008 AnnualMeeting of Stockholders no later than 120 days after the close of its fiscalyear ended September 30, 2007, which proxy statement is incorporatedherein by reference.

 

**ITEM14.****                                             ****PRINCIPALACCOUNTING FEES AND SERVICES**

 

The information requiredis omitted pursuant to General Instruction G(3) of Form 10-K, sincethe Registrant will file its definitive proxy statement for the 2008 AnnualMeeting of Stockholders no later than 120 days after the close of its fiscalyear ended September 30, 2007, which proxy statement is incorporatedherein by reference.

 

**PART IV**

 

**ITEM15.****                                             ****EXHIBITS,FINANCIAL STATEMENT SCHEDULES**

 
| (a)    | Financial Statements                                                                                                                                                    |   |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                                    |   |
|   | The following  consolidated financial statements of Barnwell Industries, Inc. and its   subsidiaries are included in Part II, Item 8:                         |   |
|   |                                                                                                                                                                    |   |
|   | Report of Independent Registered Public Accounting  Firm – KPMG LLP                                                                                                |   |
|   |                                                                                                                                                                    |   |
|   | Consolidated Balance  Sheets – September 30, 2007 and 2006                                                                                                    |   |
|   |                                                                                                                                                                    |   |
|   | Consolidated  Statements of Earnings – for the three years ended September 30, 2007                                                                           |   |
|   |                                                                                                                                                                    |   |
|   | Consolidated  Statements of Cash Flows – for the three years ended September 30, 2007                                                                         |   |
|   |                                                                                                                                                                    |   |
|   | Consolidated  Statements of Stockholders’ Equity and Comprehensive Income                                                                                          |   |
|   | for the three  years ended September 30, 2007                                                                                                                      |   |
|   |                                                                                                                                                                    |   |
|   | Notes to Consolidated Financial Statements                                                                                                                              |   |
|   |                                                                                                                                                                    |   |
|   | Schedules have been omitted because they were not  applicable, not required, or the information is included in the consolidated  financial statements or notes thereto. |   |

 
| (b)    | Exhibits      |                                                                                                                                  |
|--------|---------------|---------------------------------------------------------------------------------------------------------------------------------------|
|   |          |                                                                                                                                  |
|   | No. 3.1  | Certificate of  Incorporation(1)                                                                                                      |
|   |          |                                                                                                                                  |
|   | No. 3.2  | Amended and Restated  By-Laws(1)                                                                                                      |
|   |          |                                                                                                                                  |
|   | No. 4.0  | Form of the  Registrant’s certificate of common stock, par value $.50 per share.(2)                                         |
|   |          |                                                                                                                                  |
|   | No. 10.1 | The Barnwell  Industries, Inc. Employees’ Pension Plan (restated as of  October 1, 1989).(3)                      |
|   |          |                                                                                                                                  |
|   | No. 10.2 | Phase I Makai  Development Agreement dated June 30, 1992, by and between Kaupulehu  Makai Venture and Kaupulehu Developments.(4) |
|   |          |                                                                                                                                  |

 

119

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|   | No. 10.3 | KD/KMV Agreement  dated June 30, 1992 by and between Kaupulehu Makai Venture and Kaupulehu  Developments.(4)                                                                         |
|--------|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |          |                                                                                                                                                                                      |
|   | No. 10.4 | Barnwell  Industries, Inc.’s letter to Warren D. Steckley dated May 6, 1998,  regarding certain terms of employment.(5)                                                    |
|   |          |                                                                                                                                                                                      |
|   | No. 21   | List of  Subsidiaries                                                                                                                                                                     |
|   |          |                                                                                                                                                                                      |
|   | No. 31.1 | Certification of Chief  Executive Officer Pursuant To 18 U.S.C. Section 1350, As Adopted  Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002                             |
|   |          |                                                                                                                                                                                      |
|   | No. 31.2 | Certification of  Chief Financial Officer Pursuant To 18 U.S.C. Section 1350, As Adopted  Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002                             |
|   |          |                                                                                                                                                                                      |
|   | No. 32   | Certification of Chief Executive Officer and Chief  Financial Officer Pursuant To 18 U.S.C. Section 1350, As Adopted  Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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(1)          Incorporated by reference to the Registrant’s Form S-8 dated November 8, 1991.

(2)          Incorporated by reference to the registration statement on Form S-1originally filed by the Registrant January 29, 1957 and as amended February 15, 1957and February 19, 1957.

(3)          Incorporated by reference to Form 10-K for the year ended September 30,1989.

(4)          Incorporated by reference to Form 10-K for the year ended September 30,1992.

(5)          Incorporated by reference to Form 10-KSB for the year ended September 30,2000.

 

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SIGNATURES

 

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

 

BARNWELLINDUSTRIES, INC.

(Registrant)

 

 
| /s/ Russell M. Gifford        |                       |
|-------------------------------|----------------------------|
| By:                           | RUSSELL M.  GIFFORD        |
|                          | Chief Financial  Officer,  |
|                          | Executive Vice  President, |
|                          | Treasurer and  Secretary   |
| Date:  December 12, 2007 |
|                               |                            |  |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

 
| /s/ Morton H. Kinzler         |   |
|-------------------------------|--------|
| MORTON H.  KINZLER            |   |
| Chief Executive  Officer and  |   |
| Chairman of the  Board        |   |
| Date:  December 12, 2007 |

 

 
| /s/ Alexander C. Kinzler             |   | /s/ Russell M. Gifford               |   |
|--------------------------------------|--------|--------------------------------------|--------|
| ALEXANDER C.  KINZLER                |   | RUSSELL M.  GIFFORD                  |
| President, Chief  Operating Officer, |   | Executive Vice  President,           |
| General Counsel  and Director        |   | Chief Financial  Officer, Treasurer, |
| Date:  December 12, 2007        |   | Secretary and  Director              |
|                                 |   | Date: December 12,  2007        |
|                                 |   |                                 |
|                                 |   |                                 |
| /s/ Martin Anderson                  |   | /s/ Murray C. Gardner                |   |
| MARTIN ANDERSON,  Director           |   | MURRAY C.  GARDNER, Director         |
| Date: December 12,  2007        |   | Date: December 12,  2007        |

 

121

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SIGNATURES(continued)

 
| /s/ Ahron H. Haspel               |   | /s/ Alan D. Hunter            |   |
|-----------------------------------|--------|-------------------------------|--------|
| AHRON H. HASPEL,  Director        |   | ALAN D. HUNTER,  Director     |
| Date: December 12,  2007     |   | Date: December 12,  2007 |
|                              |   |                          |
|                              |   |                          |
| /s/ Robert J.  Inglima, Jr.  |   | /s/ Terry Johnston            |   |
| ROBERT J.  INGLIMA, JR., Director |   | TERRY JOHNSTON,  Director     |
| Date:  December 12, 2007     |   | Date: December 12,  2007 |
|                              |   |                          |
|                              |   |                          |
| /s/ Diane G. Kranz                |   | /s/ Kevin K. Takata           |   |
| DIANE G. KRANZ,  Director         |   | KEVIN K. TAKATA,  Director    |
| Date: December 12,  2007     |   | Date: December 12,  2007 |
|                              |   |                          |

 

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