**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,  2008** |
| ** **               | ** ** |
| ** **               | or |
| ** **               |   |
| **[   ]** | **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 its charter)

 

| **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 |       | NYSE Alternext U.S.                                                         |       |

 

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

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

                                                                                                                                                      o Yes   x No

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.

                                                                                                                                                      o Yes   x No

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.                                                              x Yes   o No

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K.                                            x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

Large accelerated filer o                                                                   Acceleratedfiler o

Non-accelerated filer  o  (Do not check if a smaller reportingcompany)                        Smallerreporting company x

 

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

 

Theaggregate market value of the voting common stock held by non-affiliates of theregistrant, computed by reference to the closing price of a share of commonstock on March 31, 2008 (the last business day of the registrant’s mostrecently completed second fiscal quarter) was $49,978,000.

 

Asof December 4, 2008 there were 8,240,160 shares of common stockoutstanding.

 

Documents Incorporated by Reference

 

1.               Proxy statement tobe forwarded to stockholders on or about January 15, 2009 is incorporatedby reference in Part III hereof.

 

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**TABLEOF CONTENTS**

 
|          |        |                                                                                                                | Page   |
|---------------|-------------|---------------------------------------------------------------------------------------------------------------------|--------|
|          |        |                                                                                                                |   |
| PART I   |        |                                                                                                                |   |
|          |        |                                                                                                                |   |
|          |        | Discussion of Forward-Looking Statements                                                                            | 3      |
|          |        |                                                                                                                |   |
|          | Item 1.     | Business                                                                                                            | 4      |
|          |        |                                                                                                                |   |
|          | Item 1A.    | Risk Factors                                                                                                        | 20     |
|          |        |                                                                                                                |   |
|          | Item  1B.   | Unresolved  Staff Comments                                                                                          | 37     |
|          |        |                                                                                                                |   |
|          | Item 2.     | Properties                                                                                                          | 37     |
|          |        |                                                                                                                |   |
|          | Item 3.     | Legal  Proceedings                                                                                                  | 37     |
|          |        |                                                                                                                |   |
|          | Item  4.    | Submission  of Matters to a Vote of Security Holders                                                                | 37     |
|          |        |                                                                                                                |   |
| PART II  |        |                                                                                                                |   |
|          |        |                                                                                                                |   |
|          | Item  5.    | Market For  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 38     |
|          |        |                                                                                                                |   |
|          | Item  6.    | Selected  Financial Data                                                                                            | 39     |
|          |        |                                                                                                                |   |
|          | Item  7.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 40     |
|          |        |                                                                                                                |   |
|          | Item  7A.   | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 61     |
|          |        |                                                                                                                |   |
|          | Item  8.    | Financial  Statements and Supplementary Data                                                                        | 62     |
|          |        |                                                                                                                |   |
|          | Item 9.     | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure                               | 108    |
|          |        |                                                                                                                |   |
|          | Item 9A(T). | Controls and  Procedures                                                                                            | 108    |
|          |        |                                                                                                                |   |
|          | Item 9B.    | Other Information                                                                                                   | 109    |
|          |        |                                                                                                                |   |
| PART III |        |                                                                                                                |   |
|          |        |                                                                                                                |   |
|          | Item  10.   | Directors,  Executive Officers and Corporate Governance                                                             | 109    |
|          |        |                                                                                                                |   |
|          | Item 11.    | Executive  Compensation                                                                                             | 109    |
|          |        |                                                                                                                |   |
|          | Item  12.   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 109    |
|          |        |                                                                                                                |   |
|          | Item  13.   | Certain  Relationships and Related Transactions, and Director Independence                                          | 110    |
|          |        |                                                                                                                |   |
|          | Item  14.   | Principal  Accounting Fees and Services                                                                             | 110    |
|          |        |                                                                                                                |   |
| PART IV  |        |                                                                                                                |   |
|          |        |                                                                                                                |   |
|          | Item  15.   | Exhibits,  Financial Statement Schedules                                                                            | 110    |

 

2

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**PART I**

 

**CAUTIONARYSTATEMENT 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 byreference, contain “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995, Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Aforward-looking statement is one which is based on current expectations offuture events or conditions and does not relate to historical or current facts.  These statements include various estimates, forecasts,projections of Barnwell Industries, Inc.’s (referred to herein togetherwith its subsidiaries as “Barnwell,” “we,” “our,” “us” or the “Company”) futureperformance, statements of Barnwell’s plans and objectives and other similarstatements.  Forward-looking statementsinclude phrases such as “expects,” “anticipates,” “intends,” “plans,” “believes,”“predicts,” “estimates,” “assumes,” “projects,” “may,” “will,” “will be,” “should,”or similar expressions.  AlthoughBarnwell believes that its current expectations are based on reasonableassumptions, it cannot assure that the expectations contained in suchforward-looking statements will be achieved. Forward-looking statements involve risks, uncertainties and assumptionswhich could cause actual results to differ materially from those contained insuch statements.  Investors should notplace undue reliance on these forward-looking statements, as they speak only asof the date of filing of this Form 10-K, and Barnwell expressly disclaimsany obligation or undertaking to publicly release any updates or revisions toany 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’s acquisitionor 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 or unknown factors not discussed in thisreport could also cause actual results to materially and adversely differ fromthose discussed in the forward-looking statements.*

 

3

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Unless otherwise indicated, all references to “dollars”in this Form 10-K are to United States dollars.

 

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

 

**Overview**

 

Barnwell was incorporated in Delaware in 1956 andfiscal 2008 represented Barnwell’s 52nd year of operations.  Barnwell operates in the following fourprincipal business segments:

 

·      *Oil and Natural Gas Segment*. Barnwell engages in oil and natural gas exploration, development,production and sales in Canada.

 

·      *Land Investment Segment*. Barnwell invests in leasehold land and other real estate interests inHawaii.

 

·      *Residential Real Estate Segment*.  Established in January 2007, Barnwellacquires house lots for investment and development of homes for sale in Hawaii.

 

·      *Contract Drilling Segment*. Barnwell provides well drilling services and water pumping systeminstallation and repairs in Hawaii.

 

**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 of Canada initiates and participatesin exploratory and developmental operations for oil and natural gas on propertyin which it has an interest, and evaluates proposals by third parties withregard to participation in such exploratory and developmental operationselsewhere.

 

*Operations*

 

Barnwell’s investments in oil and natural gasproperties consist of investments in Canada, principally in the Province ofAlberta, with minor holdings in the Provinces of Saskatchewan and BritishColumbia.  These property interests areprincipally held under governmental leases or licenses.  Under the typical Canadian provincialgovernmental lease, Barnwell must perform exploratory operations and complywith certain other conditions.  Leaseterms vary with each province, but, in general, the terms grant Barnwell theright to remove oil, natural gas and related substances subject to payment ofspecified royalties on production.

 

All exploratory and developmental operations areoverseen by Barnwell’s Calgary, Alberta staff and Barnwell’s Chief OperatingOfficer located in Honolulu, along with senior management and independentconsultants as necessary.  In fiscal2008, Barnwell participated in exploratory and developmental operationsprimarily in the Canadian Province of Alberta, although Barnwell does not limitits consideration of exploratory and developmental operations to this area.

 

4

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The Province of Alberta charges oil and natural gasproducers a royalty for production in Alberta. The Province of Alberta determines its royalty share of natural gas andof oil by using reference prices that average all natural gas sales and oilsales, respectively, in Alberta.  Royaltyrates are calculated on a sliding scale basis, increasing as prices increase upto a maximum royalty rate of 35%. Additionally, Barnwell pays gross overriding royalties and leaseholdroyalties on a portion of its natural gas and oil sales to parties other thanthe Province of Alberta.

 

On October 25, 2007, the Alberta Governmentannounced a New Royalty Framework (“NRF”) that will take effect on January 1,2009.  The NRF increases royalty rates onconventional oil and natural gas production whereby royalty rates will be bothprice-sensitive and production-sensitive and may increase up to a maximum of50%.  The price-sensitive maximum 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.  Approximately99% of Barnwell’s gross revenues are derived from properties located withinAlberta.  Approximately 85% of all fiscal2008 royalties related to crown charges, and 15% of Barnwell’s fiscal 2008royalties related to freehold and override charges which are not directlyaffected by the NRF.

 

In November 2008, the Alberta Governmentannounced a one-time option of selecting new transitional rates or NRF rateswhen drilling a new natural gas or conventional oil well 1,000 to 3,500 metersin depth.  All wells drilled between 2009and 2013 that adopt the transitional rates will be required to shift to the NRFon January 1, 2014.  All currentwells will move to the NRF on January 1, 2009 as previously scheduled.

 

In fiscal 2008 and 2007, the weighted-average royaltyrate paid on all of Barnwell’s natural gas was approximately 23% and 24%,respectively.  The weighted-average rateof all royalties paid to governments and others on natural gas from theDunvegan Unit, Barnwell’s principal oil and natural gas property, wasapproximately 25% and 27% in fiscal 2008 and 2007, respectively.  The slight decrease in royalty rate on allproperties was primarily due to the lower royalties paid at Dunvegan.  At Dunvegan, the decrease in royalty rate wasdue to higher operating cost royalty credits received from the Alberta Departmentof Energy for operating expenditures incurred by Barnwell, a decrease inaverage gross production per well, and the categorization of these wells aslower productivity, decreasing the royalty rate overall for the property.

 

In fiscal 2008 and 2007, the weighted-average royaltyrate paid on oil was approximately 21% and 20%, respectively.  The slight increase in the weighted-averageroyalty rate on oil was primarily due to higher average oil prices partiallyoffset by a higher percentage of Barnwell’s fiscal 2008 production of oilcoming from newer wells where royalties are assessed at a lower rate than onolder wells.

 

Natural gas prices are typically higher in the winterthan at other times due to increased heating demand.  Oil prices are also subject to seasonalfluctuations, but to a lesser degree. Oil and natural gas unit sales are based on the quantity produced fromthe properties by the operator.  Duringperiods of low demand for natural gas, the operator of the Dunvegan propertymay re-inject natural gas into underground storage facilities in the Dunveganproperty for delivery at a future date.

 

5

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*WellDrilling Activities*

 

During fiscal 2008, Barnwell participated in thedrilling of 26 gross development wells and 6 gross exploratory wells, 29 ofwhich management believes should be capable of production and 3 are dry holes.

 

Thefollowing table sets forth more detailed information with respect to the numberof exploratory (“Exp.”) and development (“Dev.”) wells drilled for the fiscalyears ended September 30, 2008, 2007, and 2006 in which Barnwellparticipated:

 
| ** ** | ** ** | Productive     |       | Productive     |       | Total Productive |       |           |       |             |       |       |       |       |       |
|------------|------------|----------------|------------|----------------|------------|-----------------------|------------|----------------|------------|------------------|------------|------------|------------|------------|------------|
| ** ** | ** ** | Oil Wells |       | Gas Wells |       | Wells                 |       | Dry Holes |       | Total Wells |       |
| ** ** | ** ** | Exp.           |       | Dev.           |       | Exp.                  |       | Dev.           |       | Exp.             |       | Dev.       |       | Exp.       |       | Dev. |   | Exp. |   | Dev. |   |
| **2008**   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **            | ** ** | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross*** | ** ** | **3.0**        | ** ** | ** **     | **3.0**    | ** **            | ** ** | **1.0**        | ** ** | ** **       | **22.0**   | ** ** | ** ** | **4.0**    | ** ** | ** ** | **25.0** | ** ** | ** ** | **2.0** | ** ** | ** ** | **1.0** | ** ** | ** ** | **6.0** | ** ** | ** ** | **26.0** | ** ** | ** ** |
| **Net***   | ** ** | **1.2**        | ** ** | ** **     | **0.8**    | ** **            | ** ** | **0.6**        | ** ** | ** **       | **4.3**    | ** ** | ** ** | **1.8**    | ** ** | ** ** | **  5.1** | ** ** | ** ** | **0.8** | ** ** | ** ** | **0.1** | ** ** | ** ** | **2.6** | ** ** | ** ** | **  5.2** | ** ** | ** ** |
|       |       |           |       |           |       |                  |       |           |       |             |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 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 |   |   |
|            |            |                |            |                |            |                       |            |                |            |                  |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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| * | The  term “Gross” refers to the total number of wells in which Barnwell owns an  interest, and “Net” refers to Barnwell’s aggregate interest therein. For  example, a 50% interest in a well represents one gross well, but 0.5 net  well. The gross figures include interests owned of record by Barnwell and, in  addition, the portions owned by others. |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Barnwell invested $17,662,000 in oil and natural gasproperties during fiscal 2008, of which $518,000 (3%) was for acquisition ofoil and natural gas leases and lease rentals, $1,451,000 (8%) was forgeological and geophysical costs, $8,852,000 (50%) was for intangible drillingcosts, and $6,841,000 (39%) was for production equipment.  The major areas of investments in fiscal 2008were in the Dunvegan, Progress, Bonanza/Balsam, Boundary Lake, Kitty, and PouceCoupe areas of Alberta and Boundary Lake area of British Columbia.

 

The Dunvegan Unit, in which Barnwell holds an 8.9%working interest, is Barnwell’s principal oil and natural gas property and islocated in Alberta, Canada.  At September 30,2008, the Dunvegan Unit had 205 producing natural gas wells.  In fiscal 2008, Barnwell participated in thedrilling of 10 gross (0.9 net) development gas wells in the Dunvegan area, ofwhich all but one gross (0.1 net) well were successful.  Barnwell also participated in the drilling offour gross (0.5 net) development gas wells in the Dunvegan area (Non-Unit), ofwhich all were successful.  Total capitalexpenditures at Dunvegan were $3,070,000 in fiscal 2008 as compared to$3,524,000 and $1,781,000 in fiscal 2007 and 2006, respectively.  Barnwell expects that fiscal 2009 capitalexpenditures at Dunvegan will increase slightly from fiscal 2008’s level withthe anticipated drilling of 5 gross (0.4 net) development gas wells from theDunvegan Unit and 7 gross (0.6 net) Non-Unit development gas wells.

 

Capital expenditures totaled $3,498,000 in the Progressarea in fiscal 2008 as compared to $1,042,000 in fiscal 2007.  Three gross (1.7 net) wells were drilled infiscal 2008 of which one gross 

 

6

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(0.5net) well was successful and on production, one gross (0.3 net) well waswaiting to be tied in and one gross (0.9 net) well is still being evaluated at September 30,2008.  Barnwell did not acquire anyundeveloped land in the Progress area in fiscal 2008 and completed developmentof certain wells drilled in a prior year. At September 30, 2008 Barnwell’s average working interest in itsproductive wells in the Progress area was 42%.

 

Capital expenditures totaled $2,086,000 in theBonanza/Balsam area in fiscal 2008 as compared to $590,000 in fiscal 2007.  Two gross (1.2 net) wells were drilled infiscal 2008 of which one gross (0.6 net) well is being evaluated and one gross(0.6 net) well was unsuccessful at September 30, 2008.  Barnwell did not acquire any undeveloped landin the Bonanza/Balsam area in fiscal 2008. At September 30, 2008 Barnwell’s average working interest in itsproductive wells in the Bonanza/Balsam area was 31%.

 

Capital expenditures totaled $2,557,000 in theBoundary Lake area of Alberta in fiscal 2008 as compared to $1,335,000 infiscal 2007.  One gross (0.2 net) wellwas drilled in fiscal 2008 which was successful and waiting to be tied in at September 30,2008.  Barnwell’s fiscal 2008 capitalexpenditures in facilities within the Boundary Lake area of Alberta amounted to$1,126,000.  Barnwell did not acquire anyundeveloped land in the Boundary Lake area of Alberta in fiscal 2008.  At September 30, 2008, Barnwell’saverage working interest in its productive wells in the Boundary Lake area ofAlberta was 27%.

 

Capital expenditures totaled $1,557,000 in theBoundary Lake area of British Columbia in fiscal 2008 as compared to $761,000in fiscal 2007.  Two gross (0.5 net)wells were drilled in fiscal 2008 which were successful and waiting to be tiedin at September 30, 2008.  Barnwell’sfiscal 2008 capital expenditures in facilities within the Boundary Lake area ofBritish Columbia amounted to $484,000. Barnwell did not acquire any undeveloped land in the Boundary Lake areaof British Columbia in fiscal 2008 and completed development of certain wellsdrilled in a prior year.  At September 30,2008, Barnwell’s average working interest in its productive wells in theBoundary Lake area of British Columbia was 24%.

 

Capital expenditures totaled $654,000 in the Kittyarea in fiscal 2008.  One gross (0.2 net)well was successfully drilled in fiscal 2008 and on production at September 30,2008.  In the Kitty area, Barnwellacquired oil and natural gas rights in 640 gross (160 net) acres of undevelopedland in fiscal 2008.  At September 30,2008 Barnwell’s average working interest in its productive wells in the Kittyarea was 25%.

 

Capital expenditures totaled $323,000 in the PouceCoupe area in fiscal 2008.  Two gross(0.2 net) wells were drilled in fiscal 2008 of which one gross (0.1 net) wellwas on production and one gross (0.1 net) well was waiting to be tied in at September 30,2008.   Barnwell did not acquire anyundeveloped land in the Pouce Coupe area in fiscal 2008.  At September 30, 2008 Barnwell’s averageworking interest in its productive wells in the Pouce Coupe area was 7%.

 

Barnwell participated in 12 gross (4.9 net) wells, 16gross (5.2 net) wells, and 28 gross (11.7 net) wells in fiscal 2008, 2007 and2006, respectively, that were on prospects developed by Barnwell.

 

7

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The following table summarizes the number of wellsBarnwell was in the process of drilling as of September 30, 2008:

 
|       |       | Wells Being Drilled at  September 30, 2008 |       |
|------------|------------|-------------------------------------------------|------------|
|       |       | Oil Wells                                       |       | Gas Wells |   |
|       |       | Exp.                                            |       | Dev. |   | Exp. |   | Dev. |   |
| **Gross*** | ** ** | **0.0**                                         | ** ** | **0.0** | ** ** | **0.0** | ** ** | **1.0** | ** ** |
| **Net***   | ** ** | **0.0**                                         | ** ** | **0.0** | ** ** | **0.0** | ** ** | **0.2** | ** ** |

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| ***     **The  term “Gross” refers to the total number of wells in which Barnwell owns an  interest, and “Net” refers to Barnwell’s aggregate interest therein.  For example, a 50% interest in a well  represents one gross well, but 0.5 net well.   The gross figures include interests owned of record by Barnwell and,  in addition, the portions owned by others. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*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 amounts reported are net ofroyalties and the Alberta Royalty Tax Credit, where applicable.  As discussed in further detail below, theAlberta Royalty Tax Credit was discontinued effective January 1,2007.  Barnwell’s net production infiscal 2008, 2007 and 2006 was derived primarily from the Province of Alberta.

 
|                                                   |       | Year ended  September 30, |                              |
|--------------------------------------------------------|------------|--------------------------------|-----------------------------------|
| ** **                                             |       | **2008**                       |                              | 2007 |   | 2006 |   |
| Annual net  production:                                |       |                           |                              |   |   |   |   |
| Natural gas  liquids (BBLS)*                           | ** ** | **107,000**                    |                              | 114,000 |   | 115,000 |   |
| Oil (BBLS)*                                            | ** ** | **160,000**                    |                              | 146,000 |   | 145,000 |   |
| Natural gas  (MCF)*                                    | ** ** | **3,349,000**                  |                              | 3,615,000 |   | 3,629,000 |   |
| Annual average  sale price per unit of production:     |       |                           |                              |   |   |   |   |
| BBL of natural  gas liquids**                          | ** ** | ** **                     | **$  61.02**            |   |   | $  37.36 |   |   | $  40.18 |   |
| BBL of oil**                                           | ** ** | ** **                     | **$100.15**                       |   |   | $  56.96 |   |   | $  56.85 |   |
| MCF of natural  gas***                                 | ** ** | ** **                     | **$    7.77** |   |   | $    5.88 |   |   | $    6.67 |   |
| Annual average  production cost per MCFE  produced**** |       |                           | **$    1.97** |   |   | $    1.83 |   |   | $    1.45 |   |
| Annual average  depletion cost per MCFE  produced***** |       |                           | **$    2.89** |   |   | $    2.49 |   |   | $    2.17 |   |

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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.                                                               |

 

8

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In fiscal 2008, approximately 54%, 33% and 13% ofBarnwell’s oil and natural gas revenues were from the sale of natural gas, oiland natural gas liquids, respectively.

 

In fiscal 2008, Barnwell’s net natural gas productionafter royalties averaged 9,150 MCF per day, a decrease from 9,900 MCF per dayin fiscal 2007.  Gross natural gasproduction decreased 7% in fiscal 2008, as compared to fiscal 2007, 6% atDunvegan and 8% at all other properties. Dunvegan contributed approximately 52% of Barnwell’s net natural gasproduction in fiscal 2008 and 2007.  Infiscal 2008, natural gas production from the Dunvegan Unit was responsible forapproximately 50% of Barnwell’s natural gas revenues, as compared to 51% infiscal 2007.

 

Barnwell’s major oil producing properties are the RedEarth, Chauvin and Bonanza/Balsam areas in Canada.  In fiscal 2008, net oil production afterroyalties averaged 440 barrels per day as compared to an average of 400 barrelsper day in fiscal 2007; gross oil production increased 11% as compared to theprior year.  The addition of new wells inthe Bonanza/Balsam and Manyberries areas were partially offset by decreasedproduction from the Red Earth and Chauvin areas caused by natural declines fromexisting wells.

 

In fiscal 2008, net natural gas liquids productionafter royalties averaged 290 barrels per day, a decrease from 310 barrels perday in fiscal 2007.  Gross natural gasliquids production declined 4% in fiscal 2008, as compared to fiscal 2007.  These decreases were principally due to lowerDunvegan production which decreased 9% or 25 barrels per day which werepartially offset by new natural gas liquids production at Progress.  Dunvegan contributed approximately 83% ofBarnwell’s net natural gas liquids production in fiscal 2008.

 

The average production cost per MCFE was $1.97 forfiscal 2008, an 8% increase from $1.83 for fiscal 2007.  The increase was due to a 10% increase in theaverage exchange rate of the Canadian dollar to the U.S. dollar in fiscal 2008,as compared to fiscal 2007.  Actual fieldcosts decreased by 6% due to lower repairs and maintenance work performed onolder properties.

 

The average depletion cost per MCFE was $2.89 forfiscal 2008, a 16% increase from $2.49 for fiscal 2007.  The increase was due to a 5% increase in thedepletion rate and a 10% increase in the average exchange rate of the Canadiandollar to the U.S. dollar in fiscal 2008, as compared to fiscal 2007.  The 5% increase in the depletion rate was theresult of increases over the past several years in Barnwell’s costs of findingand developing proven reserves, which have partially increased due to the risingcosts of oil and natural gas exploration and development, along with productprices and the drilling of unsuccessful wells.

 

Petroleum and natural gas prices are very difficult topredict and fluctuate significantly. Natural gas prices tend to be higher in the winter than in the summerdue to increased demand, although this trend has become less pronounced due tothe increased use of natural gas to generate electricity for air conditioningin the summer and increased natural gas storage capacity in North America.  Beginning in the quarter ended September 30,2008 through the date of this filing, oil and natural gas prices haveexperienced a significant decline.  Ifprices continue to decline, we may be required to write off the excess ofunamortized capitalized costs over the related cost ceiling and reduce oil andnatural gas capital expenditures, possibly to a significant degree.

 

9

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*ProductiveWells*

 

Thefollowing table sets forth the gross and net number of productive wellsBarnwell has an interest in as of September 30, 2008.

 
|             |   | Productive Wells* |   |
|------------------|--------|-------------------|--------|
|             |   | Gross**           |   | Net** |   |
| Location         |   | Oil               |   |   | Gas |   |   | Oil |   |   | Gas |   |   |
| Canada           |   |              |   |   |   |   |   |   |   |   |   |
| Alberta          |   | 165               |   |   | 583 |   |   | 29.1 |   |   | 66.7 |   |   |
| Saskatchewan     |   | 7                 |   |   | 30 |   |   | 0.3 |   |   | 4.9 |   |   |
| British Columbia |   |              | 4      |   |   |   | 0 |   |   |   | 1.0 |   |   |   | 0.0 |   |   |
| Total            |   |              | 176    |   |   |   | 613 |   |   |   | 30.4 |   |   |   | 71.6 |   |   |
|                  |        |                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

| *  | Eighteen natural  gas wells have dual or multiple completions. |
|----|----------------------------------------------------------------|
| ** | Please see note  (**) on the following table.                  |

 

*DevelopedAcreage and Undeveloped Acreage*

 

Thefollowing table sets forth certain information with respect to oil and naturalgas properties of Barnwell as of September 30, 2008.

 
|             |   |      |    |        |   |        |   |   |   |          |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |
|------------------|--------|-----------|---------|-------------|--------|-------------|--------|--------|--------|---------------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
|             |   |      |    |        |   |        |   |   |   | Developed and |    |
|             |   | Developed |    | Undeveloped |   | Undeveloped |   |
|             |   | Acreage*  |    | Acreage*    |   | Acreage*    |   |
| Location         |   | Gross**   |    | Net**       |   | Gross**     |   | Net**  |   | Gross**       |    | Net**  |   |
| Canada           |   |      |    |        |   |        |   |   |   |          |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |
| Alberta          |   |      | 248,728 |        |   |        | 39,601 |   |   |          | 237,097 |   |   |   | 110,146 |   |   |   | 485,825 |   |   |   | 149,747 |   |   |
| British Columbia |   |      | 1,827   |        |   |        | 542    |   |   |          | 4,704   |   |   |   | 1,167   |   |   |   | 6,531   |   |   |   | 1,709   |   |   |
| Saskatchewan     |   |      | 3,140   |        |   |        | 426    |   |   |          | -       |   |   |   | -       |   |   |   | 3,140   |   |   |   | 426     |   |   |
| Total            |   |      | 253,695 |        |   |        | 40,569 |   |   |          | 241,801 |   |   |   | 111,313 |   |   |   | 495,496 |   |   |   | 151,882 |   |   |
|                  |        |           |         |             |        |             |        |        |        |               |         |        |        |        |         |        |        |        |         |        |        |        |         |        |        |  |  |  |

----

| *  | “Developed  Acreage” includes the acres covered by leases upon which there are one or  more producing wells. “Undeveloped Acreage” includes acres covered by leases  upon which there are no producing wells and which are maintained in effect by  the payment of delay rentals or the commencement of drilling thereon.                                                                             |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** | The term “Gross” refers  to the total number of acres or wells in which Barnwell owns an interest, and  “Net” refers to Barnwell’s aggregate interest therein. For example, a 50%  interest in a 320 acre lease represents 320 gross acres and 160 net acres.  The gross acreage and well figures include interests owned of record by  Barnwell and, in addition, the portions owned by others. |

 

Barnwell’s leasehold interests in its undevelopedacreage expire over the next fiscal years, if not developed, as follows: 5%expire during fiscal 2009; 33% expire during fiscal 2010; 20% expire duringfiscal 2011; 16% expire during fiscal 2012; and 8% expire during fiscal2013.  Eighteen 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 undeveloped acreage includes concentrationsin Alberta, at Doris (10,944 net acres), Bonanza/Balsam (8,752 net acres),Bremner (7,424 net acres), Rycroft (7,160 net acres), Thornbury (5,949 netacres), Paddle River (4,896 net acres), Boundary Lake (4,775 net acres) andMulligan (4,368 net acres).

 

10

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*Reserves*

 

Theamounts set forth in the following table, prepared by Paddock Lindstrom &Associates Ltd., Barnwell’s independent reservoir engineering consultants,summarize the estimated net quantities of proved producing reserves and provedreserves of crude oil (including condensate and natural gas liquids) andnatural gas as of September 30, 2008, 2007 and 2006 on all properties inwhich Barnwell has an interest.  Thesereserves are before deductions for indebtedness secured by the properties andare based on constant dollars.  Noestimates of total proved net oil or natural gas reserves have been filed withor included in reports to any federal authority or agency, other than theUnited States Securities and Exchange Commission, since October 1, 2004.

 

Proved ProducingReserves

 
|                                                        |       | September 30, |           |
|-------------------------------------------------------------|------------|--------------------|----------------|
| ** **                                                  |       | **2008**           |           | 2007 |   | 2006 |   |
| Oil (including  natural gas liquids) – barrels (BBLS): |       |               |           |   |   |   |   |
| Dunvegan                                                    | ** ** | **329,000**        | ** **     |   | 387,000 |   |   | 404,000 |   |   |
| All other  properties                                       | ** ** | ** **         | **763,000**    | ** ** |   |   | 708,000 |   |   |   | 665,000 |   |   |
| Total                                                       | ** ** | ** **         | **1,092,000**  | ** ** |   |   | 1,095,000 |   |   |   | 1,069,000 |   |   |
|                                                        |       |               |           |   |   |   |   |   |   |   |
| Natural gas –  thousand cubic feet (MCF):              |       |               |           |   |   |   |   |   |   |   |
| Dunvegan                                                    | ** ** | **10,493,000**     | ** **     |   | 11,577,000 |   |   | 11,503,000 |   |   |
| All other  properties                                       | ** ** | ** **         | **8,321,000**  | ** ** |   |   | 7,281,000 |   |   |   | 7,055,000 |   |   |
| Total                                                       | ** ** | ** **         | **18,814,000** | ** ** |   |   | 18,858,000 |   |   |   | 18,558,000 |   |   |

 

TotalProved Reserves (Includes Proved Producing Reserves)
|                                                        |       | September 30, |           |
|-------------------------------------------------------------|------------|--------------------|----------------|
| ** **                                                  |       | **2008**           |           | 2007 |   | 2006 |   |
| Oil (including  natural gas liquids) – barrels (BBLS): |       |               |           |   |   |   |   |   |
| Dunvegan                                                    | ** ** | **337,000**        | ** **     |   | 387,000 |   |   | 426,000 |   |   |
| All other  properties                                       | ** ** | ** **         | **998,000**    | ** ** |   |   | 1,000,000 |   |   |   | 877,000 |   |   |
| Total                                                       | ** ** | ** **         | **1,335,000**  | ** ** |   |   | 1,387,000 |   |   |   | 1,303,000 |   |   |
|                                                        |       |               |           |   |   |   |   |   |   |   |
| Natural gas –  thousand cubic feet (MCF):              |       |               |           |   |   |   |   |   |   |   |
| Dunvegan                                                    | ** ** | **10,697,000**     | ** **     |   | 11,577,000 |   |   | 12,074,000 |   |   |
| All other  properties                                       | ** ** | ** **         | **12,600,000** | ** ** |   |   | 12,441,000 |   |   |   | 12,752,000 |   |   |
| Total                                                       | ** ** | ** **         | **23,297,000** | ** ** |   |   | 24,018,000 |   |   |   | 24,826,000 |   |   |

 

As of September 30, 2008, essentially all ofBarnwell’s proved producing and total proved reserves were located in theProvince of Alberta, with minor volumes located in the Provinces ofSaskatchewan and British Columbia.

 

During fiscal 2008, Barnwell’s total net provedreserves, including proved producing reserves, of oil, condensate and naturalgas liquids decreased by 52,000 barrels, and total net proved reserves ofnatural gas decreased by 721,000 MCF.

 

The following table, based on information prepared byindependent petroleum engineers, Paddock Lindstrom & Associates Ltd.,summarizes changes in the estimates of Barnwell’s net interests 

 

11

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in total proved reservesof crude oil and natural gas liquids (“NGL”) and natural gas (“MCF” means 1,000cubic feet of natural gas) which are all in Canada:

 
|                                                                                         |       | OIL & NGL |          | GAS        |       |
|----------------------------------------------------------------------------------------------|------------|--------------------|---------------|------------|------------|
|                                                                                         |       | (Barrels)          |          | (MCF)      |       |
| 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 |   |   |
|                                                                                         |       |               |          |       |       |   |   |
| Revisions of  previous estimates                                                             |       | 89,000             |          |       | 1,114,000  |   |   |
| Extensions,  discoveries and other additions                                                 |       | 126,000            |          |       | 1,514,000  |   |   |
| Less production                                                                              |       |               | (267,000      | )          |       |   | (3,349,000 | ) |   |
| **Balance  at September 30, 2008**                                                      | ** ** | ** **         | **1,335,000** | ** ** | ** ** | ** ** | **23,297,000** | ** ** | ** ** |

 

The upward revisions in reserves in fiscal 2008 weredue to improved performance on certain wells drilled in prior years.

 

Barnwell’s working interest in the Dunvegan areaaccounted for approximately 46% and 48% of its total proved natural gasreserves at September 30, 2008 and 2007, respectively, and approximately25% and 28% of total proved oil and natural gas liquids reserves at September 30,2008 and 2007, respectively.

 

The following table sets forth Barnwell’s oil andnatural gas reserves at September 30, 2008, by property name, based oninformation prepared by Paddock Lindstrom & Associates Ltd.  Gross reserves are before the deduction ofroyalties; net reserves are after the deduction of royalties.  This table is based on constant dollars wherereserve estimates are based on sales prices, costs and statutory tax rates inexistence at September 30, 2008, the date of the projection.  Oil, which includes natural gas liquids, isshown in thousands of barrels (“MBBLS”) and natural gas is shown in millions ofcubic feet (“MMCF”).

 

12

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OIL AND NATURAL GASRESERVES AT SEPTEMBER 30, 2008

 
|               |       | 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**       | ** ** | **492**                | ** ** | ** **   | **329**    | ** ** | ** ** | **12,390** | ** ** | ** ** | **10,493** | ** ** | ** ** | **503** | ** ** | ** ** | **337** | ** ** | ** ** | **12,642** | ** ** | ** ** | **10,697** | ** ** | ** ** |
| Red Earth          |       | 278                    |       |         | 207        |   |   | 12 |   |   | 9 |   |   | 278 |   |   | 207 |   |   | 12 |   |   | 9 |   |   |
| Bonanza/Balsam     |       | 154                    |       |         | 99         |   |   | 747 |   |   | 652 |   |   | 154 |   |   | 99 |   |   | 747 |   |   | 652 |   |   |
| Pouce Coupe  South |       | 7                      |       |         | 5          |   |   | 1,324 |   |   | 1,112 |   |   | 62 |   |   | 42 |   |   | 1,423 |   |   | 1,195 |   |   |
| Medicine River     |       | 34                     |       |         | 25         |   |   | 485 |   |   | 381 |   |   | 34 |   |   | 25 |   |   | 485 |   |   | 381 |   |   |
| Doris              |       | 0                      |       |         | 0          |   |   | 375 |   |   | 317 |   |   | 0 |   |   | 0 |   |   | 988 |   |   | 861 |   |   |
| Faith South        |       | 0                      |       |         | 0          |   |   | 0 |   |   | 0 |   |   | 0 |   |   | 0 |   |   | 1,011 |   |   | 809 |   |   |
| Wood River         |       | 75                     |       |         | 50         |   |   | 152 |   |   | 134 |   |   | 75 |   |   | 50 |   |   | 390 |   |   | 318 |   |   |
| Progress           |       | 129                    |       |         | 99         |   |   | 2,778 |   |   | 2,357 |   |   | 195 |   |   | 148 |   |   | 3,406 |   |   | 2,833 |   |   |
| Pouce Coupe        |       | 4                      |       |         | 2          |   |   | 358 |   |   | 306 |   |   | 4 |   |   | 2 |   |   | 436 |   |   | 371 |   |   |
| Boundary Lake,  AB |       | 55                     |       |         | 37         |   |   | 477 |   |   | 364 |   |   | 111 |   |   | 71 |   |   | 1,201 |   |   | 918 |   |   |
| Boundary Lake,  BC |       | 0                      |       |         | 0          |   |   | 0 |   |   | 0 |   |   | 81 |   |   | 71 |   |   | 451 |   |   | 377 |   |   |
| Other properties   |       |                   | 312        |         |       |   | 239 |   |   |   | 3,061 |   |   |   | 2,689 |   |   |   | 370 |   |   |   | 283 |   |   |   | 4,421 |   |   |   | 3,876 |   |   |
| **TOTAL**          | ** ** | ** **             | **1,540**  | ** **   | ** ** | ** ** | **1,092** | ** ** | ** ** | ** ** | **22,159** | ** ** | ** ** | ** ** | **18,814** | ** ** | ** ** | ** ** | **1,867** | ** ** | ** ** | ** ** | **1,335** | ** ** | ** ** | ** ** | **27,613** | ** ** | ** ** | ** ** | **23,297** | ** ** | ** ** |

 

*StandardizedMeasure of Estimated Discounted Future Net Cash Flows*

 

The following table sets forth Barnwell’s “EstimatedFuture Net Revenues” from total proved oil, natural gas and natural gas liquidsreserves and the present value of Barnwell’s “Estimated Future Net Revenues”(discounted at 10%).  Estimated futurenet revenues for total proved reserves are net of estimated future expendituresof developing and producing the proved reserves, and assume the continuation ofexisting economic conditions.  Netrevenues have been calculated using year-end sales prices and current costs,after deducting all royalties, operating costs, future estimated capitalexpenditures, and income taxes.

 
|                                                           |   | Proved Producing |                    | Total Proved |   |
|----------------------------------------------------------------|--------|------------------|-------------------------|--------------|--------|
|                                                           |   | Reserves         |                    | Reserves     |   |
| Year ending  September 30,                                |   |             |                    |         |   |
| 2009                                                           |   |             | $  20,571,000 |         |   |   | $  23,315,000 |   |   |
| 2010                                                           |   |             | 16,316,000              |         |   |   | 20,440,000 |   |   |
| 2011                                                           |   |             | 12,978,000              |         |   |   | 15,856,000 |   |   |
| Thereafter                                                     |   |             | 49,102,000              |         |   |   | 64,345,000 |   |   |
|                                                           |   |             | $  98,967,000 |         |   |   | $123,956,000 |   |   |
|                                                           |   |             |                    |         |   |   |   |   |   |
| Present value  (discounted at 10%)  at September 30, 2008 |   |             | $  70,456,000 | *            |   |   | $  88,246,000 | * |   |

----

| * | These  amounts do not purport to represent, nor should they be interpreted as, the  fair value of Barnwell’s natural gas and oil reserves. An estimate of fair  value would also consider, among other items, the value of Barnwell’s  undeveloped land position, the recovery of reserves not presently classified  as proved, anticipated future changes in oil and natural gas prices (these  amounts were based on a natural gas price of $5.94 per 1,000 cubic feet and  an oil price of $92.76 per barrel as of September 30, 2008) and costs,  and a discount factor more representative of the time value of money and the  risks inherent in reserve estimates. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

13

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*Marketingof Oil and Natural Gas*

 

Barnwell sells substantially all of its oil andnatural gas liquids production under short-term contracts between itself andmarketers of oil.  The price of oil andnatural gas liquids is freely negotiated between the buyers and sellers and islargely determined by the world price for oil, which is principally denominatedin U.S. dollars.

 

Natural gas sold by Barnwell is generally sold underboth long-term and short-term contracts with prices indexed to marketprices.  The price of natural gas andnatural gas liquids is freely negotiated between buyers and sellers and isprincipally determined for Barnwell by the North American price for naturalgas, which is principally denominated in U.S. dollars.  In fiscal 2008, 2007 and 2006, Barnwell tookvirtually all of its oil and natural gas “in kind” where Barnwell markets theproducts instead of having the operator of a producing property market theproducts on Barnwell’s behalf.

 

Barnwell’s oil and natural gas segment derived 66% ofits oil and natural gas revenues in fiscal 2008 from four individuallysignificant customers, ProGas Limited (22%), Glencoe Resources Ltd. (15%),Mercuria Energy Canada Inc. (14%), and Shell Trading Canada (14%).  A substantial portion of Barnwell’s naturalgas production from Dunvegan and other properties is sold to aggregators andmarketers under various short-term and long-term contracts, with the price ofnatural gas determined by negotiations between the aggregators and the finalpurchasers.  In fiscal 2008, over 90% ofBarnwell’s oil and natural gas revenues were from products sold at spot prices.

 

*GovernmentalRegulation*

 

The jurisdictions in which the oil and natural gasproperties of Barnwell are located have regulatory provisions relating topermits for the drilling of wells, the spacing of wells, the prevention of oiland natural gas waste, allowable rates of production and other matters.  The amount of oil and natural gas produced issubject to control by regulatory agencies in each province that periodicallyassign allowable rates of production. The Province of Alberta and Government of Canada also monitor andregulate the volume of natural gas that may be removed from the province andthe conditions of removal.

 

There is no current government regulation of the pricethat may be charged on the sale of Canadian oil or natural gas production.  Canadian natural gas production destined forexport is priced by market forces subject to export contracts meeting certaincriteria prescribed by Canada’s National Energy Board and the Government ofCanada.

 

Different royalty rates are imposed by the provincialgovernments, the Government of Canada and private interests with respect to theproduction and sale of crude oil, natural gas and natural gas liquids.  In addition, provincial governments receiveadditional revenue through the imposition of taxes on crude oil and natural gasowned by private interests within the province. Essentially, provincial royalties are calculated as a percentage ofrevenue and vary depending on production volumes, selling prices and the dateof discovery.

 

As discussed above, on October 25, 2007, theAlberta Government announced a New Royalty Framework (“NRF”) that will takeeffect on January 1, 2009.  The NRFincreases royalty rates on conventional oil and natural gas production wherebyroyalty rates will be both price-sensitive and production-sensitive and mayincrease up to a maximum of 50%.  Theprice-sensitive maximum is 

 

14

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reachedfor oil when oil is selling at or above $120.00 Canadian dollars per barrel andfor natural gas when natural gas is selling at or above $17.50 Canadian dollarsper MCF.  Approximately 99% of Barnwell’sgross revenues are derived from properties located within Alberta.  Approximately 85% of all fiscal 2008royalties related to crown charges, and 15% of Barnwell’s fiscal 2008 royaltiesrelated to freehold and override charges which are not directly affected by theNRF.

 

In November 2008, the Alberta Governmentannounced a one-time option of selecting new transitional rates or NRF rateswhen drilling a new natural gas or conventional oil well 1,000 to 3,500 metersin depth.  All wells drilled between 2009and 2013 that adopt the transitional rates will be required to shift to the NRFon January 1, 2014.  All currentwells will move to the NRF on January 1, 2009 as previously scheduled.

 

In May 2006, a bill reducing the Province ofAlberta’s corporate tax rate from 11.5% to 10.0% effective April 1, 2006received Royal Assent and was passed into law. In June 2006, Royal Assent was received on a bill passed by theParliament of Canada which reduced the federal corporate income tax rate to 19%from 21% by 2010 starting January 1, 2008. The federal corporate surtax was also eliminated effective January 1,2008.  Accordingly, as a result of thesereductions in Canadian tax rates, Barnwell’s Canadian net deferred income taxliabilities were reduced by approximately $1,094,000 during fiscal 2006 and$100,000 in fiscal 2007.  During thefirst quarter of fiscal 2008, the Canadian government enacted reductions in thecorporate tax rate from 20.5%, 20.0%, 19.0%, 18.5% and 18.5% in calendar years2008, 2009, 2010, 2011 and 2012, respectively, to 19.5%, 19.0%, 18.0%, 16.5%and 15%, respectively.  This reduction inCanadian federal tax rates resulted in a $909,000 reduction of the net deferredtax liability in fiscal 2008.

 

In Alberta, a producer of oil or natural gas wasentitled to a credit against the royalties payable to Alberta called theAlberta Royalty Tax Credit (“ARTC”).  TheARTC was discontinued by the Alberta government effective January 1,2007.  Accordingly, no ARTC payments werereceived during fiscal 2008.  Barnwellreceived ARTC payments of $111,000 and $438,000 in fiscal years 2007 and 2006,respectively.  The ARTC payments receivedthrough December 31, 2006 were recorded as a credit against oil andnatural gas royalties and reported in oil and natural gas revenues.

 

*Competition*

 

The majority of Barnwell’s natural gas sales takeplace in Alberta, Canada.  Natural gasprices in Alberta are generally competitive with other major North Americanareas due to sufficient pipeline capacity into the United States.  Barnwell’s oil and natural gas liquids aresold in Alberta with prices determined by the world price for oil.

 

Barnwell competes in the sale of oil and natural gason the basis of price, and on the ability to deliver products.  The oil and natural gas industry is intenselycompetitive in all phases, including the exploration for new production andreserves and the acquisition of equipment and labor necessary to conductdrilling activities.  The competitioncomes from numerous major oil companies as well as numerous other independentoperators.  There is also competitionbetween the oil and natural gas industry and other industries in supplying theenergy and fuel requirements of industrial, commercial and individualconsumers.  Barnwell is a minorparticipant in the industry and competes in its oil and natural gas activitieswith many other companies having far greater financial, technical and otherresources.

 

15

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**LandInvestment Segment**

 

*Overview*

 

Barnwell owns a 77.6% controlling interest inKaupulehu Developments, a Hawaii general partnership that owns interests inleasehold land and development rights for property located approximately sixmiles north of the Kona International Airport in the North Kona District of theisland of Hawaii.

 

*Operations*

 

Between 1986 and 1989, Kaupulehu Developments obtainedthe state and county zoning changes necessary to permit development of the FourSeasons Resort Hualalai at Historic Ka’upulehu and Hualalai Golf Club, whichopened in 1996, a second golf course, and single-family and multi-familyresidential units.  These projects weredeveloped by an unrelated entity on leasehold land acquired from KaupulehuDevelopments.

 

Kaupulehu Developments holds the development rightsfor residentially-zoned leasehold land within and adjacent to Hualalai GolfClub.  These development rights are underoption to Hualalai Investors JV, LLC and Hualalai Investors II, LLC, twoentities unrelated to Barnwell (hereinafter referred to as “Hualalai Investors”).  Barnwell acquired a 1.5% passive minorityinterest, through an 80%-owned joint venture, in Hualalai Investors in fiscal2007.  If Hualalai Investors exercisesall remaining options, Kaupulehu Developments expects to receive a total of$6,198,000 as of September 30, 2008.

 

Between 1993 and 2001, Kaupulehu Developments obtainedthe state and county zoning changes necessary to permit development ofsingle-family and multi-family residential units, a golf course and a limitedcommercial area on approximately 870 leasehold acres, zoned for resort/residential development,located adjacent to and north of the Four Seasons Resort Hualalai at HistoricKa’upulehu.

 

In February 2004,Kaupulehu Developments sold its leasehold interest in the approximately 870acres in two increments (“Increment I” and “Increment II”) to WB KDAcquisition, LLC (“WB”).  There is noaffiliation between Kaupulehu Developments and WB.  WB is affiliated with RP-Hualalai Investors,LLC, a managing member of Hualalai Investors, and Westbrook Partners,developers of Kuki’o Resort located adjacent to Hualalai Resort.  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 to Increment I, KaupulehuDevelopments received an $11,550,000 closing payment and is entitled to receivepayments from WB based on the following percentages of the gross receipts fromWB’s sales of single-family residential lots in Increment I: 9% of thegross proceeds from single-family lot sales up to aggregate gross proceeds of$100,000,000; 10% of such aggregate gross proceeds greater than $100,000,000but less than $300,000,000; and 14% of such aggregate gross proceeds in excessof $300,000,000.  In fiscal 2008 foursingle family lots were sold, in fiscal 2007 

 

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seven single family lotswere sold and in fiscal 2006 five single family lots were sold for a total of16 single-family lots.

 

In June 2006, Kaupulehu Developments sold itsleasehold interest in Increment II to WB and WB KD Acquisition II, LLC (“WBKD”).  There is no affiliation between KaupulehuDevelopments and WB or WBKD.  WB and WBKDare both affiliates of RP-Hualalai Investors, LLC and Westbrook Partners.  Pursuant to the sale, 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.

 

In addition, under the terms of the sale ofIncrement II, WBKD has the exclusive right to negotiate with KaupulehuDevelopments with respect to Kaupulehu Developments’ interest in approximately1,000 acres of vacant leasehold land zoned conservation in the Kaupulehu arealocated adjacent to Increment II. This right expires in June 2009 or, if WBKD completes any and allenvironmental assessments and surveys reasonably required to support a petitionto the Hawaii State Land Use Commission for reclassification and rezoning ofthe aforementioned land, in June 2012.

 

Kaupulehu Mauka Investors, LLC, a limited liabilitycompany wholly-owned by Barnwell, holds 14 lot acquisition rights as to lotswithin 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.  The 14 lot acquisition rightsgive Barnwell the right to acquire 14 residential lots, each of which iscurrently estimated to be two to five acres in size, which may be developed onthe Mauka Lands.  These lands arecurrently classified as agricultural by the state of Hawaii and, accordingly,the developer of these lands (Hualalai Investors) will need to pursue bothstate and county of Hawaii approvals for reclassification and rezoning topermit a residential subdivision and negotiate development terms.

 

*Competition*

 

Barnwell’s land investment segment is subject tointense competition in all phases of its operations including the acquisitionof new properties, the securing of approvals necessary for land rezoning, andthe search for potential buyers of property interests presently owned.  The competition comes from numerousindependent land development companies and other industries involved in landinvestment activities.  The principalfactors affecting competition are the location of the project and pricing.  Kaupulehu Developments is a minor participantin the land development industry and competes in its land investment activitieswith many other entities having far greater financial and other resources.

 

**ResidentialReal Estate Segment**

 

*Overview*

 

Established in fiscal 2007, Kaupulehu 2007, LLLP (“Kaupulehu2007”), a Hawaii limited liability limited partnership 80%-owned by Barnwell,acquires house lots for investment and constructs turnkey single-family homesfor future sale.

 

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*Operations*

 

In fiscal 2007, Kaupulehu 2007 made nonrefundableinitial deposits of $200,000 each to secure the right to purchase seven parcelsin the Lot 4A Increment I area of Kaupulehu, North Kona, Hawaii fromWB, an unrelated entity.  Each lot undercontract had a purchase price of $2,378,000 and the deposit for each lot was tobe applied to the purchase price of each lot.

 

In fiscal 2007, Kaupulehu 2007 purchased three of theaforementioned parcels and in January 2008, Kaupulehu 2007 acquired afourth residential parcel.   Kaupulehu2007 is in the process of developing residences for future sale on two of theparcels and intends to hold the third and fourth parcels for investmentpurposes.

 

In June 2008, Kaupulehu 2007 sold its investmentsin two of its three remaining rights to purchase lots in the Lot 4AIncrement I area to an unrelated party. The unrelated party used the lot purchase rights acquired from Kaupulehu2007 to purchase two parcels in the Lot 4A Increment I area fromWB.  As Kaupulehu 2007 no longer had anobligation to purchase the aforementioned two parcels, Kaupulehu 2007 receiveda $400,000 refund of its original deposits for the two lots at $200,000 perlot.

 

At September 30, 2008, one deposit of $200,000remained.  The closing date for Kaupulehu2007’s obligation to purchase the remaining parcel is being negotiated.

 

*Competition*

 

Barnwell’s residential real estate segment is subjectto intense competition in all phases of its operations including theacquisition of land, the building of residential homes, including the need forraw materials and skilled labor, and the search for potential purchasers ofcompleted homes.  The competition comesfrom numerous independent real estate developers.  The principal factors affecting competitionare the location of the project, reputation, design, quality and pricing.  Kaupulehu 2007 is a newcomer and a minorparticipant in the real estate development industry and competes with manyother entities having far greater financial and other resources.

 

**ContractDrilling Segment**

 

*Overview*

 

Barnwell’s wholly-owned subsidiary, Water ResourcesInternational, Inc. (“Water Resources”), drills water, water monitoringand geothermal wells of varying depths in Hawaii, installs and repairs waterpumping systems, and is the state of Hawaii’s distributor for Floway pumps andequipment.

 

*Operations*

 

Water Resources owns and operates three Spencer-Harrisportable rotary drill rigs capable of drilling up to approximately 6,000 feet,an IDECO H-35 rotary drill/workover rig, a GEFCO 40-T portable rotary drill rigand pump installation and service equipment. Additionally, Water Resources leases a three-quarter of an acremaintenance facility in Honolulu, Hawaii and a one acre maintenance and storagefacility with 2,800 square feet of interior space in Kawaihae, Hawaii, andmaintains an inventory of drilling materials and pump supplies.

 

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The demand for Water Resources’ services is primarilydependent upon land development activities in Hawaii.  Water Resources markets its services to landdevelopers and government agencies, and identifies potential contracts throughpublic notices, its officers’ involvement in community activities andreferrals.  Contracts are usually fixedprice per lineal foot drilled or day rate contracts and are negotiated withprivate entities or obtained through competitive bidding with private entitiesor local, state and federal agencies. Contract revenues are not dependent upon the discovery of water,geothermal production zones or other similar targets, and contracts are notsubject to renegotiation of profits or termination at the election of thegovernmental entities involved. Contracts provide for arbitration in the event of disputes.

 

Water Resources derived 24%, 47% and 37% of itscontract drilling revenues in fiscal 2008, 2007 and 2006, respectively,pursuant to federal, state of Hawaii and county contracts.  At September 30, 2008, Barnwell hadaccounts receivable from the state of Hawaii and county entities totalingapproximately $509,000.  Barnwell haslien rights on wells drilled and pumps installed for federal, state of Hawaii,county and private entities.

 

Water Resources currently operates in Hawaii and isnot subject to seasonal fluctuations.

 

In fiscal 2008, Water Resources started four welldrilling contracts and 10 pump installation contracts and completed four welldrilling contracts and eight pump installation contracts.  The four completed well drilling contractswere started in the prior year. Fifty-eight percent (58%) of well drilling and pump installation jobs,representing 24% of total contract drilling revenues in fiscal 2008, have beenpursuant to government contracts.

 

At September 30, 2008, Water Resources had abacklog of six well drilling contracts and five pump installation and repaircontracts, of which four well drilling and three pump installation and repairwere in progress as of September 30, 2008.

 

The dollar amount of Water Resources’ backlog of firmwell drilling and pump installation and repair contracts at November 30,2008 and 2007 was as follows:

 
| ** **                    |       | **2008**   |                       | 2007       |   |
|-------------------------------|------------|------------|----------------------------|------------|--------|
| Well drilling                 | ** ** | ** ** | **$  3,180,000** | ** ** |   |   | $  7,860,000 |   |   |
| Pump  installation and repair | ** ** | ** ** | **630,000**                | ** ** |   |   | 1,480,000 |   |   |
|                          | ** ** | ** ** | ** **                 | ** ** |   |   |   |   |   |
| ** **                    |       | ** ** | **$  3,810,000** | ** ** |   |   | $  9,340,000 |   |   |

 

All of the contracts in backlog at November 30,2008 are expected to be completed within fiscal year 2009.

 

*Competition*

 

Water Resources utilizes rotary drill rigs andcompetes with other drilling contractors in Hawaii which use drill rigs similarto Water Resources’ drilling rigs or drilling rigs that drill as quickly asWater 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.

 

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Competitive pressures are expected to remain high,thus there is no assurance that the quantity of available or awarded jobs whichoccurred in fiscal 2008 will continue.

 

**FinancialInformation About Industry Segments and Geographic Areas**

 

Note 12 in the “Notes to Consolidated FinancialStatements” in Item 8 contains information on our segments and geographicareas.

 

**Employees**

 

As of December 4, 2008, Barnwell employed 53employees, 49 of which are on a full-time basis.  20 are employed in contract drillingactivities, 20 are employed in oil and natural gas activities, and 13 aremembers of the corporate and administrative staff.  None of our employees are union members.

 

**EnvironmentalCosts**

 

Barnwell is subject to extensive environmental lawsand regulations.  Federal, state, andCanadian governmental agencies issue rules and regulations and enforcelaws to protect the environment which are often difficult and costly to complywith and which carry substantial penalties for failure to comply, particularlyin regard to the discharge of materials into the environment.  These laws, which are constantly changing,regulate the discharge of materials into the environment and maintenance ofsurface conditions and may require Barnwell to remove or mitigate the environmentaleffects of the disposal or release of petroleum or chemical substances atvarious sites.  Barnwell did not incurmaterial environmental costs in fiscal 2008.

 

**AvailableInformation**

 

We are required to file annual, quarterly and currentreports and other information with the Securities and Exchange Commission (“SEC”).  These filings are not deemed to beincorporated by reference in this report. You may read and copy any documents filed by us at the Public Reference Room ofthe SEC, 100 F Street, N.E., Washington, D.C. 20549.  You may obtain information on the operationof the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Our filings with the SEC are also availableto the public through the SEC’s website at www.sec.gov.  Furthermore, we maintain an Internet site atwww.brninc.com.  We make available on ourInternet website free of charge our annual reports on Form 10-K, quarterlyreports on Form 10-Q and current reports on Form 8-K as soon aspracticable after we electronically file such reports with the SEC.

 

**ITEM 1A.               RISK FACTORS**

 

The business of Barnwell and its subsidiaries facenumerous risks, including those set forth below or those described elsewhere inthis Form 10-K or in Barnwell’s other filings with the SEC.  The risks described below are not the onlyrisks that Barnwell faces, nor are they necessarily listed in order ofsignificance.  If any of the followingrisk factors should occur, our profitability, financial condition or liquiditycould be materially impacted.

 

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*RisksRelated to Oil and Natural Gas Segment*

 

**The oiland natural gas industry is highly competitive.**

 

We compete for capital, acquisitions of reserves,undeveloped lands, skilled personnel, access to drilling rigs, service rigs andother equipment, access to processing facilities, pipeline and refiningcapacity and in many other respects with a substantial number of otherorganizations, many of which may have greater technical and financial resourcesthan we do.  Some of these organizationsexplore for, develop and produce oil and natural gas, carry on refiningoperations and market oil and other products on a worldwide basis.  As a result of these complementaryactivities, some of our competitors may have competitive resources that aregreater and more diverse than ours. Furthermore, many of our competitors may have a competitive advantagewhen responding to factors that affect demand for oil and natural gasproduction, such as changing prices and production levels, the cost andavailability of alternative fuels and the application of governmentregulations.  If our competitors are ableto capitalize on these competitive resources, it could adversely affect ourrevenues.

 

**Oil andnatural gas prices are volatile.  Ourresults of operations and financial condition are highly dependent on theprices of and demand for our oil and natural gas production.**

 

Oil and natural gas prices are volatile and havefluctuated widely during recent years in response to many factors that arebeyond our control.  These factors include,but are not limited to, minor changes in supply and demand, market uncertainty,weather, worldwide political instability, foreign supply of oil and naturalgas, the level of consumer product demand, government regulations and taxes,the price and availability of alternative fuels and the overall economicenvironment.  Any decline in crude oil ornatural gas prices may have a material adverse effect on our operations,financial condition, operating cash flows, borrowing ability, reserves, amountof capital that we are able to allocate for the development of oil and naturalgas reserves and future growth.

 

Energy prices are also subject to other political andregulatory actions outside our control, which may include changes in thepolicies of the Organization of Petroleum Exporting Countries or otherdevelopments involving or affecting oil-producing countries, or actions orreactions of the government of the United States in anticipation of or inresponse to such developments.

 

**If oiland natural gas prices decrease, we may be required to take write-downs of thecarrying value of our oil and natural gas properties.**

 

We follow the full costmethod of accounting for costs related to our oil and natural gasproperties.  Under this method, the netbook value of properties less related deferred income taxes, may not exceed acalculated “ceiling.”  The ceiling is theestimated after tax future net revenues from proved oil and natural gasproperties, discounted at 10% per year. In calculating discounted future net revenues, oil and natural gasprices in effect at the time of the calculation are held constant, except forchanges which are fixed and determinable by existing contracts.  The full cost ceiling is evaluated at the endof each quarter using the prices for oil and natural gas at that date.  The excess, if any, of the net book valueabove the ceiling is required to be written off as an expense.  A significant decline in oil and natural gasprices from current levels, or other factors, without other mitigatingcircumstances, could result in reductions in the carrying value of such assetsand an equivalent charge to earnings.

 

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**Anincrease in operating costs or a decline in our production level could have amaterial adverse effect on our results of operations and financial condition.**

 

Higher operating costs for our underlying propertieswill directly decrease the amount of cash flow received by us and, therefore,may reduce the price of our common stock. Electricity, supplies, and labor costs are a few of the operating coststhat are susceptible to material fluctuation.

 

The level of production from our existing propertiesmay decline at rates greater than anticipated due to unforeseen circumstances,many of which are beyond our control.  Asignificant decline in our production could result in materially lower revenuesand cash flow.

 

**Our operating results are affectedby our ability to market the oil and natural gas that we produce.**

 

Our business depends in part upon the availability,proximity and capacity of natural gas gathering systems, pipelines andprocessing facilities.  Canadian federaland provincial, as well as United States federal and state, regulation of oiland natural gas production, processing and transportation, tax and energypolicies, general economic conditions, and changes in supply and demand couldadversely affect our ability to produce and market oil and natural gas.  If market factors change and inhibit themarketing of our production, overall production or realized prices may decline.

 

**We are not the operator and havelimited influence over the operations of the majority of our oil and naturalgas properties.**

 

We hold minority interests in the majority of our oiland natural gas properties.  As a result,we cannot control the pace of exploration or development or major decisionsaffecting the drilling of wells or the plan for development and production atnon-operated properties, although contract provisions give Barnwell certain consentrights in some matters.  The operator’sinfluence over these matters can affect the pace at which we incur capitalexpenditures.  Additionally, as certainunderlying joint venture data is not accessible to us, we depend on theoperators at non-operated properties to provide us with reliable accountinginformation.

 

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

 

Barnwell’s oil and natural gas operations are affectedby political developments and laws and regulations, particularly in the UnitedStates and Canada, such as restrictions on production, restrictions on importsand exports, the maintenance of specified reserves, tax increases andretroactive tax claims, expropriation of property, cancellation of contractrights, environmental protection controls, environmental compliancerequirements and laws pertaining to workers’ health and safety.  Further, the right to explore for and developoil and natural gas on lands in Alberta, Saskatchewan and British Columbia iscontrolled by the governments of each of those provinces.  Changes in royalties and other terms ofprovincial leases, permits and reservations may have a substantial effect onBarnwell’s operations.  We derive asignificant portion of our revenues from our operations in Canada.  In fiscal 2008, we derived approximately 75%of our operating revenues from operations in Canada.

 

Additionally, our ability to compete in the Canadianoil and natural gas industry may be adversely affected by governmentalregulations or other policies that favor the awarding of contracts to 

 

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contractorsin which Canadian nationals have substantial ownership interests.  Furthermore, we may face governmentallyimposed restrictions or fees from time to time on the transfer of funds to theU.S.

 

Government regulations control and often limit accessto potential markets and impose extensive requirements concerning employeesafety, environmental protection, pollution control and remediation ofenvironmental contamination. Environmental regulations, in particular, prohibit access to somemarkets and make others less economical, increase equipment and personnel costsand often impose liability without regard to negligence or fault.  In addition, governmental regulations maydiscourage our customers’ activities, reducing demand for our products andservices.

 

****Compliance with foreign tax and other lawsmay adversely affect our operations.****

 

Tax and other laws and regulations are not alwaysinterpreted consistently among local, regional and national authorities.  Income tax laws, other legislation orgovernment incentive programs relating to the oil and natural gas industry mayin the future be changed or interpreted in a manner that adversely affects usand our stockholders.  It is alsopossible that in the future we will be subject to disputes concerning taxationand other matters in Canada, including the manner in which we calculate ourincome for tax purposes, and these disputes could have a material adverseeffect on our financial performance.

 

****We are dependent upon future discoveries oracquisitions of oil and natural gas to maintain our reserves.****

 

We actively explore for oil and natural gasreserves.  However, future explorationand drilling results 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 natural gas reserves will beimpaired.  Additionally, we cannotguarantee that we will be successful in developing additional reserves oracquiring additional reserves on terms that meet our investmentobjectives.  Without these reserveadditions, our reserves will deplete and as a consequence, either productionfrom, or the average reserve life of, our properties will decline.

 

****Actual reserves will vary from reserveestimates.****

 

The value of our common stock depends upon, amongother things, the level of reserves of oil and natural gas.  Estimating reserves is inherently uncertain,and the figures herein are only estimates. Ultimately, actual reserves attributable to our properties will varyfrom estimates, and those variations may be material.  The estimation of reserves involves a numberof factors and assumptions, including, among others:

·                  historicalproduction from our wells compared with production rates from similar producingwells in the area;

·                  futurecommodity prices, production and development costs, royalties and capitalexpenditures;

·                  initialproduction rates;

·                  productiondecline rates;

·                  ultimaterecovery of reserves;

 

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·                  success of futuredevelopment activities;

·                  marketabilityof production;

·                  effects ofgovernment regulation; and

·                  othergovernment levies that may be imposed over the producing life of reserves.

 

Reserve estimates are based on the relevant factors,assumptions and prices as of the date on which the evaluations areprepared.  Many of these factors aresubject to change and are beyond our control. If these factors, assumptions and prices prove to be inaccurate, actualresults may vary materially from reserve estimates.

 

****Delays in business operations could adverselyaffect our distributions.****

 

In addition to the usual delays in payment bypurchasers of oil and natural gas to the operators of our properties, and thedelays of those operators in remitting payment to us, payments between any ofthese parties may also be delayed by:

·                  restrictionsimposed by lenders;

·                  accountingdelays;

·                  delays in thesale or delivery of products;

·                  delays in theconnection of wells to a gathering system;

·                  blowouts orother accidents;

·                  adjustments forprior periods;

·                  recovery by theoperator of expenses incurred in the operation of the properties; and

·                  theestablishment by the operator of reserves for these expenses.

 

Any of these delays could expose us to additionalthird party credit risks.

 

****The industry in which we operate exposes usto potential liabilities that may not be covered by insurance.****

 

Our operations are subject to all of the risksassociated with the operation and development of oil and natural gasproperties, including the drilling of oil and natural gas wells, and theproduction and transportation of oil and natural gas.  These risks include encountering unexpectedformations or pressures, premature declines of reservoirs, blow-outs, equipmentfailures and other accidents, cratering, sour gas releases, uncontrollableflows of oil, natural gas or well fluids, adverse weather conditions,pollution, other environmental risks, fires and spills.  A number of these risks could result in personalinjury, loss of life, or environmental and other damage to our property or theproperty of others.

 

While we maintain reserves for anticipated liabilitiesand carry various levels of insurance, we could be affected by civil, criminal,regulatory or administrative actions, claims or proceedings.  We cannot fully protect against all of therisks listed above, nor are all of these risks insurable.  There is no assurance that any applicableinsurance or indemnification agreements will adequately protect us againstliability for the risks listed above.  Wecould face substantial losses if an event occurs for which we are not fullyinsured or are not indemnified against or a customer or insurer fails to meetits indemnification or insurance obligations. In addition, there can be no assurance that insurance will continue tobe available to cover any or all of these risks, or, even if available, thatinsurance premiums or other costs will not rise significantly in the future, soas to make the cost of such insurance prohibitive.

 

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

 

The oil and natural gas industry is subject toextensive environmental regulation pursuant to local, provincial and federallegislation.  A violation of thatlegislation may result in the imposition of fines or the issuance of “clean up”orders.  Legislation regulating the oiland natural gas industry may be changed to impose higher standards andpotentially more costly obligations.  Forexample, the 1997 Kyoto Protocol to the United Nation’s Framework Convention onClimate Change, known as the Kyoto Protocol, was ratified by the Canadiangovernment in December 2002 and will require, among other things, significantreductions in greenhouse gases.  Theimpact of the Kyoto Protocol on us is uncertain and may result in significantadditional costs for our future operations. Although we record a provision in our financial statements relating toour estimated future environmental and reclamation obligations, we cannotguarantee that we will be able to satisfy our actual future environmental andreclamation obligations.

 

We are not fully insured against certain environmentalrisks, either because such insurance is not available or because of highpremium costs.  In particular, insuranceagainst risks from environmental pollution occurring over time, as opposed tosudden and catastrophic damages, is not available on economically reasonableterms.  Accordingly, any site reclamationor abandonment 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 have difficulty financing our planned capital expenditures,which could have an adverse affect on our business.****

 

We make and will continue to make substantial capitalexpenditures in our exploration and development projects.  Without adequate capital resources, ourdrilling and other activities may be limited and our business, financialcondition and results of operations may suffer. We may not be able to secure necessary financing on reasonable terms orat all and financing may not continue to be available to us under our existingfinancing arrangements.  If capitalresources are unavailable, we may curtail our drilling, development and otheractivities or be forced to sell some of our assets under untimely orunfavorable terms.  Any such curtailmentor sale could have a material adverse effect on our business, financialcondition and results of operations.

 

****Unforeseen title defects may result in a loss of entitlement toproduction and reserves.****

 

Although we conduct title reviews in accordance withindustry practice prior to any purchase of resource assets or property, suchreviews do not guarantee that an unforeseen defect in the chain of title will notarise and defeat our title to the purchased assets.  If such a defect were to occur, ourentitlement to the production from such purchased assets could be jeopardized.

 

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*Risks Related to Land InvestmentSegment*

 

****The real estate investment industry is experiencing a severe andextended downturn that may continue for an indefinite period.  This downturn in economic conditions couldadversely affect our business.****

 

The real estate investment industry is cyclical innature and is particularly vulnerable to shifts in local, regional, andnational economic conditions outside of our control such as interest rates,housing demand, population growth, employment levels and job growth andproperty taxes.  Further, a weakening ofthe economic drivers in Hawaii, which include tourism, military spending,construction starts and employment, and a decrease in market demand adverselyimpacted the level of real estate activity in Hawaii.  The industry has experienceda significant decrease in demand for new homes in recent months and this trendmay continue for an extended period of time. Economic conditions in the United States have also weakened recently,which puts continued pressure on consumer confidence for residential realestate.  These challenging marketconditions are expected to continue for the foreseeable future and, in the nearterm, these conditions may further deteriorate. We expect that continued weakness in the industry could adversely affectour business, results of operations and financial condition.

 

Considerable economic and political uncertaintiescurrently exist that could have adverse effects on consumer buying habits,construction costs, availability of labor and materials and other factorsaffecting us and the real estate industry in general.  Significant expenditures associated withinvestment in real estate, such as real estate taxes, insurance, maintenancecosts and debt payments, cannot generally be reduced even though changes inHawaii’s or the nation’s economy may cause a decrease in revenues from ourproperties.

 

****Our real estate business is primarily concentrated in the state ofHawaii.  As a result, our financialresults are dependent on the economic growth and health of Hawaii, particularlythe island of Hawaii.****

 

Barnwell’s land investment 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 of natural disasters in Hawaii could adversely affect ourbusiness.**

 

The occurrence of natural disasters in Hawaii such as,but not limited to, earthquakes, landslides, hurricanes, tornadoes, volcanicactivity, droughts and floods, could have a material adverse effect on ourability to develop and sell properties or realize income from ourprojects.  The occurrence of naturaldisasters could also cause increases in property and flood insurance rates anddeductibles, which could reduce demand for our properties.

 

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**Increases in interest rates, tightening of lending standards anddecreases, limitations or restrictions in the availability of mortgagefinancing and other economic factors outside our control, such as consumerconfidence and declines in employment levels could lead to slowed home sales,which could adversely affect our total earned revenues and earnings.**

 

The United States residential mortgage market isexperiencing significant disruption. Mortgage interest rates have recently experienced significant volatilityand contributed to the challenging market conditions faced by us and theindustry.  In addition, as a result ofincreased default rates and other factors, the willingness of many lenders tomake home mortgage loans has decreased and lenders have tightened their lendingstandards.  The volatility in interestrates, the decrease in the willingness of lenders to make home mortgage loans,and the tightening of lending standards have made it more difficult for somepotential buyers to finance the purchase of our homes.  Potential buyers may not be able to obtainacceptable financing to purchase residential lots within the Kaupulehu area,leading to further declines in the market for homes.  Any limitations or restrictions on theavailability of mortgage financing or increases in mortgage interest ratescould reduce residential lot sales, thereby reducing our total revenues and netearnings.  Even if potential buyers donot need financing, changes in interest rates and mortgage availability couldmake it harder for them to sell their existing homes to potential buyers whoneed financing.  Any limitations orrestrictions on the availability of mortgage financing, further interest rateincreases or limits on the deductibility of home mortgages could adverselyaffect our sales, which would reduce our revenues.

 

**Our business is subject to extensive regulation which makes itdifficult and expensive for us to conduct our operations.**

 

We are subject to a wide variety of federal, state andlocal laws and regulations relating to land use and development and toenvironmental compliance and permitting obligations, including those related tothe use, storage, discharge, emission, and disposal of hazardousmaterials.  Any failure to comply withthese laws could result in capital or operating expenditures or the impositionof severe penalties or restrictions on operations that could adversely affectpresent and future operations, or jeopardize our ability to sell the leaseholdinterest currently held.

 

****Future percentage of sales payments could be impaired if the developerof the property is unable to negotiate fee simple interests.****

 

In 2006 we sold our leasehold interest in the secondof two increments of resort/residential zoned property to an unrelateddeveloper.  As a part of the sale, we areentitled to receive future payments based on a percentage of the sales pricesof residential lots sold in this second increment.  Receipt of these percentage of sales paymentswill be contingent upon the ability of the developer of the leaseholdinterest in the resort/residential zoned property to successfully negotiate feesimple prices within this second increment. If the developer is unsuccessful in such negotiations, our ability toreceive percentage of sales payments on the sales of those lots would beimpaired and could impair our ability to receive percentage of sales paymentson the sales of lots in the first increment.

 

**Future percentage of sales payments would be impacted if the developerof the second of two increments does not complete the necessary infrastructureand amenities.**

 

Demand for lots is dependent upon the developercompleting the necessary infrastructure and amenities and thus we are reliantupon the developer to construct such improvements within the area.  

 

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If thedeveloper does not do so, our ability to receive future percentage of salespayments from the sales of lots in the second of two increments would benegatively impacted.

 

****If we are unable to obtain required land use entitlements at reasonablecosts, or at all, our operating results could be adversely affected.****

 

We hold the leasehold interest to approximately 1,000acres of vacant land that is currently zoned conservation.  Our success in selling this interest may becontingent upon obtaining the necessary reclassification from the State ofHawaii Land Use Commission and county of Hawaii.  Obtaining the necessary reclassification andministerial approvals is often difficult, costly and may take several years, ormore, to complete.  Delays or failures toobtain the necessary reclassification approvals may adversely affect ourfinancial results.

 

****Environmental and other regulations may have an adverse effect on ourbusiness.****

 

Our properties are subject to federal, state and localenvironmental regulations and restrictions that may impose significantlimitations.  In most cases, approval todevelop requires multiple permits which involve a long, uncertain and costly regulatoryprocess.

 

**General economic conditions in the lodgingindustry****couldadversely affect our overall financial results.**

 

We own a 1.5% passive minority interest in HualalaiResort, which includes the Four Seasons Resort Hualalai at Historic Ka’upulehu,two golf courses and a clubhouse, and the Kona Village Resort, an 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 our lot acquisition rights could be impaired if thedeveloper of the property is unable to obtain required land use entitlements orsuccessfully negotiate development terms and agreements.****

 

We hold acquisition rights to 14 lots inagricultural-zoned leasehold lands in the upland area of Kaupulehu (“MaukaLands”) situated between the Queen Kaahumanu Highway and the Mamalahoa Highwayat Kaupulehu, North Kona, island and state of Hawaii.  The lot acquisition rights give us the rightto purchase residential lots which may be developed on the Mauka Lands.  The ability to purchase residential lots andthe value of such lots in the future is contingent upon the developer of theproperty obtaining the necessary land use reclassification, zoning anddevelopment approvals from regulatory entities. Obtaining the necessary reclassification and ministerial approvals isoften difficult, costly and may take several years, or more, to complete.  Delays or failures to obtain the necessaryreclassification and rezoning approvals may adversely affect our financialresults.  Our ability to purchase lotsand the value of such lots is also contingent upon the ability of the developerof the property to successfully negotiate development terms and agreementswithin the Mauka Lands.  If the developeris unsuccessful in such negotiations, our ability to purchase residential lotsin the Mauka Lands would be impaired.

 

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*Risks Related to Residential RealEstate Segment*

 

**The homebuilding industry is experiencing a severe and extendeddownturn that may continue for an indefinite period and may continue toadversely affect our business, results of operations and stockholders’ equity.**

 

The residential homebuilding industry historically hasbeen cyclical and is sensitive to changes in economic conditions such asemployment levels, consumer confidence, consumer income, availability offinancing and interest rate levels. Adverse changes in any of these conditions generally, or in the marketin which we operate, could decrease demand and pricing for new homes or resultin customer cancellations of pending contracts, which could adversely affectthe number of home deliveries we make or reduce the prices we can charge forhomes, either of which could result in a reduction in our revenues ordeterioration of our margins.

 

The homebuilding industry has experienced asignificant and sustained downturn characterized by decreased demand for newhomes, an oversupply of both new and resale home inventories, includingforeclosed homes; aggressive price competition among homebuilders, includingincreased incentives for home sales; and a more restrictive mortgage lendingenvironment.  Economic conditions in theUnited States have also weakened recently, which puts continued pressure onconsumer confidence for residential real estate.  These challenging market conditions areexpected to continue for the foreseeable future and, in the near term, theseconditions may further deteriorate.  Weexpect that continued weakness in the homebuilding industry could furtheradversely affect our business, results of operations and financial condition.

 

**We are reliant upon sales of residential homes under development andlots held for investment as a source of liquidity.  If we are unable to sell the homes or lotswithin a reasonable timeframe, our****revenues, operating results, cash inflows and financial condition couldbe materially impacted.**

 

Barnwell currently owns four parcels in the Lot 4AIncrement I area of Kaupulehu, North Kona, Hawaii.  We are in the process of developingresidences for future sale on two of the parcels and intend to hold theremaining two parcels for investment purposes. The two turnkey homes currently being built are slated for completionwithin the next six months.

 

The acquisition of the parcels and home constructioncosts on the two turnkey homes are being financed through a bank revolvingcredit facility.  The entire unpaidprincipal balance and all accrued interest is due in full on December 17,2010, unless we sell a home and lot before then, in which case we 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 timing and amount of residential home sales and/orlot sales are unpredictable and may be sporadic.  The inability to sell the homes or lotswithin a reasonable timeframe may lead to unnecessary interest costs.  Additionally, if we are unable to sell thehomes or lots within a reasonable timeframe, we may need to request a loanextension, obtain refinancing or reduce oil and natural gas capital expendituresto make the required cash outflows.  Thiswould negatively impact our liquidity. Furthermore, if estimated cash inflows from home or lot sales do notoccur on a timely basis or are less than current expectations, our revenues,operating results, cash inflows and financial condition could be materiallyimpacted.

 

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****Significant competition in the real estate industry could have anadverse effect on our business.****

 

The homebuilding industry is highly competitive.  We face competition from other developers onthe island of Hawaii, and from other luxury residential properties in Hawaiiand the mainland United States.  In manycases, our competitors have greater financial and other resources, moreestablished market positions, better opportunities for land acquisitions andhave lower costs of capital, labor and material than we do.  If we are unable to compete with these largercompetitors, our financial results could be adversely affected.

 

****We have limited experience in the homebuilding industry.****

 

Homebuilding is a new business segment for us and weare relying to a material extent on our business partners to help us executeour business plan.

 

****We may need additional financing to fund our real estate developmentactivities.  If we are unable to obtainsufficient financing or such financing is obtained on adverse terms, we may notbe able to operate our business as planned, which could adversely affect ourresults of operations and future growth.****

 

The real estate development industry is capitalintensive and homebuilding requires significant up-front expenditures toacquire land and begin development. Accordingly, we will incur substantial indebtedness to finance our homebuildingactivities.  Although we believe thatinternally generated funds and borrowing capacity under our credit facilitywill be sufficient to fund our development and construction activities, theamounts available from such sources may not be adequate to meet our needsespecially in the tight credit market. Additionally, we will need to establish new funding sources to financeour land acquisition capital expenditures. If such sources are not sufficient, we would seek additional capital inthe form of debt or equity financing from a variety of potential sources,including additional bank financing, joint venture partner financing, and/orsecurities offerings.  The amount andtypes of indebtedness which we may incur are limited by the terms of theagreements governing our existing debt. In addition, the availability of borrowed funds to be utilized for landacquisition, development and construction may be greatly reduced, and thelending community may require increased amounts of equity to be invested in aproject by borrowers in connection with both new loans and the extension ofexisting loans.  The failure to obtainsufficient capital to fund our planned capital and other expenditures couldhave a material adverse effect on our business.

 

****Our operating results from homebuilding are expected to be variable.****

 

Due to the cyclical nature of the real estatedevelopment industry, we expect to experience variability in our futureoperating results on a quarterly and an annual basis.  Factors expected to contribute to this variabilityinclude, among other things:

·                  the timing ofland acquisitions and permitting;

·                  the timing ofhome closings, land sales and level of home sales;

·                  our ability tocontinue to acquire additional land or options thereon on acceptable terms;

·                  the conditionof the real estate market and the general economy; and

·                  delays inconstruction due to natural disasters, adverse weather, reduced contractoravailability and strikes.

 

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Forexample, the timing of land acquisitions and permitting impacts our ability topursue the development of new housing projects in accordance with our businessplan.  If the timing of land acquisitionsor zoning or regulatory approvals is delayed, we will be delayed in ourability to develop housing projects, which would likely decrease ourbacklog.  Furthermore, these delays couldresult in a decrease in our revenues and earnings for the periods in which thedelays occur and possibly subsequent periods until the planned housing projectscan be completed.  A delay in asignificant number of home closings or land sales due to natural disasters,adverse weather or contractor availability would have a similar impact onrevenues and earnings for the period in which the delays occur.  Further, revenues may increase in subsequentperiods over what would normally be expected as a result of increased homeclosings as the delays described above are resolved.

 

****Changes in the governmentregulations applicable to homebuilders could restrict our business activities,increase our operating expenses and cause our revenues to decline.****

 

Regulatory requirements applicable to homebuilderscould cause us to incur significant liabilities and operating expenses andcould restrict our business activities. We are subject to local, state and federal statutes and rules regulating,among other things, certain developmental matters, building and site design,and matters concerning the 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.

 

****Ourresidential real estate segment is dependent on the continued availability andsatisfactory** performance of our building contractors, which,if unavailable, could have a material adverse effect on our business.**

 

We conduct our construction operations throughunaffiliated building contractors.  As aconsequence, we depend on the continued availability of and satisfactoryperformance by the contractors for the construction of our homes.  There may not be sufficient availability ofand satisfactory performance by the contractors.  If the contractors’ quality of work is notsufficient to assist us in home construction, our ability to construct homes onthe schedule we have planned would be affected. This could result in an increase in our costs to construct homes in atimely manner, which could result in an increase in our overall costs and thusa decline in our margins and in our net income. Further, non-timely completion of work could affect our ability to sellhomes based upon our projected timeline thus possibly affecting our ability toobtain additional financing to continue our homebuilding efforts.

 

****Shortages of labor ormaterials and/or increases in the price of materials could delay constructionor increase the cost of home construction thereby reducing our sales andearnings.****

 

The homebuilding business has from time to timeexperienced building material and labor shortages, as well as volatility in theprices of certain materials, including lumber, framing, drywall and 

 

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cement,which are significant 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.

 

**Themarket value of our real estate interests could drop significantly, which mayrequire write-downs of the carrying value of our real estate held fordevelopment and investment to its estimated fair value.  Any write-downs would negatively impact ourresults of operations and financial condition.**

 

The risk of owning developed and undeveloped land canbe substantial for homebuilders. Homebuilding requires that we acquire land forreplacement and expansion of land inventory within our existing and newmarkets.  The risks inherent inpurchasing and developing land increase as consumer demand for housingdecreases.  Thus, we may have bought anddeveloped land which we cannot profitably sell or on which we cannot profitablybuild and sell homes.  The market valueof land, buildable lots and housing inventories can fluctuate significantly asa result of changing economic market conditions.  It is possible that the measures we employ tomanage inventory risks will not be successful and as a result our operationsmay suffer.  In addition, inventorycarrying costs can be significant and can result in losses in a poorlyperforming market.  Prevailing market conditions maysignificantly influence the market value of our residential lots held fordevelopment and/or our residential parcels held for investment.  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. Furthermore, if the marketconditions continue to deteriorate, we may be required to write-down thecarrying value of our real estate held for development and investment to itsestimated fair value.  Such write-downswould have a negative impact on our results of operations and financialcondition.

 

****Severe weather and othernatural conditions or disasters may disrupt or delay construction and mayimpair the value of our real estate property.****

 

Severe weather and other natural conditions ordisasters, such as, but not limited to, earthquakes, landslides, hurricanes,tornadoes, volcanic activity, droughts, floods, and heavy or prolonged rain,can negatively affect our operations by requiring us to delay or haltconstruction or to perform potentially costly repairs to our projects underconstruction and to unsold homes. Further, these conditions can delay home closings, adversely affect thecost or availability of materials or labor, or impair the value of the propertyon a temporary or permanent basis.  To the extent our insurance is not adequateto cover business interruption losses or repair costs resulting from theseevents, our total earned revenues and earnings may be adversely affected.

 

****The homebuilding industryis highly competitive and, with more limited resources than some of ourcompetitors, we may not be able to compete effectively.****

 

The homebuilding 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 basisof a number of interrelated factors, including location, reputation, amenities,design, quality and price, with numerous homebuilders, including somehomebuilders with greater 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 

 

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salesvolumes.  A reduction in our revenue ormargins due to competitive factors could affect our ability to service ourdebt, including the credit facilities.

 

*Risks Related to ContractDrilling Segment*

 

****Demand for water well drilling and/or pumpinstallation is volatile.  A decrease indemand for our services could adversely affect our revenues and results ofoperations.****

 

Demand for services is highly dependent upon landdevelopment activities in the state of Hawaii. As also noted above, the real estate development industry is cyclical innature and is particularly vulnerable to shifts in local, regional, andnational economic conditions outside of our control such as interest rates,housing demand, population growth, employment levels and job growth andproperty taxes.  If we experience adecrease in water well drilling and/or pump installation contracts, we mayexperience decreased revenues and operating results.

 

****A significant portion ofour contract drilling business is dependent on municipalities and a decline inmunicipal spending could adversely impact our business.****

 

A significant portion of our contract drillingdivision revenues are derived from water and infrastructure contracts withgovernmental entities or agencies. Reduced tax revenues in certain regions may limit spending and newdevelopment by local municipalities which in turn will affect the demand forour services in these regions.  Materialreductions in spending by a significant number of municipalities or local governmentalagencies could have a material adverse effect on our business, results ofoperations, liquidity and financial position.

 

****Our contract drillingoperations face significant competition from companies with greater financialresources.****

 

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.

 

****The loss of or damage tokey vendor, customer or sub-contractor relationships would adversely affect ouroperations.****

 

Our business is dependent on our relationships withkey vendors, customers and subcontractors. The loss of or damage to any of our key relationships could negativelyaffect our business.

 

*Entity-Wide Risks*

 

**The financial crisis may have impacts on our business and financialcondition that we currently cannot predict.**

 

The ongoing credit crisisand turmoil in the global financial system may have an impact on our businessand our financial condition, and we may face challenges if conditions in thefinancial markets do not improve.  Ourability to access the capital markets may be restricted at a time when we would

 

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like, or need, to raise capital, which could have animpact on our flexibility to react to changing economic and businessconditions.  The economic situation couldadversely affect the demand for real estate development activities in the stateof Hawaii which in turn could cause a decline in the water well drilling and/orpump installation services required. Furthermore, weak market conditions could cause a decrease in demand forluxury homes.  Additionally, the currenteconomic situation could lead to reduced demand for oil and natural gas, orlower prices for natural gas and oil, or both, which could have a negative impacton our revenues.

 

**We are reliant upon future cash flows from operations, land investmentsegment development rights and percentage of sales proceeds, and availablecredit as a source of liquidity.  Ifestimated cash inflows do not occur timely or are less than currentexpectations, our liquidity may be negatively impacted.**

 

In addition to cash flows from oil and natural gas andcontract drilling operations, we rely upon land investment segment developmentrights and percentage of sales payment proceeds as a source of liquidity.  However, oil and natural gas prices have beenhistorically volatile and the timing and amount of land investment segmentpercentage of sales proceeds are unpredictable, may be sporadic, and are notunder our control.  Development rightsproceeds, on the other hand, are scheduled but there is no assurance thatfuture monies will be received.

 

Wealso have a credit facility with a Canadian bank that is denominated inCanadian dollars.  Any decreases incurrency exchange rates affect the amount of credit available to us.  Furthermore, our real estate revolving creditfacility’s loan advance limitation is subject to the underlying security’sappraised value.  Any decreases in theappraised value of the underlying security could reduce the amount of creditavailable to us.

 

Accordingly, if estimated cash inflows do not occur ona timely basis or are less than current expectations or if we are subject to reductions in available credit, ourrevenues, operating results, cash inflows and financial condition could bematerially impacted.

 

****Our future level ofindebtedness and the terms of our financing arrangements may adversely affectour operations, financial condition and limit our growth.****

 

At September 30, 2008, we had long-termindebtedness of approximately $26.2 million. In the ordinary course of business, we may incur significant additionaldebt, to the extent permitted by our revolving credit facilities, in order tofund future capital expenditures, acquisitions and homebuilding activities.

 

The terms of our revolving credit facilities imposerestrictions on our ability and, in some cases, the ability of our subsidiariesto take a number of actions that we may otherwise desire to take, including oneor more of the following:

·                  incurring additional debt, includingguarantees of indebtedness;

·                  making investments;

·                  creating liens on our assets; and

·                  selling assets.

 

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Our level of indebtedness and the covenants containedin our financing agreements could have important consequences.  For example, it could:

·                  limit our ability to obtain future financing,through equity offerings or debt financings, for working capital, capitalexpenditures, acquisitions, refinancing of indebtedness or general corporateand other activities;

·                  require us to dedicate a substantial portionof our cash flow from operations to service our debt, thereby reducing ourability to use our cash flow for other purposes (i.e., working capital, capitalexpenditures, and other general business activities);

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

·                  subject us to higher costs and morerestrictive covenants in the future for working capital, capital expenditures,acquisitions, general corporate or other purposes, if additional financing isobtained;

·                  make us vulnerable to increases in interestrates as our revolving credit facilities are subject to variable interestrates;

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

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

·                  make us more vulnerable to general economicdownturns and adverse developments in our industries, especially declines inoil and natural gas prices, and the economy in general.

 

We may incur additional debt, including significantsecured indebtedness, or issue additional stock in order to fund capitalexpenditures, make future acquisitions, and develop our properties.  A higher level of indebtedness increases therisk that we may default on our obligations. Our ability to meet our debt obligations and to reduce our level ofindebtedness depends on our future performance. General economic conditions, oil and natural gas prices and financial,business and other factors affect our operations and our futureperformance.  Many of these factors arebeyond our control.  Factors that willaffect our ability to raise cash through a refinancing of our debt includefinancial market conditions, the value of our assets and our performance at thetime we need capital.

 

In addition, our bank borrowing base on our Canadianrevolving credit facility is subject to periodic redetermination.  A lowering of our borrowing base couldrequire us to repay indebtedness in excess of the borrowing base, or we mayneed to further secure the lenders with additional collateral.

 

****The price of our commonstock has been volatile and could continue to fluctuate substantially.****

 

The market price of our common stock has been volatileand could fluctuate 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.

 

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****Failure to retain keypersonnel could hurt our operations.****

 

We require highly skilled and experienced personnel tooperate our business.  In addition tocompeting in highly competitive industries, we compete in a highly competitivelabor market.  Our business could beadversely affected by an inability to retain personnel or upward pressure onwages as a result 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, 2008, two of our investorsand our executive officers held approximately 44% of our common stock.  Theinterests of these stockholders may not always coincide with the interests ofother stockholders.  These stockholders,acting together, have significant influence over all matters submitted to ourstockholders, including the election of our directors, and could accelerate,delay, deter or prevent a change of control of us.  These stockholders are able to exercisesignificant control over our business, policies and affairs.

 

****We believe that therequirement to comply with Section 404 of the Sarbanes-Oxley Act in fiscal2010 and the possible requirement to comply in fiscal 2009 will result inadditional expenses and may divert management’s attention.****

 

The Company may become an accelerated filer as definedin Rule 12b-2 of the Securities Exchange Act of 1934, which would requirethe Company to comply with the Section 404(b) auditor attestation ofthe Sarbanes-Oxley Act for fiscal 2009; we are currently required to comply infiscal 2010.  In such event, our independentregistered public accounting firm would be required to provide its attestationof the adequacy of the Company’s internal controls.  If such compliance is required, the Companyanticipates incurring additional general and administrative expenses andanticipates that its compliance efforts may divert management’s time andattention away from other aspects 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 planexpenses and obligations are subject to a high degree of uncertainty and couldincrease in future years depending on numerous factors, including theperformance of the financial markets, specifically the equity markets, and thelevels of interest rates.

 

****We are involved in jointventures and are subject to risks associated with joint venture partnerships.****

 

We are involved in joint venture relationships and mayinitiate future joint venture projects. Entering into a joint 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.

 

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**We may not be able to utilize allof our deferred tax assets.**

 

As of September 30, 2008, we had gross deferredtax assets of $10.0 million for which there was a valuation allowance of $5.9million.  Our deferred tax assets consistprimarily of foreign tax credit carryforwards, net operating losscarryforwards, excess of the cost basis of investment in land and residentialreal estate, and accruals and bad debt allowances that are not currentlydeductible for tax purposes.  Theultimate realization of the deferred tax assets is dependent upon a variety offactors, including taxable income in prior carryback years, estimates of futuretaxable income, tax planning strategies and reversals of existing taxabletemporary differences.  Some or all ofthese deferred tax assets could expire unused if we are unable to generatetaxable income in the future sufficient to utilize them or we enter intotransactions that limit our right to use them. If a material portion of our deferred tax assets expire unused, it couldhave a material negative impact on our financial position or results ofoperations, which could have a material adverse affect on the Company’sfinancial position, results of operations and cash flows.

 

**ITEM 1B.****      ****UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2.****         ****PROPERTIES**

 

**Oil and Natural Gas, Land Investment andResidential Real Estate Properties**

 

The location and character of Barnwell’s oil andnatural gas properties, and its land investment and residential real estateproperties, are described above under Item 1, “Business.”

 

**Corporate Offices**

 

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

 

**ITEM 3.****         ****LEGAL PROCEEDINGS**

 

Barnwell is occasionally involved in routinelitigation and is subject to governmental and regulatory controls that areincidental to the business.  Barnwell’smanagement believes that routine claims and litigation involving Barnwell arenot likely to have a material adverse effect on its financial position, resultsof operations or liquidity.

 

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

 

None.

 

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**PART II**

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

 

**MarketInformation**

 

In October 2005, Barnwell declared athree-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 on whichBarnwell’s common stock has been traded was the American Stock Exchange (“AMEX”)under the ticker symbol “BRN” until September 30, 2008.  Effective October 1, 2008, the NYSEEuronext completed its acquisition of the AMEX. The new entity is now known as NYSE Alternext U.S.  Barnwell’s ticker symbol remains the same onthe new entity.  The following tables present the quarterly high andlow sales prices, on the AMEX, for Barnwell’s common stock during the periodsindicated:

 
| Quarter Ended            |   | High   |   | Low    |   | Quarter Ended           |   | High   |   | Low   |   |
|--------------------------|--------|--------|--------|--------|--------|-------------------------|--------|--------|--------|-------|--------|
| December 31,  2006  |   | $24.00 |   | $16.82 |   | December 31, 2007  |   | $17.35 |   | $8.38 |   |
| March 31,  2007     |   | 23.96  |   | 19.26  |   | March 31, 2008     |   | 12.59  |   | 7.75  |   |
| June 30,  2007      |   | 22.43  |   | 18.30  |   | June 30, 2008      |   | 16.95  |   | 9.11  |   |
| September 30,  2007 |   | 22.00  |   | 14.37  |   | September 30, 2008 |   | 13.21  |   | 8.50  |   |

 

**Holders**

 

As of December 4, 2008, there were 8,240,160shares of common stock, par value $0.50, outstanding.  There were approximately 960 holders of thecommon stock of the registrant as of December 4, 2008.

 

**Dividends**

 

The table below sets forth the cash dividends paidper share of common stock for fiscal years 2008 and 2007.

 
| Record Date            |   | Payable Date            |   | Dividend Paid |
|------------------------|--------|-------------------------|--------|---------------|
| September 8, 2008 |   | September 22, 2008 |   | $0.075        |
| June 2, 2008      |   | June 16, 2008      |   | $0.05         |
| March 3, 2008     |   | March 17, 2008     |   | $0.05         |
| January 7, 2008   |   | January 22, 2008   |   | $0.05         |
| 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         |

 

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The payment of future cash dividends will depend on,among other things, our financial condition, operating cash flows, the amountof cash inflows from land investment activities, and the level of our oil andnatural gas capital expenditures.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 

See the information included in Part III,Item 12, under the caption “Equity Compensation Plan Information.”

 

**IssuerPurchases of Equity Securities**

 

The following table presents informationrelated to repurchases of Barnwell’s common stock made during the three monthsended September 30, 2008:

 
|                      |   |      |   |       |   | Total number         |   | Maximum number      |
|---------------------------|--------|-----------|--------|------------|--------|----------------------|--------|---------------------|
|                      |   | Total     |   | Average    |   | of shares purchased  |   | of shares           |
|                      |   | number of |   | price paid |   | as part of           |   | that may yet be     |
|                      |   | shares    |   | per        |   | publicly announced   |   | purchased under the |
| Period                    |   | purchased |   | share      |   | plans or programs(a) |   | plans or programs   |
| July 1-31, 2008      |   |      | -      |       |   | $                    | -      |                |   | - |   |   | - |
| August 1-31, 2008    |   |      | 7,200  |       |   | $                    | 12.16  |                |   | 7,200 |   |   | 142,800 |
| September 1-30, 2008 |   |      | 19,400 |       |   | $                    | 10.71  |                |   | 19,400 |   |   | 123,400 |
| Total                     |   |      | 26,600 |       |   | $                    | 11.10  |                |   | 26,600 |   |   |   |

 

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(a)          In August 2008, theBoard of Directors authorized a stock repurchase program in the open market ofup to 150,000 shares during the period commencing on August 18, 2008 andending on December 31, 2008.

 

**StockPerformance Graph and Cumulative Total Return**

 

Disclosure is not required as Barnwell qualifies as asmaller reporting company.

 

**ITEM 6.          SELECTED FINANCIAL DATA**

 

Disclosure is not required as Barnwell qualifies as asmaller reporting company.

 

39

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| **ITEM 7.** | ** ** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

The following discussion is intended to assist in theunderstanding of the Consolidated Balance Sheets of Barnwell Industries, Inc.and subsidiaries (collectively referred to herein as “Barnwell,” “we,” “our,” “us”or the “Company”) as of September 30, 2008 and 2007, and the relatedConsolidated Statements of Earnings, Stockholders’ Equity and ComprehensiveIncome, and Cash Flows for each of the years in the three-year period ended September 30,2008.  This discussion should be read inconjunction with the consolidated financial statements and related Notes toConsolidated Financial Statements included in this report.

 

**Use of Estimates in the Preparation of FinancialStatements**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management of Barnwell to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues and expenses and thedisclosure of contingent assets and liabilities.  Actual results could differ significantlyfrom those estimates.

 

**Critical Accounting Policies and Estimates**

 

Management believes the accounting policies that aremost critical in assisting financial statement readers in understanding andevaluating our results due to their subjective judgments are those related tothe full cost ceiling calculation and depletion of our oil and natural gasproperties, income taxes and asset retirement obligation.  We continue to monitor our accountingpolicies to ensure proper application of current rules and regulations.

 

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

 

Policy Description

 

We use the full cost method of accounting for our oiland natural gas properties, under which we are required to conduct quarterlycalculations of a “ceiling,” or limitation on the carrying value of oil andnatural gas properties.  The ceilinglimitation is the sum of 1) the discounted present value (at 10%), usingprices as of the end of each reporting period on a constant basis, of Barnwell’sestimated future net cash flows from estimated production of proved oil andnatural gas reserves, less estimated future expenditures to be incurred indeveloping and producing the proved reserves but excluding future cash outflowsassociated with settling asset retirement obligations accrued on the balancesheet; 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.

 

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Judgments and Assumptions

 

The estimate of our oil and natural gas reserves is amajor component of the ceiling calculation and represents the component thatrequires the most subjective judgments. Estimates of reserves are forecasts based on engineering data,historical data, projected future rates of production and the timing 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 4% 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 reviseddownward by 5% at the end of fiscal 2008, the ceiling limitation would havedecreased approximately $4,475,000.  Thisdecrease would not have resulted in a write-down in fiscal 2008.

 

In addition to the impact of the estimates of provedreserves on the calculation of the ceiling, estimated proved reserves are alsoa significant component of the quarterly calculation of depletion expense.  The lower the estimated reserves, the higherthe depletion rate per unit of production. Conversely, the higher the estimated reserves, the lower the depletionrate per unit of production.  If reportedreserve volumes were revised downward by 5% as of the beginning of fiscal 2008,depletion for fiscal 2008 would have increased by approximately $644,000.

 

While the quantities of proved reserves requiresubstantial judgment, the associated prices of oil, natural gas and natural gasliquids reserves, and the applicable discount rate, that are used to calculatethe discounted present value of the reserves do not require judgment.  The ceiling calculation dictates that a 10%discount factor be used and that prices and costs in effect as of the last dayof the period are held constant indefinitely which results in a value that isnot necessarily indicative of the fair market value of the reserves.  Therefore, the future net revenues associatedwith the estimated proved reserves are not based on our assessment of futureprices or costs.  Rather, they are basedon such prices and costs in effect as of the end of each period for which theceiling calculation is performed.

 

Oil and natural gas prices have historically beenvolatile.  Therefore, oil and natural gasproperty write-downs that result from applying the full cost ceilinglimitation, and that are caused by fluctuations in prices as opposed toreductions to the underlying quantities of reserves, should not be viewed asabsolute indicators of a reduction of the ultimate value of the relatedreserves.

 

*Incometaxes*

 

Policy Description

 

Income taxes are determined using the asset and liabilitymethod.  Deferred tax assets andliabilities are recognized for the estimated future tax impacts of differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax ratesin effect for the year in which those temporary differences are expected to berecovered or settled.  The effect ondeferred tax assets and 

 

41

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liabilitiesof a change in tax rates is recognized in income in the period that includesthe 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 in determining ourincome tax expense for each reporting period. Significant changes to these estimates could result in an increase ordecrease 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 valuation allowanceprimarily for the U.S. tax effect of deferred Canadian taxes, accruedliabilities, bad debt allowances and state of Hawaii net operating losscarryforwards which may not be realizable in future years as there can be noassurance of any specific level of earnings, that the timing of U.S. taxableincome will coincide with the payment of Canadian taxes to enable Canadiantaxes to be fully deducted (or recoverable) for U.S. tax purposes, or thatCanadian deferred tax assets will provide any incremental benefit for U.S. taxpurposes over the amount of benefit for Canadian tax purposes.

 

Canadian deferred tax assets related to liabilitiesaccrued for book purposes but not for tax purposes are estimated to be realizedthrough future Canadian income tax deductions against future Canadian oil andnatural gas earnings.  U.S. deferred taxassets related to liabilities accrued for book purposes but not for taxpurposes and the excess of the cost basis of investment in land and residentialreal estate for tax purposes over the cost basis of investment in land andresidential real estate for book purposes are estimated to be realized fromdeductions against future U.S. earnings from sales of interests in leasehold land,land development rights and residential real estate.  Foreign tax credit carryforwards areestimated to be utilized when U.S. federal income taxes otherwise due onCanadian source income in a given year exceed the foreign tax credit generatedin that year.  Barnwell has incurredhigher U.S. tax liabilities on Canadian source earnings than Canadian taxliabilities on such earnings in recent years. As such, Barnwell has utilized its foreign tax credit carryforwards inrecent years and Barnwell estimates that it will fully utilize its remainingforeign tax credit carryforward.  Theamount of deferred income tax assets considered realizable may be reduced ifestimates of future taxable income are reduced.

 

In addition, Barnwell operates within the U.S. and Canadaand is subject to audit in these jurisdictions. Barnwell records accruals for the estimated outcomes of these audits,and the accruals may change in the future due to new developments in eachmatter.  Tax benefits are recognized whenwe determine that it is more likely than not that such benefits will berealized.  Where uncertainty exists dueto the complexity of income tax statutes and where the potential tax amountsare significant, we generally seek independent tax opinions to support ourpositions.  If our evaluation of thelikelihood of the realization of benefits is inaccurate, we could incuradditional income tax and interest expense 

 

42

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thatwould adversely impact earnings, or we could receive tax benefits greater thananticipated which would positively impact earnings.

 

Management evaluates its potential exposures from taxpositions taken that have or could be challenged by taxing authorities in theevaluation required pursuant to FASB Interpretation (“FIN”) No. 48.  These potential exposures result becausetaxing authorities may take positions that differ from those taken bymanagement in the interpretation and application of statutes, regulations andrules.  Management considers thepossibility of alternative outcomes based upon past experience, previousactions by taxing authorities (e.g., actions taken in other jurisdictions) andadvice from tax experts.

 

Management believes that Barnwell’s provision for taxcontingencies is reasonable.  However,the ultimate resolution of tax treatments disputed by governmental authoritiesmay adversely affect Barnwell’s current and deferred income tax amounts.

 

*AssetRetirement Obligation*

 

Policy Description

 

Barnwell accounts for asset retirement obligations inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 143,“Accounting for Asset Retirement Obligations,” and FIN No. 47, “Accountingfor Conditional Asset Retirement Obligations - an interpretation of FASBStatement No. 143,” which requires that the fair value of a liability foran asset retirement obligation be recognized in the period in which it isincurred if a reasonable estimate of fair value can be made.  Barnwell’s estimated site restoration andabandonment costs of its oil and natural gas properties are capitalized as partof the carrying amount of oil and natural gas properties and depleted over thelife of the related reserves.  Theliability is accreted at the end of each period through charges to oil andnatural 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.

 

Judgments and Assumptions

 

The asset retirement obligation is recorded at fairvalue in the period in which it is incurred along with a corresponding increasein the carrying amount of the related asset. Barnwell has estimated fair value by discounting the estimated futurecash outflows required to settle abandonment and restoration liabilities.  The present value calculation includesnumerous estimates, assumptions and judgments regarding the existence ofliabilities, the amount and timing of cash outflows required to settle theliability, what constitutes adequate restoration, inflation factors, credit adjusteddiscount rates, and consideration of changes in legal, regulatory,environmental and political environments. Abandonment and restoration cost estimates are determined in conjunctionwith Barnwell’s reserve engineers based on historical information regardingcosts incurred to abandon and restore similar well sites, information regardingcurrent market conditions and costs, and knowledge of subject well sites andproperties.  The process of estimatingthe asset retirement obligation requires substantial judgment and use ofestimates, resulting in imprecise determinations.  Following the implementation of SFAS No. 143,actual asset retirement obligations through the end of fiscal 2008 have notmaterially differed from our estimates. However, because of the inherent imprecision of estimates as describedabove, there can be no assurance that material differences will not occur inthe future.  A 20% increase in accretionand depletion related to the asset retirement obligation would have increasedBarnwell’s fiscal 2008 expenses before taxes by approximately $158,000.

 

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**Contractual Obligations**

 

Disclosure is not required as Barnwell qualifies as asmaller reporting company.

 

**Overview**

 

Barnwell is engaged in the following lines ofbusiness: 1) exploring for, developing, producing and selling oil andnatural gas in Canada (oil and natural gas segment), 2) investing inleasehold land and other real estate interests in Hawaii (land investmentsegment), 3) acquiring property for investment and development of homesfor sale in Hawaii (residential real estate segment, established January 2007),and 4) drilling wells and installing and repairing water pumping systemsin Hawaii (contract drilling segment).

 

*Oil andNatural Gas Segment*

 

Barnwell sells substantially all of its oil andnatural gas liquids production under short-term contracts with marketers ofoil.  Natural gas sold by Barnwell isgenerally sold under both long-term and short-term contracts with prices indexedto market prices.  The price of naturalgas, oil and natural gas liquids is freely negotiated between the buyers andsellers.  Oil and natural gas prices are determined bymany factors that are outside of our control. Market prices for petroleum products are dependent upon factorssuch as, but not limited to, changes in market supply and demand, which are impacted by overall economic activity,changes in weather, pipeline capacityconstraints, inventory storage levels, and output.  Petroleum and natural gas prices are verydifficult to predict and fluctuate significantly.  Natural gas prices tend to be higher in thewinter than in the summer due to increased demand, although this trend hasbecome less pronounced due to the increased use of natural gas to generateelectricity for air conditioning in the summer and increased natural gasstorage capacity in North America.

 

Oil and natural gas exploration, development andoperating costs generally follow trends in product market prices, thus in timesof higher product prices the cost of exploration, development and operation ofoil and natural gas properties will tend to escalate as well.  Barnwell’s oil and natural gas operationsmake capital expenditures in the exploration, development, and production of oiland natural gas.  Cash outlays forcapital expenditures are largely discretionary, however, a minimum level ofcapital expenditures is required to replace depleting reserves.  Due to the nature of oil and natural gasexploration and development, significant uncertainty exists as to the ultimatesuccess of any drilling effort.

 

*LandInvestment Segment*

 

Barnwell owns a 77.6% controlling interest inKaupulehu Developments, a Hawaii general partnership which owns interests inleasehold land and development rights for property located approximately sixmiles north of the Kona International Airport in the North Kona District of theisland of Hawaii, within and adjacent to Hualalai Resort at Historic Ka’upulehu,between the Queen Kaahumanu Highway and the Pacific Ocean.  A director of Barnwell and minority interestowner in certain of Barnwell’s business ventures and his affiliated entitiesown a direct financial interest in 19.3% of Kaupulehu Developments.  Refer to Note 9 of “Notes toConsolidated Financial Statements” in Item 8 for further discussion onrelated party interests.  KaupulehuDevelopments’ interests are discussed below.

 

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Kaupulehu Developments’ interests include thefollowing:

 

·                  Development rightsfor residentially-zoned leasehold land within and adjacent to the Hualalai GolfClub which are under option to a developer.  As of September 30, 2008, thedevelopment rights are under option for $6,198,000, comprised of the balance of$886,000 due on December 31, 2008 and two payments of $2,656,000 due on December 31,2009 and December 31, 2010.

 

·                  The right toreceive varying percentages of the gross sales from the sale of lots withinapproximately 870 acres in the Kaupulehu area by another developer.

 

·                  Approximately1,000 acres of vacant leasehold land zoned conservation in the Kaupulehu arealocated adjacent to the 870 acres described above.  Kaupulehu Developments has an agreement whichprovides a potential developer with the exclusive right to negotiate withKaupulehu Developments with respect to these 1,000 acres.  This right expires in June 2009 or, ifthe developer completes any and all environmental assessments and surveysreasonably required to support a petition to the Hawaii State Land UseCommission for reclassification and rezoning of the aforementioned land, in June 2012.

 

Kaupulehu Mauka Investors, LLC, a limited liabilitycompany wholly-owned by Barnwell, holds 14 lot acquisition rights as to lotswithin 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.  The 14 lot acquisition rightsgive Barnwell the right to acquire 14 residential lots, each of which iscurrently estimated to be two to five acres in size, which may be developed onthe Mauka Lands.  These lands arecurrently classified as agricultural by the state of Hawaii and, accordingly,the developer of these lands will need to pursue both state and county ofHawaii approvals for reclassification and rezoning to permit a residentialsubdivision and negotiate development terms.

 

*ResidentialReal Estate Segment*

 

Barnwell owns an 80% controlling interest in Kaupulehu2007, LLLP (“Kaupulehu 2007”), a Hawaii limited liability limited partnership,which acquires house lots for investment and constructs turnkey single-familyhomes for future sale.  A director ofBarnwell and minority interest owner in certain of Barnwell’s business venturesand his affiliates have a 20% interest in Kaupulehu 2007.  Refer to Note 9 of “Notes toConsolidated Financial Statements” in Item 8 for further discussion onrelated party interests.

 

*ContractDrilling Segment*

 

Barnwell drills water, water monitoring and geothermalwells and installs and repairs water pumping systems in Hawaii.  Contract drilling results are highlydependent upon the quantity, dollar value and timing of contracts awarded bygovernmental and private entities and can fluctuate significantly.

 

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**Business Environment**

 

Our primary operations are concentrated in the stateof Hawaii and in Canada.  Accordingly,our business performance is directly affected by macro economic conditions inthose areas, as well as general economic conditions of the U.S. domestic andworld economies.  Recent uncertaintyarising from the global credit crisis, steep declines in the stock market,collapses of financial institutions and subsequent government bail-outs areevidence that the U.S. and global economies are weakening.

 

*Oil andNatural Gas Segment*

 

Historically, oil and natural gas prices have beenvolatile, are difficult to predict and fluctuate significantly.  Oil and natural gas prices hit historic highlevels in recent years and during the latter half of fiscal 2008.  Since then prices have fallen sharply fromthe recent record levels and may continue to decline.  Natural gas prices for Barnwell, based onquarterly averages during the three years ended September 30, 2008, haveranged from a low of $5.09 per thousand cubic feet to a high of $9.76 perthousand cubic feet.  During the quarterended June 30, 2008, the quarterly average price for natural gas was $9.70per thousand cubic feet.  This averageprice was the highest since the quarter ended December 31, 2005 whenprices had been affected by the effects of Hurricane Katrina, which interruptedoil production in the Gulf area resulting in a significant effect on fuelprices.  Oil prices for Barnwell, basedon quarterly averages for the period discussed above, ranged from a low of$48.67 per barrel to a high of $117.22 per barrel (the average price for thequarter ended June 30, 2008).

 

Beginning in the quarter ended September 30, 2008through the date of this filing, oil and natural gas prices have experienced asignificant decline.  If prices continueto decline, we may be required to write off any excess of unamortizedcapitalized costs over the related cost ceiling and reduce oil and natural gascapital expenditures, possibly to a significant degree.

 

*LandInvestment and Residential Real Estate Segments*

 

According to the State of Hawaii Department ofBusiness, Economic Development and Tourism’s (“DBEDT”) 4th Quarter 2008Quarterly Statistical & Economic Report, virtually no growth isprojected in Hawaii’s economy for fiscal 2009. Factors contributing to the slowing of Hawaii’s economy include fallingtourism and falling residential investment. Tightening credit markets, increased unemployment rates and reducedvisitor counts suggest a slowing economy.

 

For the past few years, Hawaii’s economy hasexperienced positive growth and the South Kohala/North Kona area of the islandof Hawaii, the area in which Kaupulehu Developments’ leasehold interests arelocated and Kaupulehu 2007 is building homes, has experienced strong demand forresidential real estate.  Howeverbeginning in fiscal 2008, the weakened economy coupled with the softening realestate markets caused sales within the Kaupulehu area to be lower than originalexpectations.  Due to the softening ofthe real estate market, future revenues from real estate sales will likely belower than in recent years.  If futuremarket demand for luxury real estate is less than current expectations, ouroperating results, financial condition and liquidity could be adverselyaffected.

 

Barnwell anticipates the two turnkey homes currentlyunder construction will be completed within the next six months.  Our ability to sell the completed residencesand/or lots held for investment is contingent upon the strength of the realestate market.  However, due to thesoftening of the real estate market, the demand for luxury homes is anticipatedto decrease in the near future.

 

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*ContractDrilling Segment*

 

Demand for water well drilling and/or pump installationservices is volatile and dependent upon land development activities within thestate of Hawaii.  According to the DBEDT4th Quarter 2008 Quarterly Statistical & Economic Report, the dollarvalue of private building authorizations and government contracts awardeddecreased during 2008 as compared to 2007. Furthermore during the quarter ended September 30, 2008, for thefirst time since early 2002, construction jobs showed a decline from theprevious year’s comparable quarter. Major indicators of construction activity suggest slower constructionactivity into 2009.

 

**Results of Operations**

 

*Summary*

 

Barnwell generated net earnings of $11,732,000 infiscal 2008, an $8,216,000 increase from net earnings of $3,516,000 in fiscal2007.  This increase was largely due tothe following items:

 

·      Operatingprofits before income taxes increased $13,586,000, primarily due to higherprices received for all petroleum products, partially offset by a $2,090,000increase, before income taxes, in general and administrative expenses net ofminority interest, and bad debt expense of $1,091,000, before income taxes,principally related to oil and natural gas segment receivables; and

 

·      The currentyear period included a deferred income tax benefit of $909,000 as a result of adecrease in Canadian federal income tax rates as compared to a benefit of$100,000 in the prior year period.

 

Barnwell generated net earnings of $3,516,000 infiscal 2007, an $11,121,000 decrease from net earnings of $14,637,000 in fiscal2006.  Net earnings for fiscal 2007decreased as net earnings of fiscal 2006 included the receipt of a closingpayment from the sale of Increment II of Kaupulehu Developments’ leaseholdland interests, which generated a $4,621,000 operating profit, after minorityinterest and before taxes, and proceeds from real estate consulting servicesrendered.  There was no closing paymentor real estate consulting proceeds received in fiscal 2007.  Also contributing to the decrease was therecognition of $4,130,000 of deferred tax benefits due to a reduction in the valuationallowance for foreign tax credit carryforwards and $1,094,000 of deferred taxbenefits due to a reduction of Canadian income tax rates during fiscal2006.  There was no reduction in thevaluation allowance for foreign tax credit carryforwards in fiscal 2007.  The decrease was further attributable tolower prices received by Barnwell for natural gas and natural gas liquids infiscal 2007, as compared to fiscal 2006. The decrease in net earnings was partially offset by lower general andadministrative expenses in fiscal 2007 due primarily to reduced bonus expenseand a decrease in costs associated with regulatory compliance efforts.

 

*General*

 

In addition to U.S. operations, Barnwell conductsforeign operations in Canada. Consequently, Barnwell is subject to foreign currency translation andtransaction gains and losses due to fluctuations of the exchange rates betweenthe Canadian dollar and the U.S. dollar.

 

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The fiscal year average exchange rate of the Canadiandollar to the U.S. dollar increased 10% in fiscal 2008, as compared to fiscal2007, and the exchange rate of the Canadian dollar to the U.S. dollar decreased6% at September 30, 2008, as compared to September 30, 2007.  Accordingly, the assets, liabilities,stockholders’ equity and revenues and expenses of Barnwell’s subsidiariesoperating in Canada have been adjusted to reflect the change in the exchangerates.  Barnwell’s Canadian dollar assetsare greater than its Canadian dollar liabilities; therefore, increases ordecreases in the value of the Canadian dollar to the U.S. dollar generate othercomprehensive income or losses, respectively. The fiscal year average exchange rate of the Canadian dollar to the U.S.dollar increased 3% in fiscal 2007, as compared to fiscal 2006, and theexchange rate of the Canadian dollar to the U.S. dollar increased 12% at September 30,2007, as compared to September 30, 2006. Other comprehensive income and losses are not included in netearnings.  The other comprehensive lossdue to foreign currency translation adjustments, net of taxes, for fiscal 2008was $2,066,000, a $5,382,000 decrease from other comprehensive income due toforeign currency translation adjustments, net of taxes, of $3,316,000 in fiscal2007.

 

Foreign currency transaction gains and losses were notmaterial in fiscal 2008, 2007 and 2006 and are reflected in “General andadministrative” expenses in the Consolidated Statements of Earnings.

 

The impact of fluctuations of the exchange rates betweenthe Canadian dollar and the U.S. dollar may be material from period toperiod.  Barnwell cannot accuratelypredict future fluctuations between the Canadian and U.S. dollars.

 

*Oil andnatural gas revenues*

 

Selected Operating Statistics

 

The following tables set forth Barnwell’s annual netproduction and annual average price per unit of production for fiscal 2008 ascompared to fiscal 2007, and fiscal 2007 as compared to fiscal 2006.  Production amounts reported are net ofroyalties and the Alberta Royalty Tax Credit, where applicable.  As discussed in further detail below, theAlberta Royalty Tax Credit was discontinued effective January 1, 2007.

 

Fiscal 2008 -Fiscal 2007

 
|                |       | Annual Net Production |   |
|---------------------|------------|-----------------------|--------|
|                |       |                  |   |   |   | Increase (Decrease) |   |
|                | ** ** | **2008**              |   | 2007 |   | Units |   | % |   |
| Natural gas  (MCF)* | ** ** | **3,349,000**         |   | 3,615,000 |   | (266,000) |   | (7%) |   |
| Oil (BBLS)**        | ** ** | **160,000**           |   | 146,000 |   | 14,000  |   | 10%  |   |
| Liquids (BBLS)**    | ** ** | **107,000**           |   | 114,000 |   | (7,000) |   | (6%) |   |

 
|                | ** ** | Annual Average Price Per Unit           |   |
|---------------------|------------|-----------------------------------------|--------|
|                | ** ** | ** **                              |   |   |   | Increase |   |
|                | ** ** | **2008**                                |   |              2007 |   | $ |   | % |   |
| Natural gas  (MCF)* | ** ** | **$     7.77** |   | $   5.88 |   | $   1.89 |   | 32% |   |
| Oil (BBLS)**        | ** ** | **$ 100.15**                       |   | $ 56.96 |   | $ 43.19 |   | 76% |   |
| Liquids (BBLS)**    | ** ** | **$   61.02**            |   | $ 37.36 |   | $ 23.66 |   | 63% |   |

 

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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 (BBLS)**        | ** ** | 146,000               |   | 145,000 |   | 1,000 |   | 1% |   |
| Liquids (BBLS)**    | ** ** | 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 (BBLS)**        | ** ** | $ 56.96                   |   | $ 56.85 |   | $   0.11 |   | 0% |   |
| Liquids (BBLS)**    | ** ** | $ 37.36                   |   | $ 40.18 |   | $ (2.82) |   | (7%) |   |

 

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

**                BBL(S) = stock tank barrel equivalent to 42 U.S.gallons

 

Oil and natural gas revenues increased $14,842,000(43%) from $34,599,000 in fiscal 2007 to $49,441,000 in fiscal 2008, primarily due to significant increases inoil, natural gas and natural gas liquids prices, which increased 76%, 32% and63%, respectively, as compared to prices in fiscal 2007.

 

Net natural gas productiondecreased 7% in fiscal 2008 as compared to fiscal 2007 due primarily to naturaldeclines in production from both older and newer properties.  At Dunvegan, Barnwell’s principal oil andnatural gas property, net natural gas production at Dunvegan decreased 146,000MCF (8%).

 

Net oil production increased 10% during fiscal 2008 ascompared to fiscal 2007, due to production from new oil wells.  The increase was partially offset by naturaldeclines in production from older properties.

 

Oil and natural gas prices have experienced a declinein October and November 2008, thus Barnwell estimates that oil andnatural gas revenues for the first quarter of fiscal 2009 will be negativelyimpacted as compared to the same period in fiscal 2008.  However, oil and natural gas prices aredetermined by many factors that are outside of our control, have beenhistorically volatile and are subject to wide fluctuations.  As a result, we cannot accurately predictfuture oil and natural gas prices.

 

The Alberta Royalty Tax Credit (“ARTC”) program wasdiscontinued by the Alberta government, effective January 1, 2007.  Accordingly, no ARTC credits were receivedduring fiscal 2008.  Barnwell received$111,000 and $438,000 under the ARTC program in fiscal years 2007 and 2006,respectively.  Credits received byBarnwell under the ARTC program through December 31, 2006 were recorded asa credit against oil and natural gas royalties and reported in oil and naturalgas revenues.

 

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 todecreases in prices for natural gas and natural gas liquids.  Oil prices in fiscal 2007 were essentiallyequivalent to oil prices in fiscal 2006.

 

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Net natural gas production in fiscal 2007 wasessentially unchanged from that of fiscal 2006. Gross natural gas production decreased 6% in fiscal 2007, as compared tofiscal 2006, due to natural declines in production from older properties anddeclines at certain newer properties due to various operational issues.  The impact of the decreases in grossproduction was largely offset by lower royalties as a percentage of revenues,due in part to lower prices, which reduced the royalty owners’ share of gasproduction.  At Dunvegan, Barnwell’sprincipal oil and natural gas property, gross natural gas production decreased89,000 MCF due to natural declines from older wells, whereas net natural gasproduction at Dunvegan increased 72,000 MCF due to a decrease in royalties as apercentage of revenues, due in part to lower prices.

 

*Oil andnatural gas operating expenses*

 

Operating expenses increased $378,000 (4%) to$10,581,000 in fiscal 2008, as compared to $10,203,000 in fiscal 2007.  Oil and natural gas operating expensesincreased due to a 10% increase in the average exchange rate of the Canadiandollar to the U.S. dollar that increased oil and natural gas operating expenses$911,000 in fiscal 2008 as compared to fiscal 2007.  The increase, however, was partially offsetby lower workover activity and repairs at certain older properties.

 

Operating expenses increased $1,986,000 (24%) to$10,203,000 in fiscal 2007, as compared to $8,217,000 in fiscal 2006.  Operating expenses increased due to higherutility costs, industry-wide cost pressures which resulted in higher oilfieldservices costs, and higher than usual workover activity which resulted inhigher repairs and maintenance costs. The increase was also due to a 3% increase in the average exchange rateof the Canadian dollar to the U.S. dollar that increased oil and natural gasoperating expenses $283,000 in fiscal 2007 as compared to fiscal 2006.

 

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

 

Kaupulehu Developments holds development rights forresidentially-zoned leasehold land within and adjacent to the Hualalai GolfClub.  The development rights are underoption to Hualalai Investors, an entity in which Barnwell acquired a 1.5%passive minority interest through an 80%-owned joint venture in fiscal 2007.  Hualalai Investors is the owner and current developer of HualalaiResort.

 

Revenues, minority interestin earnings and operating profit related to sales of development rights underoption for the fiscal years ended September 30, 2008, 2007 and 2006 aresummarized as follows:

 
|                                                |       | Year  ended September 30, |
|-----------------------------------------------------|------------|--------------------------------|
| ** **                                          | ** ** | **2008**                       |   | 2007 |   | 2006 |
| Sale of development rights under option:            | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** |
| Proceeds                                            | ** ** | ** **                     | **$ 4,426,000** | ** ** |   |   | $ 2,438,000 |   |   |   | $ 2,875,000 |   |
| Fees                                                | ** ** | ** **                     | **(265,000** | **)** |   |   | (146,000 | ) |   |   | (173,000 | ) |
| Revenues - sale of  development rights, net         | ** ** | ** **                     | **4,161,000** | ** ** |   |   | 2,292,000 |   |   |   | 2,702,000 |   |
| Minority interest in  earnings                      | ** ** | ** **                     | **(910,000** | **)** |   |   | (501,000 | ) |   |   | (591,000 | ) |
|                                                |       |                           |   |   |   |   |   |   |   |   |   |   |
| Operating profit - sale of  development rights, net | ** ** | ** **                     | **$ 3,251,000** | ** ** |   |   | $ 1,791,000 |   |   |   | $ 2,111,000 |   |

 

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Fiscal 2008 proceeds from the sale of developmentrights of $4,426,000 include $2,656,000 of proceeds received for thedevelopment rights option that was due on December 31, 2007 as well as$1,770,000 of proceeds related to the development rights option due on December 31,2008.

 

The total amount ofremaining future option receipts, if all options are fully exercised, is$6,198,000 as of September 30, 2008, comprised of $886,000 representingthe balance of the option due on December 31, 2008, and two payments of$2,656,000 due on December 31, 2009 and December 31, 2010.  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.

 

All capitalized costs associated with KaupulehuDevelopments’ development rights were expensed in previous years.  The development rights option revenues, netof related fees, are recorded in the Consolidated Statements of Earnings as “Saleof development rights, net.”

 

The following tablesummarizes the revenues received from WB KD Acquisition, LLC (“WB”), anunrelated entity,for thesale of Kaupulehu Developments’ interest in leasehold land, related minorityinterest in earnings and operating profit for the years ended September 30,2008, 2007 and 2006.  WB is affiliatedwith RP-Hualalai Investors, LLC, a managing member of Hualalai Investors, andWestbrook Partners, developers of Kuki’o Resort located adjacent toHualalai Resort.

 
|                                                        | Year ended  September 30, |       |
|-------------------------------------------------------------|--------------------------------|------------|
| ** **                                                  | **2008**                       | ** ** | ** ** | ** ** | 2007 |   |   |   | 2006 |   |
| Sale of interest in leasehold land:                         |                           |       |   | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Revenues from  percentage of sales payments                 | ** **                     | **$**      | **517,000** | ** ** | ** ** | ** ** | $ | 3,585,000 |   |   |   | $ | 3,660,000 |   |
| Revenues from  Increment II closing payment                 | ** **                     | ** ** |             - | ** ** | ** ** | ** ** |             - |   |   |   | 10,000,000 |   |
| Capitalized  costs relating to Increment II sale       | ** **                     | ** ** |             - | ** ** | ** ** | ** ** |             - |   |   |   | (2,983,000 | ) |
| Legal costs  relating to Increment II sale                  | ** **                     | ** ** |             - | ** ** | ** ** | ** ** |             - |   |   |   | (220,000 | ) |
| Fees                                                        | ** **                     | ** ** | **(71,000** | **)** | ** ** | ** ** | (215,000 | ) |   |   | (820,000 | ) |
| Revenues - sale  of interest in leasehold land, net         | ** **                     | ** ** | **446,000** | ** ** | ** ** | ** ** | 3,370,000 |   |   |   | 9,637,000 |   |
| Minority  interest in earnings                              | ** **                     | ** ** | **(243,000** | **)** | ** ** | ** ** | (737,000 | ) |   |   | (2,328,000 | ) |
| Operating profit  - sale of interest in leasehold land, net | ** **                     | **$**      | **203,000** | ** ** | ** ** | ** ** | $ | 2,633,000 |   |   |   | $ | 7,309,000 |   |

 

WB sold four single-family lots during the year ended September 30,2008 and paid Kaupulehu Developments $1,182,000 in percentage of salespayments.  WB sold seven single-familylots during the year ended September 30, 2007 and paid KaupulehuDevelopments $3,585,000 in percentage of sales payments.  WB sold five single-family lots during theyear ended September 30, 2006 and paid Kaupulehu Developments $3,660,000in percentage of sales payments.

 

One of the lots sold by WB in fiscal 2008 and three ofthe lots sold by WB in fiscal 2007 were purchased by Kaupulehu 2007 under a lotpurchase contract executed in January 2007 (see further discussion inNote 5 in the “Notes to Consolidated Financial Statements” inItem 8).  Percentage of salespayments received by Kaupulehu Developments from WB as a result of Kaupulehu2007’s lot purchases in fiscal 2008 and 2007 totaled $214,000 and $642,000,respectively.  WB is not affiliated withBarnwell, Kaupulehu Developments or Kaupulehu 2007.  Percentage of sales revenues resulting fromKaupulehu 2007’s lot purchases were previously not eliminated.  In the three months ended September 30,2008, Barnwell concluded that its share of all such revenues should beeliminated, resulting in a $665,000 non-cash reduction in revenues reported as “Saleof interest in leasehold land, 

 

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net” in the ConsolidatedStatements of Earnings, with corresponding $333,000 and $332,000 reductions inthe carrying value of “Residential Lots Under Development” and “Investment inResidential Parcels,” respectively, on the Consolidated Balance Sheet at September 30,2008.  Impacts on all periods affectedwere not material.

 

In June 2006, Kaupulehu Developments entered intoan agreement with WB and WB KD Acquisition II, LLC (“WBKD”), under whichKaupulehu Developments sold its interest in Increment II to WBKD (“Increment IIAgreement”).  Increment IIrepresents a portion of approximately 870 acres of leasehold land zoned forsingle-family and multi-family residential units and a golf course andclubhouse in the Kaupulehu area.  Thereis no affiliation between Kaupulehu Developments and WB or WBKD.  WB and WBKD are both affiliates ofRP-Hualalai Investors, LLC and Westbrook Partners.  Pursuant to the Increment II Agreement,Kaupulehu Developments received a $10,000,000 closing payment and is entitledto receive future payments from WBKD based on a percentage of the sales pricesof the residential lots, ranging from 3.25% to 14%, to be determined in the futuredepending upon a number of variables, including whether the lots are sold priorto improvement.  No Increment II paymentswere received in fiscal 2008 or fiscal 2007.

 

Revenues from percentage of sales payments and theIncrement II closing payment, net of related costs, are recorded in theConsolidated Statements of Earnings for the years ended September 30,2008, 2007 and 2006, respectively, as “Sale of interest in leasehold land, net.”  There is no assurance that any futurepayments will be received.

 

During 2008, the developerscompleted and dedicated the Interpretive Center, which includes the main publicaccess parking, facilities, access road and paths.  Work on the Beach Club is proceeding withmost of the major components, including the bar, restaurant, pool andlandscaping nearing completion.  TheBeach Club is planned to be completed early in 2009.  A large lawn was planted in late September whichwill be fully grown in and usable during the holiday season.

 

*Contractdrilling*

 

Contract drilling revenues and costs are associatedwith well drilling and water pump installation, replacement and repair inHawaii.

 

Contract drilling revenues increased $3,794,000 (63%)to $9,787,000 in fiscal 2008, as compared to $5,993,000 in fiscal 2007, andcontract drilling operating expenses increased $2,745,000 (56%) to $7,684,000in fiscal 2008, as compared to $4,939,000 in fiscal 2007.  The contract drilling segment generated a$1,711,000 operating profit before general and administrative expenses duringfiscal 2008, an increase of $881,000 (106%) as compared to an operating profitbefore general and administrative expenses of $830,000 in fiscal 2007.  The increase is primarily due to increases inwell drilling and pump installation activity, higher values and margins ofcontracts performed in fiscal 2008 as compared to fiscal 2007, and lower welldrilling operating profit in fiscal 2007 due to higher drilling costs incurredon contracts performed.

 

At September 30, 2008, there was a backlog of sixwell drilling contracts and five pump installation and repair contracts, ofwhich four well drilling and three pump installation and repair were inprogress as of September 30, 2008. The backlog of contract drilling revenues as of November 30, 2008was approximately $3,810,000.  All of thecontracts in backlog at November 30, 2008 are expected to be completedwithin fiscal year 2009.

 

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Contract drilling revenues increased $127,000 (2%) to$5,993,000 in fiscal 2007, as compared to $5,866,000 in fiscal 2006, andcontract drilling operating expenses increased $230,000 (5%) to $4,939,000 infiscal 2007, as compared to $4,709,000 in fiscal 2006.  Operating profit before general and administrativeexpenses decreased $138,000 (14%) from $968,000 in fiscal 2006 to $830,000 infiscal 2007 due to higher drilling costs incurred on certain contracts.

 

Contract drilling revenues and costs are not seasonalin nature but can fluctuate significantly based on the awarding and timing ofcontracts, which are determined by contract drilling customer demand.

 

*Gasprocessing and other income*

 

Gas processing and other income increased $627,000(53%) to $1,809,000 in fiscal 2008 as compared to $1,182,000 in fiscal2007.  The increase is primarily due tocurrent year gains of $443,000 from the sale of lot purchase rights (seefurther discussion in Note 5 in the “Notes to Consolidated FinancialStatements” in Item 8) and $260,000 representing insurance proceedsreceived on the involuntary conversion of an incapacitated drill rig that hadbeen fully depreciated.

 

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

 

*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 years 2008 or 2007.  The drill rig was identical to one ofBarnwell’s other drill rigs and was originally purchased to drill geothermalwells.

 

*General and administrative expenses*

 

General and administrative expenses increased$2,040,000 (20%) to $12,497,000 in fiscal 2008, as compared to $10,457,000 infiscal 2007.  The increase was primarilyattributable to i) a $1,222,000 increase in current compensation costs,ii) a $373,000 increase in professional services, primarily due toregulatory compliance efforts, and iii) a $407,000 increase due toincreases in the average exchange rate of the Canadian dollar to the U.S.dollar.

 

General and administrative expenses decreased$1,187,000 (10%) to $10,457,000 in fiscal 2007, as compared to $11,644,000 infiscal 2006.  The decrease wasprincipally attributable to i) decreased personnel costs of $813,000,largely due to decreased bonus expense and incentive compensation costs,ii) decreased professional services costs of $219,000, primarily relatedto regulatory compliance costs incurred in fiscal 2006, and iii) increasedadministrative expense reimbursements from oil and natural gas joint venturepartners of $281,000.  This decrease waspartially offset by general inflationary increases.

 

*Bad debtexpense*

 

During fiscal 2008, Barnwell recorded a $1,091,000 baddebt reserve principally due to the bankruptcy of SemGroup, L.P.  In July 2008, SemGroup, L.P. announced it had filed voluntarypetitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code aswell as an application for 

 

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creditorprotection under the Companies’ Creditors Arrangement Act in Canada.  A subsidiary of SemGroup, L.P. was asignificant marketer of Barnwell’s oil and natural gas.  As a result of the SemGroup, L.P. bankruptcyfilings, Barnwell recorded an allowance for doubtful accounts and bad debtexpense during the year ended September 30, 2008 for production sold tothe SemGroup, L.P. subsidiary in June and July 2008.  August 2008 and subsequent productionwas moved to a different marketer.

 

No baddebt reserves were recorded during fiscal 2007 or 2006.

 

*Depletion,depreciation and amortization*

 

Depletion, depreciation and amortization increased$1,552,000 (12%) to $14,726,000 in fiscal 2008, as compared to $13,174,000 infiscal 2007, due to a 5% increase in the depletion rate and a 10% increase inthe average exchange rate of the Canadian dollar to the U.S. dollar.  The increase was partially offset by a 4%decrease in production.  The higherdepletion rate is due to increases in Barnwell’s costs of finding anddeveloping proven reserves.  Barnwell’scost of finding and developing proven reserves has increased due to the costsof oil and natural gas exploration and development having increased along withproduct prices and the drilling of unsuccessful wells.

 

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 averageexchange rate of the Canadian dollar to the U.S. dollar.

 

*Interestexpense*

 

Interest expense increased $44,000 (4%) to $1,043,000in fiscal 2008, as compared to $999,000 in fiscal 2007, due to higher averageloan balances, partially offset by lower average interest rates during fiscal2008 as compared to fiscal 2007.  Theweighted-average balance of outstanding borrowings from Royal Bank of Canadaincreased to $13,672,000 in fiscal 2008 as compared to $12,566,000 in fiscal2007.  The average interest rate incurredduring fiscal 2008 on Barnwell’s borrowings from Royal Bank of Canada decreasedto 5.62%, as compared to 7.28% in fiscal 2007. The weighted-average balance of outstanding borrowings under the realestate credit facility increased to $8,530,000 in fiscal 2008 as compared to$2,799,000 in fiscal 2007.  The averageinterest rate incurred during fiscal 2008 from borrowings on the real estatecredit facility decreased to 6.33%, as compared to 7.25% in fiscal 2007.  Of the interest amounts incurred, $394,000was capitalized in fiscal 2008 as compared to $142,000 during fiscal 2007.

 

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 incurred during fiscal 2007 on Barnwell’sborrowings from Royal Bank of Canada increased to 7.28%, as compared to 6.67%in fiscal 2006.  The weighted-averagebalance of outstanding borrowings from Royal Bank of Canada increased to$12,566,000 in fiscal 2007 as compared to $11,640,000 in fiscal 2006.  The increase was also due in part to intereston borrowings under a $7,500,000 credit facility obtained during the latterhalf of fiscal 2007 on which Barnwell incurred interest at an average rate of7.25%, $142,000 of which was capitalized; Barnwell did not have such a loanduring fiscal 2006.

 

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Interest costs for the fiscal years ended September 30,2008, 2007 and 2006 are summarized as follows:

 
|                                                                    |       |       | Year ended  September 30, |       |
|-------------------------------------------------------------------------|------------|------------|--------------------------------|------------|
| ** **                                                              |       | ** ** | **2008**                       | ** ** |   |   | 2007 |   |   |   | 2006 |   |
| Interest costs  incurred                                                | ** ** | ** ** | **$1,437,000**                 | ** ** |   |   | $1,141,000 |   |   |   | $ 833,000 |   |
| Less interest  costs capitalized on residential  lots under development |       |       | **394,000**                    |       |   |   | 142,000 |   |   |   | – |   |
| Interest expense                                                        | ** ** | ** ** | **$1,043,000**                 | ** ** |   |   | $   999,000 |   |   |   | $ 833,000 |   |

 

The majority of Barnwell’s debt is denominated in U.S.dollars.  Therefore, the increase in theaverage exchange rate of the Canadian dollar to the U.S. dollar had a minimalimpact on interest expense.

 

Barnwell anticipates the two turnkey homes currentlybeing built will be completed within the next six months.  Upon such completion, Barnwell will no longercapitalize interest incurred on borrowings pertaining to the two lots underdevelopment and construction costs. Additionally, Barnwell estimates that, due to the current credit crisis,the interest rates on the Company’s facility with the Royal Bank of Canada willincrease upon renewal in April 2009. Therefore, we anticipate interest expense starting in the third quarterof fiscal 2009 will increase accordingly.

 

*Incometaxes*

 

During the first quarter offiscal 2008, the Canadian government enacted reductions in the corporate taxrate from 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.  This reduction in Canadianfederal tax rates resulted in a $909,000 reduction of the net deferred taxliability during fiscal 2008.  A minorreduction in Canadian federal tax rates in fiscal 2007 resulted in a $100,000reduction in net deferred tax liabilities in fiscal 2007.

 

Barnwell’s effectiveconsolidated income tax rate for the year ended September 30, 2008,excluding the aforementioned $909,000 impact of the reduction in Canadian incometax rates, was approximately 36%, and the effective consolidated income taxrate for the year ended September 30, 2007 was approximately 49%.  As Barnwell establishes a valuation allowancefor the U.S. tax effect of deferred Canadian taxes which may not be realizablein future years as there can be no assurance of any specific level of earningsor that the timing of U.S. taxable income will coincide with the payment ofCanadian taxes to enable Canadian taxes to be fully deducted (or recoverable)for U.S. tax purposes, a relative increase in Canadian deferred income taxesincreases Barnwell’s consolidated effective income tax rate, and a relativedecrease in such taxes decreases Barnwell’s consolidated effective income taxrate.  In fiscal 2008, Canadian deferredtaxes, before the impact of the Canadian income tax rate reduction discussedabove, decreased.  In fiscal 2007,Canadian deferred taxes increased. Accordingly, the effective tax rate in fiscal 2008, before the impact ofthe Canadian income tax rate reduction, decreased in fiscal 2008 relative tofiscal 2007.  Partially offsetting thedecrease in the effective tax rate in fiscal 2008 was an increase due to theimpact of a $357,000 Canadian income tax provision for unrecognized taxbenefits, including interest, in fiscal 2008.

 

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 in the provision for income 

 

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taxesfor fiscal 2006 is the recognition of a deferred income tax benefit of$4,130,000 due to a reduction in the valuation allowance for foreign tax creditcarryforwards.  There were no reductionsin the valuation allowance for foreign tax credit carryforwards in fiscal 2008or 2007.  The effective tax rate, beforethe impact of the Canadian tax rate reductions and benefit from the reductionin the valuation allowance for foreign tax credit carryforwards, wasapproximately 53% in fiscal 2006 due to a relatively high amount of Canadiandeferred taxes in that year that did not provide a corresponding benefit forU.S. tax purposes.

 

*Equity inearnings of real estate affiliate*

 

In fiscal 2006, Barnwell entered into an agreement withNearco, Inc. (“Nearco”), to form Mauka 3K, LLC (“Mauka 3K”), forthe purpose of providing real estate consulting services and investing in realestate.  Barnwell and Nearco each have a50% voting interest in Mauka 3K. Nearco is a company controlled by a director of Barnwell and minorityinterest owner in certain of Barnwell’s business ventures (see furtherdiscussion on related party interests in Note 9 in the “Notes toConsolidated Financial Statements” in Item 8).  Barnwell does not have a controlling interestin Mauka 3K and thus accounts for its investment utilizing the equitymethod of accounting.  Under the equitymethod of accounting, Barnwell’s proportionate share of its affiliate’s incomeis included in equity in earnings of real estate affiliate.

 

In fiscal 2006 Barnwell received net proceeds of$1,440,000 representing its share of real estate consulting revenues, lessrelated 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.”  There was essentially no activity inMauka 3K during fiscal years 2008 and 2007.

 

*EnvironmentalMatters*

 

Federal, state, and Canadian governmental agenciesissue rules and regulations and enforce laws to protect the environmentwhich are often difficult and costly to comply with and which carry substantialpenalties for failure to comply, particularly in regard to the discharge ofmaterials into the environment.  Theregulatory burden on the oil and natural gas industry increases its cost ofdoing business.  These laws, rules andregulations affect the operations of Barnwell and could have a material adverseeffect upon the earnings or competitive position of Barnwell.  Although Barnwell’s experience has been tothe contrary, there is no assurance that this will continue to be the case.

 

*Inflation*

 

The effect of inflation on Barnwell has generally beento increase its cost of operations, interest cost (as a substantial portion ofBarnwell’s debt is at variable short-term rates of interest which tend toincrease as inflation increases), general and administrative costs and directcosts associated with oil and natural gas production and contract drillingoperations.  Oil and natural gas pricesrealized by Barnwell are essentially determined by world prices for oil andwestern Canadian/Midwestern U.S. prices for natural gas.

 

*RecentAccounting Pronouncements*

 

In September 2006, the Financial AccountingStandards Board (the “FASB”) issued SFAS No. 157, “Fair ValueMeasurements.”  SFAS No. 157 definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles, and expands disclosures about fair 

 

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value measurements.  SFAS No. 157 does not require any newfair value measurements, however, for some entities, the application of SFAS No. 157will change current practice.  SFAS No. 157is effective for fiscal years beginning after November 15, 2007.  Adoption of SFAS No. 157 will not have amaterial impact 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 onitems for which the fair value option has been elected are reported in earningsat each subsequent reporting date. Upfront costs and fees related to items for which the fair value optionis elected are recognized in earnings as incurred.  SFAS No. 159 is effective for fiscalyears beginning after November 15, 2007. Adoption of SFAS No. 159 will not have a material impact onBarnwell’s results of operations, financial condition and liquidity.

 

In December 2007, the FASB issued SFAS No. 160“Noncontrolling Interests in Consolidated Financial Statements – an amendmentto Accounting Research Bulletin No. 51.” SFAS No. 160 establishes accounting and reporting standards thatrequire the ownership interest in subsidiaries held by parties other than theparent be clearly identified and presented in the Consolidated Balance Sheetswithin equity, but separate from the parent’s equity; the amount ofconsolidated net income attributable to the parent and the noncontrollinginterest be clearly identified and presented on the face of the ConsolidatedStatement of Earnings; and changes in a parent’s ownership interest while theparent retains its controlling financial interest in its subsidiary beaccounted for consistently.  Thisstatement is effective for fiscal years beginning on or after December 15,2008.  Barnwell’s management is currentlyevaluating the impact of these provisions on Barnwell’s results of operations,financial condition and liquidity.

 

In May 2008, the FASB issued SFAS No. 162, “TheHierarchy of Generally Accepted Accounting Principles.”  SFAS No. 162 identifies the sources ofaccounting principles and the framework for selecting the principles used inthe preparation of financial statements that are presented in conformity withgenerally accepted accounting principles. SFAS No. 162 becomes effective 60 days following the SEC’s approvalof the Public Company Accounting Oversight Board amendments to AU Section 411,“The Meaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples.”  Barnwell does not expectthat the adoption of SFAS No. 162 will have a material impact on itsfinancial statements.

 

**Liquidity and Capital Resources**

 

*CashFlows, Debt and Available Credit*

 

Cash flows provided by operations totaled $18,440,000for fiscal 2008, an increase of $9,648,000 as compared to $8,792,000 of cashflows provided by operations for the same period in the prior year.  This increase was due primarily to anincrease in operating profit generated by Barnwell’s oil and natural gassegment.

 

Net cash used in investing activities totaled$12,037,000 for fiscal 2008 as compared to $18,035,000 for fiscal 2007.  Cash outflows for investing activitiesdecreased primarily due to investments made in fiscal 2007 that were not madein fiscal 2008.  These investmentsinclude a 1.5% passive minority interest in three joint ventures, lotacquisition rights, a residential parcel held for 

 

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investment, and depositsto acquire residential parcels.  Thedecrease in cash outflows from investing activities was partially offset byincreased capital expenditure payments, primarily associated with Barnwell’soil and natural gas segment, during fiscal 2008 as compared to fiscal2007.  During fiscal 2008, Barnwellacquired a residential lot for investment, $2,178,000 of which was directlyfinanced by a bank and thus is reflected as a non-cash investing activity.

 

Cash flows used in financing activities totaled$2,504,000 for fiscal 2008 as compared to $7,275,000 of cash flows provided byfinancing activities for fiscal 2007.  Thisincrease in cash outflows was primarily due to increases in long-term debtrepayments and Barnwell stock repurchases in fiscal 2008 as compared to fiscal2007.  In addition, financing activitiesin the prior year included a greater amount of proceeds from long-term debtborrowings and larger capital contributions received from a minority interestpartner as compared to fiscal 2008.  Cashoutflows from financing activities were partially offset by decreased dividendpayments made during the current year as compared to the prior year.  Proceeds from long-term debt borrowingstotaled $3,594,000, and $2,178,000 of debt borrowings resulted from direct bankfinancing of a purchase of a real estate parcel which is reflected as anon-cash financing activity.

 

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

 

In February 2008, Barnwell declared a cashdividend of $0.05 per share payable March 17, 2008 to stockholders of recordon March 3, 2008.

 

In May 2008, Barnwell declared a cash dividend of$0.05 per share payable June 16, 2008 to stockholders of record on June 2,2008.

 

In August 2008, Barnwell declared a cash dividendof $0.075 per share, payable September 22, 2008, to stockholders of recordon September 8, 2008.

 

In December 2005, Barnwell’s Board of Directorsauthorized the purchase of up to 250,000 shares of its common stock in the openmarket or in privately negotiated transactions. On September 20, 2007, the Board of Directors authorized a stockrepurchase program in the open market of up to 150,000 shares of these 250,000shares during the period commencing on September 24, 2007 and ending on March 24,2008.  During the year ended September 30,2007, Barnwell repurchased 10,000 shares for an aggregate purchase price of$155,000, or approximately $15.50 per share, pursuant to the plan.  From October 1, 2007 to March 24,2008, Barnwell repurchased 106,500 shares of its common stock for $1,597,000,or approximately $15.00 per share.  Ofthese amounts, 71,500 shares were purchased for $1,063,000, or approximately$14.87 per share, on the open market under the September 20, 2007authorization, and 35,000 shares were purchased for $15.25 per share, theclosing market price on the date of the transaction, or approximately $534,000,in a privately negotiated transaction with an officer/director of Barnwell.

 

In August 2008, theBoard of Directors authorized the Company to acquire in the open market, fromtime-to-time commencing on August 18, 2008 and ending on December 31,2008, and in accordance with applicable laws, rules and regulations, up to150,000 shares of the Company’s common stock. From August 18, 2008 to September 30, 2008, Barnwellrepurchased 26,600 shares of its common stock for $295,000, or approximately$11.10 per share.  As of September 30,2008, there were 123,400 shares available for repurchase under the August 2008authorization.

 

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At September 30, 2008, Barnwell had $13,618,000in cash and cash equivalents and approximately $8,653,000 of available creditunder its credit facilities.

 

Barnwell believes its current cash balances, futurecash flows from operations, land investment segment proceeds from the sale ofdevelopment rights and percentage of sales payments, and available credit willbe sufficient to fund its estimated capital expenditures and operations for thenext 12 months, fund scheduled debt repayments and interest, and settleincentive compensation liabilities in cash if necessary.  However, oil and natural gas prices have beenhistorically volatile and the timing and amount of land investment segmentpercentage of sales proceeds are unpredictable, sporadic, and not underBarnwell’s control.  Development rightsproceeds, on the other hand, are scheduled but there is no assurance thatfuture monies will be received.  Ifestimated cash inflows do not occur on a timely basis or are less than currentexpectations, and/or if Barnwell’s Canadian revolving credit facility isreduced below the current level of borrowings under the facility after the April 2009review or is reduced because of significant decreases in the currency exchangerate, or if the real estate revolving credit facility’s loan advance limitationis reduced below borrowed amounts as a result of a decrease in appraised valuesof the underlying security, Barnwell may be required to reduce oil and naturalgas capital expenditures and other expenditures, possibly significantly, andseek alternative sources of financing or liquidate investments and/or operatingassets to make any required cash outflows.

 

Barnwell anticipates the two turnkey homes currentlybeing built will be completed within the next six months.  The real estate revolving credit facilitypertaining to the two turnkey homes and two lots held for investment is due on December 17,2010.  If Barnwell is unable to sell thehomes and lots held for investment within a reasonable timeframe, Barnwell willbe required to refinance the loan or seek alternative financing, or Barnwellmay be required to reduce oil and natural gas capital expenditures to make anyrequired cash outflows.  In addition,Barnwell will have cash outflows such as interest and other holding costs untilthe homes and lots are sold.

 

Barnwell estimates that itwill make approximately $400,000 in contributions to the pension plan duringfiscal 2009.  Subsequent to September 30,2008, the pension plan’s assets declined approximately $450,000 in value.

 

*ResidentialReal Estate Capitalized Costs*

 

Construction of the two residences being developed forresale commenced in January 2008. Capitalized expenditures related to construction of the two residences,including accrued construction costs and capitalized interest, totaled$3,867,000 for the year ended September 30, 2008.

 

In January 2008, Kaupulehu 2007 acquired a fourthresidential lot and borrowed $2,178,000 under its credit facility to financethe balance of the purchase price of the lot. Kaupulehu 2007 intends to hold this lot for investment.  Barnwell believes proceeds from the futuresale of the homes and lots held for investment would be sufficient to repay thebalance of related loan borrowings as of the date of this filing.

 

As of the date of thefiling, framing and roofing work have been completed for both homes, allowingplumbing, electrical, air conditioning and audio/video work to proceed.  Plumbing and electrical work weresubstantially completed in mid-November. A 6-foot rock wall separating the two residences is nearly complete andthe construction of rock walls separating these lots from other 

 

59

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adjoininglots is underway.  We are currentlyproceeding with stucco work on the exteriors, and interior work is beginning onthe installation of drywall, windows and doors.

 

Landscaping work is alsomoving forward, which include exterior ponds which were poured and stripped atthe end of September 2008 and 35 coconut palms which have been planted onthe two lots.  Each home has a differentfloor plan which, along with the planned lush, tropical landscaping, will giveeach home a distinctive character. Furnishings for the homes are in the process of being purchased.  Each home will be uniquely decorated toproject the relaxed Big Island lifestyle.

 

*Oil andNatural Gas Capital Expenditures*

 

Barnwell’s oil and natural gas capital expenditures,including accrued capital expenditures, increased $3,498,000 (25%) from$14,164,000 in fiscal 2007 to $17,662,000 in fiscal 2008.  During the year ended September 30,2008, Barnwell participated in drilling 32 gross (7.8 net) wells, of which 29gross (6.9 net) wells appear to be successful or are currently being evaluatedand 3 gross (0.9 net) wells were not successful.  During fiscal 2008, Barnwell replaced 81% ofoil production (including natural gas liquids and including revisions ofprevious estimates) and 78% of natural gas production (including revisions ofprevious estimates).  During fiscal 2008,Barnwell replaced 47% of oil production (including natural gas liquids andexcluding revisions of previous estimates) and 45% of natural gas production(excluding revisions of previous estimates). Of these 32 gross wells in fiscal 2008, Barnwell initiated 12 gross (4.9net) wells.  The term “gross” refers tothe total number of wells in which Barnwell owns an interest, and “net” refersto Barnwell’s aggregate interest therein. For example, a 50% interest in a well represents 1 gross well, but 0.5net well.  The gross figure includesinterests owned of record by Barnwell and, in addition, the portion owned byothers.  Of the $17,662,000 total oil andnatural gas properties investments for fiscal 2008, $518,000 (3%) was foracquisition of oil and natural gas leases and lease rentals, $1,451,000 (8%)was for geological and geophysical costs, $8,852,000 (50%) was for intangibledrilling costs, and $6,841,000 (39%) was for production equipment.

 

The following table sets forth the gross and netnumbers of oil and natural gas wells Barnwell participated in drilling for eachof the last three fiscal years:

 
| ** **                              |       | **2008**  |       | 2007       |       | 2006       |   |
|-----------------------------------------|------------|-----------|------------|------------|------------|------------|--------|
|                                    |       | **Gross** | ** ** | **Net**    | ** ** | Gross      |   | Net |   | Gross |   | Net |   |
|                                    |       |      |       |       |       |       |   |   |   |   |   |   |   |   |
| Exploratory oil  and natural gas wells  | ** ** | **6**     | ** ** | ** ** | **2.6**    | ** ** |   | 2 |   |   | 0.9 |   |   | 7 |   |   | 2.4 |   |   |
|                                    |       |      |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Development oil  and natural gas wells  | ** ** | **26**    | ** ** | ** ** | **5.2**    | ** ** |   | 30 |   |   | 5.8 |   |   | 40 |   |   | 11.1 |   |   |
|                                    |       |      |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Successful oil  and natural gas wells   | ** ** | **29**    | ** ** | ** ** | **6.9**    | ** ** |   | 29 |   |   | 5.6 |   |   | 40 |   |   | 11.2 |   |   |
|                                    |       |      |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unsuccessful oil  and natural gas wells | ** ** | **3**     | ** ** | ** ** | **0.9**    | ** ** |   | 3 |   |   | 1.1 |   |   | 7 |   |   | 2.3 |   |   |

 

Barnwellestimates that oil and natural gas capital expenditures for fiscal 2009 willrange from $10,000,000 to $15,000,000. This estimated amount may increase or decrease as dictated by cash flowsand management’s assessment of the oil and natural gas environment andprospects.

 

60

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*ContractualObligations*

 

Barnwell’s credit facility at Royal Bank of Canada, aCanadian bank, was renewed in April 2008 for $20,000,000 Canadian dollars,or approximately US$18,870,000 at the September 30, 2008 exchangerate.  Borrowings under this facilitywere US$15,000,000 at September 30, 2008 and are included in long-termdebt.  At September 30, 2008,Barnwell had unused credit available under this facility of approximatelyUS$3,870,000.  The facility is availablein U.S. dollars at the London Interbank Offer Rate plus 2.0%, at U.S. primeplus 0.75%, or in Canadian dollars at Canadian prime plus 0.75%.  A standby fee of 0.35% per annum is chargedon the unused facility balance.

 

Kaupulehu 2007 has an agreement with Mr. DavidJohnston, the son of a director of Barnwell and minority interest owner incertain of Barnwell’s business ventures (see further discussion on relatedparty interests at Note 9 in the “Notes to Consolidated FinancialStatements” in Item 8), under which Mr. David Johnston serves as Kaupulehu2007’s project manager.  Kaupulehu 2007also has an agreement with an independent building contractor for home buildingservices for Kaupulehu 2007’s lots.  Asignificant provision of these agreements is that Mr. David Johnston andthe building contractor will each receive 20% of the sales profit, which iscontingent on the sale of each of the two homes under construction.

 

As discussed in Note 11 in the “Notes toConsolidated Financial Statements” in Item 8, in December 2007,Kaupulehu 2007 refinanced $6,600,000 of its borrowings under a previouslyoutstanding non-revolving credit facility with a new revolving credit facilityfrom another financial institution.  Thenew facility provides $16,000,000 of credit under a revolving line of creditfor the purpose of refinancing the acquisition of the three aforementionedparcels, financing the acquisition of a fourth parcel purchased in January 2008,and financing costs of home construction on the said four lots.  Under the terms of the facility, financingfor home construction is limited to a maximum of two unsold homes underconstruction at any given time.  At September 30,2008, Barnwell had unused credit available under this facility of approximately$4,783,000.

 

**ITEM 7A.****                                           ****QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Disclosure is not required as Barnwell qualifies as asmaller reporting company.

 

61

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**ITEM 8.                  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

 

**Report of Independent Registered Public Accounting Firm**

 

 

The Board of DirectorsBarnwell Industries, Inc.:

 

Wehave audited the accompanying consolidated balance sheets of BarnwellIndustries, Inc. and subsidiaries as of September 30, 2008 and 2007,and the related consolidated statements of earnings, stockholders’ equity andcomprehensive income, and cash flows for each of the years in the three-yearperiod then ended.  These consolidatedfinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

Weconducted our audits in accordance with standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Barnwell Industries, Inc.and subsidiaries as of September 30, 2008 and 2007, and the results oftheir operations and their cash flows for each of the years in the three-yearperiod then ended in conformity with U.S. generally accepted accountingprinciples.

 

 

/s/ KPMG LLP

 

Honolulu, Hawaii

December 18, 2008

 

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BARNWELLINDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

 
|                                                                                      |       | September 30, |       |
|-------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                |       | **2008**           |       | 2007 |   |
| ASSETS                                                                                    |       |               |       |   |   |
| CURRENT ASSETS:                                                                           |       |               |       |   |   |
| Cash and cash  equivalents                                                                | ** ** | ** **         | **$**      | **13,618,000** | ** ** |   |   | $ | 10,107,000 |   |   |
| Accounts  receivable, net of allowance for doubtful accounts of:                          |       |               |       |   |   |   |   |   |   |   |   |
| $1,078,000 at  September 30, 2008 and $20,000 at September 30, 2007             | ** ** | ** **         | ** ** | **7,524,000** | ** ** |   |   |   | 7,131,000 |   |   |
| Deferred income  taxes                                                                    | ** ** | ** **         | ** ** | **2,134,000** | ** ** |   |   |   | 2,171,000 |   |   |
| Current taxes  receivable                                                                 | ** ** | ** **         | ** ** | **975,000** | ** ** |   |   |   | 1,040,000 |   |   |
| Other current  assets                                                                     | ** ** | ** **         | ** ** | **1,411,000** | ** ** |   |   |   | 1,030,000 |   |   |
| TOTAL CURRENT  ASSETS                                                                     | ** ** | ** **         | ** ** | **25,662,000** | ** ** |   |   |   | 21,479,000 |   |   |
| DEPOSITS ON  RESIDENTIAL PARCELS                                                          | ** ** | ** **         | ** ** | **200,000** | ** ** |   |   |   | 800,000 |   |   |
| RESIDENTIAL LOTS  UNDER DEVELOPMENT                                                       | ** ** | ** **         | ** ** | **8,876,000** | ** ** |   |   |   | 5,009,000 |   |   |
| INVESTMENT IN  RESIDENTIAL PARCELS                                                        | ** ** | ** **         | ** ** | **4,708,000** | ** ** |   |   |   | 2,383,000 |   |   |
| INVESTMENT IN  JOINT VENTURES                                                             | ** ** | ** **         | ** ** | **2,776,000** | ** ** |   |   |   | 2,765,000 |   |   |
| INVESTMENT IN  LAND INTERESTS                                                             | ** ** | ** **         | ** ** | **1,450,000** | ** ** |   |   |   | 1,450,000 |   |   |
| PROPERTY AND  EQUIPMENT, NET                                                              | ** ** | ** **         | ** ** | **88,690,000** | ** ** |   |   |   | 90,679,000 |   |   |
| TOTAL ASSETS                                                                              | ** ** | ** **         | **$**      | **132,362,000** | ** ** |   |   | $ | 124,565,000 |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                |       |               |       |   |   |   |   |   |   |   |   |
| CURRENT  LIABILITIES:                                                                     |       |               |       |   |   |   |   |   |   |   |   |
| Accounts payable                                                                          | ** ** | ** **         | **$**      | **6,516,000** | ** ** |   |   | $ | 5,983,000 |   |   |
| Accrued capital  expenditures                                                             | ** ** | ** **         | ** ** | **3,071,000** | ** ** |   |   |   | 2,774,000 |   |   |
| Accrued stock  appreciation rights                                                        | ** ** | ** **         | ** ** | **785,000** | ** ** |   |   |   | 1,672,000 |   |   |
| Accrued  incentive plan costs                                                             | ** ** | ** **         | ** ** | **1,587,000** | ** ** |   |   |   | 2,029,000 |   |   |
| Other accrued  compensation costs                                                         | ** ** | ** **         | ** ** | **3,481,000** | ** ** |   |   |   | 3,228,000 |   |   |
| Drilling  advances                                                                        | ** ** | ** **         | ** ** | **403,000** | ** ** |   |   |   | 1,407,000 |   |   |
| Payable to joint  interest owners                                                         | ** ** | ** **         | ** ** | **1,581,000** | ** ** |   |   |   | 1,123,000 |   |   |
| Income taxes  payable                                                                     | ** ** | ** **         | ** ** | **3,506,000** | ** ** |   |   |   |     - |   |   |
| Current portion  of long-term debt                                                        | ** ** | ** **         | ** ** | **    -** | ** ** |   |   |   | 354,000 |   |   |
| Other current  liabilities                                                                | ** ** | ** **         | ** ** | **1,903,000** | ** ** |   |   |   | 2,160,000 |   |   |
| TOTAL CURRENT  LIABILITIES                                                                | ** ** | ** **         | ** ** | **22,833,000** | ** ** |   |   |   | 20,730,000 |   |   |
| LONG-TERM DEBT                                                                            | ** ** | ** **         | ** ** | **26,217,000** | ** ** |   |   |   | 22,104,000 |   |   |
| LIABILITY FOR  RETIREMENT BENEFITS                                                        | ** ** | ** **         | ** ** | **2,041,000** | ** ** |   |   |   | 2,387,000 |   |   |
| ASSET RETIREMENT  OBLIGATION                                                              | ** ** | ** **         | ** ** | **4,565,000** | ** ** |   |   |   | 4,734,000 |   |   |
| DEFERRED INCOME  TAXES                                                                    | ** ** | ** **         | ** ** | **14,375,000** | ** ** |   |   |   | 19,299,000 |   |   |
| MINORITY  INTEREST                                                                        | ** ** | ** **         | ** ** | **1,067,000** | ** ** |   |   |   | 707,000 |   |   |
| COMMITMENTS AND  CONTINGENCIES                                                            |       |               |       |   |   |   |   |   |   |   |   |
| STOCKHOLDERS’  EQUITY:                                                               |       |               |       |   |   |   |   |   |   |   |   |
| Common stock,  par value $0.50 per share; Authorized, 20,000,000 shares:                  |       |               |       |   |   |   |   |   |   |   |   |
| 8,403,060 issued  at September 30, 2008, 8,280,060 issued at September 30, 2007 | ** ** | ** **         | ** ** | **4,202,000** | ** ** |   |   |   | 4,140,000 |   |   |
| Additional  paid-in capital                                                               | ** ** | ** **         | ** ** | **1,222,000** | ** ** |   |   |   | 738,000 |   |   |
| Retained  earnings                                                                        | ** ** | ** **         | ** ** | **54,862,000** | ** ** |   |   |   | 44,988,000 |   |   |
| Accumulated  other comprehensive income, net                                              | ** ** | ** **         | ** ** | **3,143,000** | ** ** |   |   |   | 4,933,000 |   |   |
| Treasury stock,  at cost:                                                                 |       |               |       |   |   |   |   |   |   |   |   |
| 150,200 shares  at September 30, 2008, 11,900 shares at September 30, 2007      | ** ** | ** **         | ** ** | **(2,165,000** | **)** |   |   |   | (195,000 | ) |   |
| TOTAL  STOCKHOLDERS’ EQUITY                                                          | ** ** | ** **         | ** ** | **61,264,000** | ** ** |   |   |   | 54,604,000 |   |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                          | ** ** | ** **         | **$**      | **132,362,000** | ** ** |   |   | $ | 124,565,000 |   |   |

 

See Notes toConsolidated Financial Statements

 

63

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF EARNINGS

 
|                                                                          |       | Year ended  September 30, |       |
|-------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                    |       | **2008**                       |       | 2007 |   | 2006 |   |
| Revenues:                                                                     |       |                           |       |   |   |   |   |
| Oil and natural  gas                                                          | ** ** | ** **                     | **$**      | **49,441,000** | ** ** |   |   | $ | 34,599,000 |   |   |   | $ | 37,904,000 |   |   |
| Contract drilling                                                             | ** ** | ** **                     | ** ** | **9,787,000** | ** ** |   |   |   | 5,993,000 |   |   |   |   | 5,866,000 |   |   |
| Sale of interest  in leasehold land, net                                      | ** ** | ** **                     | ** ** | **446,000** | ** ** |   |   |   | 3,370,000 |   |   |   |   | 9,637,000 |   |   |
| Sale of  development rights, net                                              | ** ** | ** **                     | ** ** | **4,161,000** | ** ** |   |   |   | 2,292,000 |   |   |   |   | 2,702,000 |   |   |
| Gas processing  and other                                                     | ** ** | ** **                     | ** ** | **1,809,000** | ** ** |   |   |   | 1,182,000 |   |   |   |   | 1,151,000 |   |   |
| Gain on sale of  drill rig                                                    | ** ** | ** **                     | ** ** | **    -** | ** ** |   |   |   | **    **- |   |   |   |   | 700,000 |   |   |
|                                                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                    |       |                           |       | **65,644,000** |   |   |   |   | 47,436,000 |   |   |   |   | 57,960,000 |   |   |
|                                                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Costs and  expenses:                                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil and natural  gas operating                                                | ** ** | ** **                     | ** ** | **10,581,000** | ** ** |   |   |   | 10,203,000 |   |   |   |   | 8,217,000 |   |   |
| Contract  drilling operating                                                  | ** ** | ** **                     | ** ** | **7,684,000** | ** ** |   |   |   | 4,939,000 |   |   |   |   | 4,709,000 |   |   |
| General and  administrative                                                   | ** ** | ** **                     | ** ** | **12,497,000** | ** ** |   |   |   | 10,457,000 |   |   |   |   | 11,644,000 |   |   |
| Bad debt expense                                                              | ** ** | ** **                     | ** ** | **1,091,000** | ** ** |   |   |   |     - |   |   |   |   | - |   |   |
| Depreciation,  depletion and amortization                                     | ** ** | ** **                     | ** ** | **14,726,000** | ** ** |   |   |   | 13,174,000 |   |   |   |   | 11,577,000 |   |   |
| Interest  expense, net                                                        | ** ** | ** **                     | ** ** | **1,043,000** | ** ** |   |   |   | 999,000 |   |   |   |   | 833,000 |   |   |
| Minority  interest in earnings                                                | ** ** | ** **                     | ** ** | **1,006,000** | ** ** |   |   |   | 988,000 |   |   |   |   | 2,783,000 |   |   |
|                                                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                    |       |                           |       | **48,628,000** |   |   |   |   | 40,760,000 |   |   |   |   | 39,763,000 |   |   |
|                                                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings before  income taxes and equity in earnings of real estate affiliate | ** ** | ** **                     | ** ** | **17,016,000** | ** ** |   |   |   | 6,676,000 |   |   |   |   | 18,197,000 |   |   |
|                                                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax  provision                                                         | ** ** | ** **                     | ** ** | **(5,284,000** | **)** |   |   |   | (3,160,000 | ) |   |   |   | (4,455,000 | ) |   |
|                                                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity in  earnings of real estate affiliate, net of tax                      | ** ** | ** **                     | ** ** | **   -** | ** ** |   |   |   | **   **- |   |   |   |   | 895,000 |   |   |
|                                                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NET EARNINGS                                                                  | ** ** | ** **                     | **$**      | **11,732,000** | ** ** |   |   | $ | 3,516,000 |   |   |   | $ | 14,637,000 |   |   |
|                                                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BASIC NET  EARNINGS PER COMMON SHARE                                          | ** ** | ** **                     | **$**      | **1.42** | ** ** |   |   | $ | 0.43 |   |   |   | $ | 1.79 |   |   |
| DILUTED NET  EARNINGS PER COMMON SHARE                                        | ** ** | ** **                     | **$**      | **1.39** | ** ** |   |   | $ | 0.41 |   |   |   | $ | 1.68 |   |   |
|                                                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| WEIGHTED-AVERAGE  NUMBER OF COMMON SHARES OUTSTANDING:                        |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BASIC                                                                         | ** ** | ** **                     | ** ** | **8,248,581** | ** ** |   |   |   | 8,208,189 |   |   |   |   | 8,169,060 |   |   |
| DILUTED                                                                       | ** ** | ** **                     | ** ** | **8,438,914** | ** ** |   |   |   | 8,608,759 |   |   |   |   | 8,698,405 |   |   |

 

See Notes to Consolidated Financial Statements

 

64

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BARNWELLINDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
|                                                                                 |       | Year ended  September 30, |       |
|--------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                           |       | **2008**                       |       | 2007 |   | 2006 |   |
| Cash flows from  operating activities:                                               |       |                           |       |   |   |   |   |
| Net earnings                                                                         | ** ** | ** **                     | **$**      | **11,732,000** | ** ** | ** ** |   | $ | 3,516,000 |   |   |   | $ | 14,637,000 |   |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                           |       |   |   | ** ** |   |   |   |   |   |   |   |   |   |   |
| Depreciation,  depletion and amortization                                            | ** ** | ** **                     | ** ** | **14,726,000** | ** ** | ** ** |   |   | 13,174,000 |   |   |   |   | 11,577,000 |   |   |
| Bad debt expense                                                                     | ** ** | ** **                     | ** ** | **1,091,000** | ** ** | ** ** |   |   |   - |   |   |   |   |   - |   |   |
| Minority  interest in earnings                                                       | ** ** | ** **                     | ** ** | **1,006,000** | ** ** | ** ** |   |   | 988,000 |   |   |   |   | 2,783,000 |   |   |
| Retirement benefits  expense                                                         | ** ** | ** **                     | ** ** | **528,000** | ** ** | ** ** |   |   | 511,000 |   |   |   |   | 394,000 |   |   |
| Accretion of  asset retirement obligation                                            | ** ** | ** **                     | ** ** | **314,000** | ** ** | ** ** |   |   | 232,000 |   |   |   |   | 199,000 |   |   |
| Gain on sale of  drill rig                                                           | ** ** | ** **                     | ** ** | **   -** | ** ** | ** ** |   |   |    - |   |   |   |   | (700,000 | ) |   |
| Asset retirement  obligation payments                                                | ** ** | ** **                     | ** ** | **(48,000** | **)** | ** ** |   |   | (42,000 | ) |   |   |   | (20,000 | ) |   |
| Share-based  compensation (benefit) expense                                          | ** ** | ** **                     | ** ** | **(402,000** | **)** | ** ** |   |   | 462,000 |   |   |   |   | 583,000 |   |   |
| Retirement  benefits contribution                                                    | ** ** | ** **                     | ** ** | **(456,000** | **)** | ** ** |   |   | (250,000 | ) |   |   |   | (1,050,000 | ) |   |
| Share-based  compensation payments                                                   | ** ** | ** **                     | ** ** | **(458,000** | **)** | ** ** |   |   | (2,024,000 | ) |   |   |   | (1,649,000 | ) |   |
| Deferred income  tax (benefit) expense                                               | ** ** | ** **                     | ** ** | **(2,404,000** | **)** | ** ** |   |   | 1,456,000 |   |   |   |   | 1,162,000 |   |   |
| Additions to  residential lots under development                                     | ** ** | ** **                     | ** ** | **(3,277,000** | **)** | ** ** |   |   | (4,868,000 | ) |   |   |   |    - |   |   |
| Sale of interest  in leasehold land, net                                             | ** ** | ** **                     | ** ** | **(446,000** | **)** | ** ** |   |   | (3,370,000 | ) |   |   |   | (9,637,000 | ) |   |
| Sale of  development rights, net                                                     | ** ** | ** **                     | ** ** | **(4,161,000** | **)** | ** ** |   |   | (2,292,000 | ) |   |   |   | (2,702,000 | ) |   |
| Increase from  changes in current assets and liabilities                             | ** ** | ** **                     | ** ** | **695,000** | ** ** | ** ** |   |   | 1,299,000 |   |   |   |   | 2,552,000 |   |   |
|                                                                                 |       |                           |       |   | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Net cash  provided by operating activities                                           | ** ** | ** **                     | ** ** | **18,440,000** | ** ** | ** ** |   |   | 8,792,000 |   |   |   |   | 18,129,000 |   |   |
|                                                                                 |       |                           |       |   | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Cash flows from  investing activities:                                               |       |                           |       |   | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Proceeds from  sale of development rights, net of fees paid                          | ** ** | ** **                     | ** ** | **4,161,000** | ** ** | ** ** |   |   | 2,292,000 |   |   |   |   | 2,702,000 |   |   |
| Proceeds from  sale of interest in leasehold land, net of fees paid                  | ** ** | ** **                     | ** ** | **1,111,000** | ** ** | ** ** |   |   | 3,370,000 |   |   |   |   | 12,620,000 |   |   |
| Refund of  deposits on residential parcels                                           | ** ** | ** **                     | ** ** | **400,000** | ** ** | ** ** |   |   |    - |   |   |   |   |    - |   |   |
| Proceeds from  gas over bitumen royalty adjustments                                  | ** ** | ** **                     | ** ** | **259,000** | ** ** | ** ** |   |   | 248,000 |   |   |   |   | 347,000 |   |   |
| Return of  capital distribution from joint venture                                   | ** ** | ** **                     | ** ** | **  ** **-** | ** ** | ** ** |   |   | 525,000 |   |   |   |   |    - |   |   |
| Proceeds from  matured certificates of deposit                                       | ** ** | ** **                     | ** ** | **  ** **-** | ** ** | ** ** |   |   |    - |   |   |   |   | 1,700,000 |   |   |
| Proceeds from  sale of drill rig                                                     | ** ** | ** **                     | ** ** | **  ** **-** | ** ** | ** ** |   |   |    - |   |   |   |   | 712,000 |   |   |
| Deposits on  residential parcels                                                     | ** ** | ** **                     | ** ** | **  ** **-** | ** ** | ** ** |   |   | (800,000 | ) |   |   |   |    - |   |   |
| Purchase of lot  acquisition rights                                                  | ** ** | ** **                     | ** ** | **  ** **-** | ** ** | ** ** |   |   | (1,400,000 | ) |   |   |   |    - |   |   |
| Investment in  joint ventures                                                        | ** ** | ** **                     | ** ** | **(11,000** | **)** | ** ** |   |   | (3,290,000 | ) |   |   |   |    - |   |   |
| Additions to  investment in residential parcels                                      | ** ** | ** **                     | ** ** | **(279,000** | **)** | ** ** |   |   | (2,383,000 | ) |   |   |   |    - |   |   |
| Capital  expenditures                                                                | ** ** | ** **                     | ** ** | **(17,678,000** | **)** | ** ** |   |   | (16,597,000 | ) |   |   |   | (25,385,000 | ) |   |
|                                                                                 |       |                           |       |   | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Net cash used in  investing activities                                               | ** ** | ** **                     | ** ** | **(12,037,000** | **)** | ** ** |   |   | (18,035,000 | ) |   |   |   | (7,304,000 | ) |   |
|                                                                                 |       |                           |       |   | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Cash flows from  financing activities:                                               |       |                           |       |   | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Proceeds from  long-term debt borrowings                                             | ** ** | ** **                     | ** ** | **3,594,000** | ** ** | ** ** |   |   | 9,486,000 |   |   |   |   |    - |   |   |
| Proceeds from  exercise of stock options                                             | ** ** | ** **                     | ** ** | **241,000** | ** ** | ** ** |   |   | 329,000 |   |   |   |   |    - |   |   |
| Contributions  from minority interest partner                                        | ** ** | ** **                     | ** ** | **4,000** | ** ** | ** ** |   |   | 751,000 |   |   |   |   |    - |   |   |
| Payment of loan  commitment fee                                                      | ** ** | ** **                     | ** ** | **(100,000** | **)** | ** ** |   |   |    - |   |   |   |   |    - |   |   |
| Distributions to  minority interest partners                                         | ** ** | ** **                     | ** ** | **(1,033,000** | **)** | ** ** |   |   | (1,032,000 | ) |   |   |   | (3,095,000 | ) |   |
| Repayments of  long-term debt                                                        | ** ** | ** **                     | ** ** | **(1,460,000** | **)** | ** ** |   |   | (52,000 | ) |   |   |   |    - |   |   |
| Payment of  dividends                                                                | ** ** | ** **                     | ** ** | **(1,858,000** | **)** | ** ** |   |   | (2,052,000 | ) |   |   |   | (1,430,000 | ) |   |
| Purchases of  common stock for treasury                                              | ** ** | ** **                     | ** ** | **(1,892,000** | **)** | ** ** |   |   | (155,000 | ) |   |   |   |    - |   |   |
|                                                                                 |       |                           |       |   | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Net cash (used  in) provided by financing activities                                 | ** ** | ** **                     | ** ** | **(2,504,000** | **)** | ** ** |   |   | 7,275,000 |   |   |   |   | (4,525,000 | ) |   |
|                                                                                 |       |                           |       |   | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                   | ** ** | ** **                     | ** ** | **(388,000** | **)** | ** ** |   |   | 103,000 |   |   |   |   | 180,000 |   |   |
|                                                                                 |       |                           |       |   | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                                | ** ** | ** **                     | ** ** | **3,511,000** | ** ** | ** ** |   |   | (1,865,000 | ) |   |   |   | 6,480,000 |   |   |
|                                                                                 |       |                           |       |   | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents at beginning of year                                 | ** ** | ** **                     | ** ** | **10,107,000** | ** ** | ** ** |   |   | 11,972,000 |   |   |   |   | 5,492,000 |   |   |
|                                                                                 |       |                           |       |   | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents at end of year                                            | ** ** | ** **                     | **$**      | **13,618,000** | ** ** | ** ** |   | $ | 10,107,000 |   |   |   | $ | 11,972,000 |   |   |

 

See Notes to Consolidated Financial Statements

 

65

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY AND COMPREHENSIVE INCOME

Years ended September 30, 2006, 2007 and2008

 
|                                                               |   |        |      |   |   |       |   |          |   |     |   | 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 next page)

 

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY AND COMPREHENSIVE INCOME

Years ended September 30, 2006, 2007 and2008

 

(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 |   |   |

 

(continued on next page)

 

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY AND COMPREHENSIVE INCOME

Years ended September 30, 2006, 2007 and2008

 

(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, 2007**                                                                                                                                    |       |        |       | 8,268,160     |       |       |       | $             | 4,140,000     |       |       |          | $      | 738,000       |       |               |       |   |   |   |   |   |  $ | 44,988,000 |   |   |   | $ | 4,933,000 |   |   |   | $ | (195,000 | ) |   |   | $ | 54,604,000 |   |   |
|                                                                                                                                                                      |       |        |       |          |       |       |       |          |          |       |       |          |   |          |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of stock options, 123,000 shares net of 5,200 shares  tendered and placed in treasury                                                                            |       |        |       | 117,800       |       |       |       |          | 62,000        |       |       |          |   | 257,000       |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (78,000 | ) |   |   |   | 241,000 |   |   |
|                                                                                                                                                                      |       |        |       |          |       |       |       |          |          |       |       |          |   |          |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share-based compensation costs                                                                                                                                            |       |        |       |          |       |       |       |          |          |       |       |          |   | 35,000        |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 35,000 |   |   |
|                                                                                                                                                                      |       |        |       |          |       |       |       |          |          |       |       |          |   |          |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tax benefit from employee stock option transactions                                                                                                                       |       |        |       |          |       |       |       |          |          |       |       |          |   | 192,000       |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 192,000 |   |   |
|                                                                                                                                                                      |       |        |       |          |       |       |       |          |          |       |       |          |   |          |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Purchases of 133,100 common shares for treasury                                                                                                                           |       |        |       | (133,100      | )          |       |       |          |          |       |       |          |   |          |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,892,000 | ) |   |   |   | (1,892,000 | ) |   |
|                                                                                                                                                                      |       |        |       |          |       |       |       |          |          |       |       |          |   |          |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends declared, $0.23 per share                                                                                                                                       |       |        |       |          |       |       |       |          |          |       |       |          |   |          |       |               |       |   |   |   |   |   |   | (1,858,000 | ) |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,858,000 | ) |   |
|                                                                                                                                                                      |       |        |       |          |       |       |       |          |          |       |       |          |   |          |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income:                                                                                                                                                     |       |        |       |          |       |       |       |          |          |       |       |          |   |          |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                                                                                                                                              |       |        |       |          |       |       |       |          |          |       |       |          |   |          |       |               |       | $ | 11,732,000 |   |   |   |   | 11,732,000 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 11,732,000 |   |   |
| Other comprehensive loss –                                                                                                                                           |       |        |       |          |       |       |       |          |          |       |       |          |   |          |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| foreign  currency translation adjustments, net of $1,748,000 tax benefit                                                                                                  |       |        |       |          |       |       |       |          |          |       |       |          |   |          |       |               |       |   | (2,066,000 | ) |   |   |   |   |   |   |   |   | (2,066,000 | ) |   |   |   |   |   |   |   |   | (2,066,000 | ) |   |
| Other comprehensive income – retirement plans – amortization of  accumulated other comprehensive loss into net periodic benefit cost, net of  $143,000 of taxes |       |        |       |          |       |       |       |          |          |       |       |          |   |          |       |               |       |   | 276,000 |   |   |   |   |   |   |   |   |   | 276,000 |   |   |   |   |   |   |   |   |   | 276,000 |   |   |
| Total comprehensive income                                                                                                                                                | ** ** | ** **  | ** ** | ** **    | ** ** |       |       |          |          |       | ** ** |          |   |          |       |               |       | **$** | **9,942,000** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                      |       |        |       |          |       |       |       |          |          |       |       |          |   |          |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **At September 30, 2008**                                                                                                                                            | ** ** | ** **  | ** ** | **8,252,860** | ** ** | ** ** | ** ** | **$**         | **4,202,000** | ** ** | ** ** | ** **    | **$**  | **1,222,000** | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** $** | **54,862,000** |   |   |   | **$** | **3,143,000** |   |   |   | **$** | **(2,165,000** | **)** |   |   | **$** | **61,264,000** |   |   |

 

See Notes to ConsolidatedFinancial Statements

 

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**BARNWELLINDUSTRIES, INC.**

**ANDSUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED SEPTEMBER 30, 2008, 2007 AND 2006**

 

**1.****             DESCRIPTION OF THE REPORTING ENTITY ANDBUSINESS**

 

The consolidated financialstatements include the accounts of Barnwell Industries, Inc. and allmajority-owned subsidiaries, including an indirect 77.6%-owned land investmentgeneral partnership and two 80%-owned joint ventures, (collectively referred toherein as “Barnwell,” “we,” “our,” “us,” or the “Company”).  All significant intercompany accounts andtransactions have been eliminated. Investments in companies over which Barnwell has the ability to exercisesignificant influence, but not control, are accounted for using the equitymethod.

 

During its last three fiscalyears, Barnwell was engaged in the following lines of business:1) exploring for, developing, producing and selling oil and natural gas inCanada, 2) investing in leasehold land and other real estate interests inHawaii, 3) acquiring property for investment and development of homes forsale in Hawaii (established January 2007), and 4) drilling wells andinstalling and repairing water pumping systems in Hawaii.  Barnwell’s oil and natural gas activitiescomprise its largest business segment. Approximately 75% of Barnwell’s revenues and 96% of Barnwell’s capitalexpenditures for the fiscal year ended September 30, 2008 wereattributable to its oil and natural gas activities.  Barnwell’s land investment segment revenuesaccounted for 7% of fiscal 2008 revenues; Barnwell’s contract drillingactivities accounted for 15% of fiscal 2008 revenues; and Barnwell’sresidential real estate segment and other revenues comprised 3% of fiscal 2008revenues.

 

**2.****             SIGNIFICANT ACCOUNTING POLICIES**

 

*Cash and Cash Equivalents*

 

Cash and cash equivalentsinclude cash on hand, demand deposits and short-term investments with originalmaturities of three months or less.

 

*Accounts Receivable*

 

Accounts receivable arerecorded at the invoiced amount and do not bear interest.  The allowance for doubtful accounts isBarnwell’s best estimate of the amount of probable credit losses in Barnwell’sexisting accounts receivable and is based on historical write-off experienceand the application of the specific identification method.  Account balances are charged off against theallowance after all means of collection have been exhausted and the potentialfor recovery is considered remote. Barnwell does not have any off-balance sheet credit exposure related to itscustomers.

 

*Oil and Natural Gas Properties*

 

Barnwell uses the full costmethod of accounting under which all costs incurred in the acquisition,exploration and development of oil and natural gas reserves, including costsrelated to 

 

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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 natural gas relateddeferred income taxes, on a country-by-country basis, equals the sum of1) the discounted present value (at 10%), using prices as of the end ofeach reporting period on a constant basis, of Barnwell’s estimated future netcash flows from estimated production of proved oil and natural gas reserves asdetermined by independent petroleum engineers, less estimated futureexpenditures to be incurred in developing and producing the proved reserves butexcluding future cash outflows associated with settling asset retirementobligations accrued on the balance sheet; plus 2) the cost of majordevelopment projects and unproven properties not subject to depletion, if any;plus 3) the lower of cost or estimated fair value of unproven propertiesincluded in costs subject to depletion; 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 U.S. Securities and ExchangeCommission (“SEC”) Staff Accounting Bulletin (“SAB”) Topic 12D.  Depletion is computed using theunits-of-production method whereby capitalized costs, net of salvage values,plus estimated future costs to develop proved reserves and satisfy assetretirement obligations, are amortized over the total estimated proved reserveson a country-by-country basis. Investments in major development projects are not depleted until eitherproved reserves are associated with the projects or impairment has beendetermined.  At September 30, 2008and 2007, Barnwell had no investments in major oil and natural gas developmentprojects that were not being depleted. General and administrative costs related to oil and natural gasoperations are expensed as incurred. Proceeds from the disposition of minor producing oil and natural gasproperties are credited to the cost of oil and natural gas properties.  Gains or losses are recognized on thedisposition of significant oil and natural gas properties.

 

Revenues associated with thesale of oil, natural gas and natural gas liquids are recognized in theConsolidated Statements of Earnings when the oil, natural gas and natural gasliquids are delivered and title has passed to the customer.

 

Barnwell’s sales reflect itsgross working interest share.  Barnwell’sproduction is delivered and sold at the plant gate and Barnwell does not holdany transportation contracts with pipelines. Additionally, Barnwell does not have contractual obligations related tothe physical amount of natural gas to be delivered nor does Barnwell havenatural gas imbalances related to natural gas-balancing arrangements with itspartners.

 

*Investment in Land Interests*

 

Barnwell accounts for salesof development rights under option and the Increment I andIncrement II leasehold land interest sales under the full accrual method pursuantto the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 66,“Accounting for Sales of Real Estate.” Gains from such sales are recognized when the buyer’s investments areadequate to demonstrate a commitment to pay for the property, risks and rewardsof ownership have been transferred to the buyer, and Barnwell does not have asubstantial continuing involvement with the property sold.  With regard to the sales of Increment Iand Increment II leasehold land interests, in accordance with SFAS No. 66,the percentage of sales payments are contingent future profits which will berecognized when they are realized, and all costs of the sales were recognizedat the time of sale and none were deferred to future periods when anycontingent profits will be recognized. Costs incurred for the acquisition and improvement of leasehold landinterests 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 

 

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impairment whenever events or changes incircumstances indicate that the recorded investment balance may not be fullyrecoverable.

 

*Residential Lots Under Development, Investment in Residential Parcelsand Deposits on Residential Parcels*

 

Residential lots underdevelopment, investment in residential parcels 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 aspecific lot or home are assigned to that lot or home while common costsrelated to multiple lots or homes will be allocated to each in proportion totheir anticipated sales value.

 

Barnwell capitalizesinterest costs during development and construction and includes these costs incost of sales when homes are sold.

 

*Investment in Affiliate*

 

Barnwell accounts for itsinvestment in unconsolidated affiliates under the equity method when Barnwell’sownership interest is more than 20% but no more than 50% and Barnwell does notexercise direct or indirect control over the investee.  Factors that are considered in determiningwhether or not Barnwell exercises control include rights of partners regardingsignificant strategic and operational decisions.  Under the equity method, the investment iscarried at cost and Barnwell’s share of the affiliate’s earnings or loss isrecognized as earned.

 

*Contract Drilling*

 

Revenues, costs and profitsapplicable to contract drilling contracts are included in the ConsolidatedStatements of Earnings using the percentage of completion method, principallymeasured by the percentage of labor dollars incurred to date for each contractto total estimated labor dollars for each contract.  Contract losses are recognized in full in theperiod the losses are identified.  Theperformance of drilling contracts may extend over more than one year and, inthe interim periods, estimates of total contract costs and profits are used todetermine revenues and profits earned for reporting the results of contractdrilling operations.  Revisions in theestimates required by subsequent performance and final contract settlements areincluded as adjustments to the results of operations in the period suchrevisions and settlements occur. Contracts are normally less than one year in duration.

 

*Income Taxes*

 

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.

 

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A valuation allowance isprovided when it is more likely than not that some portion or all of thedeferred tax asset will not be realized. Barnwell has established a valuation allowance primarily for the U.S.tax effect of deferred Canadian taxes, accrued liabilities, bad debt allowancesand 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, that the timing of U.S. taxable income will coincide with thepayment of Canadian taxes to enable Canadian taxes to be fully deducted (orrecoverable) for U.S. tax purposes, or that Canadian deferred tax assets willprovide any incremental benefit for U.S. tax purposes over the amount ofbenefit for Canadian tax purposes.

 

Effective October 1,2007, Barnwell adopted the provisions of FASB Interpretation (“FIN”) No. 48,“Accounting for Uncertainty in Income Taxes – an interpretation of FASBStatement No. 109.”  Thisinterpretation prescribes a threshold for recognizing the financial statementeffects of a tax position when it is more likely than not, based on thetechnical merits, that the position will be sustained upon examination by ataxing authority.  Recognized taxpositions are initially and subsequently measured as the largest amount of tax benefitthat is more likely than not of being realized upon ultimate settlement with ataxing authority.  Liabilities forunrecognized tax benefits related to such tax positions are included in otherlong-term liabilities unless the tax position is expected to be settled withinthe upcoming year, in which case the liabilities are included in accruedexpenses and other current liabilities. Interest and penalties related to unrecognized tax benefits are includedin income tax expense.  The adoption ofFIN No. 48 did not have a material impact on Barnwell’s financialstatements.  See further discussion atNote 13 below.

 

*Retirement Plans*

 

Barnwell sponsors anoncontributory defined benefit pension plan covering substantially all of itsU.S. employees, with benefits based on years of service and the employee’shighest consecutive five-year average earnings. Additionally, Barnwell sponsors a Supplemental Employee Retirement Plan(“SERP”), a noncontributory supplemental retirement benefit plan which coverscertain current and former employees of Barnwell for amounts exceeding thelimits allowed under the pension plan. In December 2006, Barnwell adopted a postretirement medicalinsurance benefits plan covering certain U.S. employees.

 

Barnwell accounts for itsdefined benefit pension plan and SERP in accordance with SFAS No. 87, “Employers’Accounting for Pensions” and its postretirement medical insurance benefits planin accordance with SFAS No. 106, “Employers’ Accounting for PostretirementBenefits Other Than Pensions.”  EffectiveSeptember 30, 2007, Barnwell adopted the recognition and disclosureprovisions of SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans — an amendment of FASB Statements No. 87,88, 106, and 132(R)” for its retirement plans. SFAS No. 158 requires an employer to recognize the over-funded orunder-funded status of defined benefit pension and other postretirement plans(other than a multiemployer plan) as an asset or liability in its statement offinancial position and to recognize changes in that funded status in the yearin which the changes occur through comprehensive income.  SFAS No. 158 also requires themeasurement 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 atNote 14 below.

 

The estimation of Barnwell’sretirement plan obligations, costs and liabilities requires management toestimate the amount and timing of cash outflows for projected future payments andcash inflows for maturities and expected returns on plan assets.  These assumptions may have an effect on theamount and timing of future contributions.

 

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At the end of each year,Barnwell determines the discount rate to be used to calculate the present valueof plan liabilities and the net periodic benefit cost.  The discount rate is an estimate of thecurrent interest rate at which the retirement plan liabilities could beeffectively settled at the end of the year. In estimating this rate, Barnwell looks to rates of return onhigh-quality, fixed-income investments. The discount rate used to value the future benefit obligation as of eachyear-end is the rate used to determine the periodic benefit cost in thefollowing year.  The estimated rate ofreturn on plan assets is based on historical trends combined with long-termexpectations, the mix of plan assets and long-term inflation assumptions.  For both the discount rate and the plan assetreturn rate, a range of estimates could reasonably have been used which wouldaffect the amount of retirement plan expense and retirement plan liabilityrecorded.

 

The effects of actualresults differing from the above assumptions or revisions to actuarialassumptions could materially affect Barnwell’s financial condition and/orresults of operations.  The effects ofchanging assumptions are included in unamortized net gains and losses, whichdirectly affect accumulated other comprehensive income (loss). These unamortizedgains and losses are amortized and reclassified to income (loss) over futureperiods.

 

*Long-lived Assets*

 

Long-lived assets to be heldand used, other than oil and natural gas properties, are evaluated forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be fully recoverable.  If the future cash flows expected to resultfrom use of the asset (undiscounted and without interest charges) are less thanthe carrying amount of the asset, an impairment loss is recognized.  Such impairment loss is measured as theamount by which the carrying amount of the asset exceeds the fair value of theasset.  Long-lived assets to be disposedof are reported at the lower of the asset carrying value or fair value, lesscost to sell.

 

Drilling rigs, premises andother property and equipment are depreciated using the straight-line methodbased on estimated useful lives.

 

*Inventories*

 

Inventories are comprised ofdrilling materials and are valued at the lower of weighted-average cost ormarket value.  Inventory is included inthe Consolidated Balance Sheets as of September 30, 2008 and 2007 underthe caption “Other current assets.”

 

*Environmental*

 

Barnwell is subject toextensive environmental laws and regulations. These laws, which are constantly changing, regulate the discharge ofmaterials into the environment and maintenance of surface conditions and mayrequire Barnwell to remove or mitigate the environmental effects of thedisposal or release of petroleum or chemical substances at various sites.  Environmental expenditures are expensed orcapitalized depending on their future economic benefit.  Expenditures that relate to an existing conditioncaused by past operations and that have no future economic benefits are expensed.  Liabilities for expenditures of a noncapitalnature are recorded when environmental assessment and/or remediation isprobable, and the costs can be reasonably estimated.

 

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*Asset Retirement Obligation*

 

Barnwell accounts for assetretirement obligations in accordance with SFAS No. 143, “Accounting forAsset Retirement Obligations,” and FIN 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 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.

 

*Earnings Per Common Share*

 

In October 2005,Barnwell’s Board of Directors declared a three-for-one stock split in the formof a 200% stock dividend.  The shareswere distributed on November 14, 2005 to all stockholders of record as of October 28,2005.  All information in this Form 10-Khas been adjusted where necessary to reflect the stock split for all periodspresented.

 

Basic earnings per shareexcludes dilution and is computed by dividing net earnings by theweighted-average number of common shares outstanding for the period.  Diluted earnings per share includes thepotentially dilutive effect of outstanding common stock options.

 

Reconciliationsbetween the numerator and denominator of the basic and diluted earnings pershare computations for the years ended September 30, 2008, 2007 and 2006are as follows:

 
| ** **                                             | ** ** | September 30, 2008 | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|
| ** **                                             | ** ** | Net Earnings            |       | Shares |   | Per-Share | ** ** |
| ** **                                             | ** ** | (Numerator)                  |       | (Denominator) |   | Amount | ** ** |
| Basic earnings  per share                              | ** ** | ** **                   | **$**      | **11,732,000** | ** ** | ** ** | ** ** | **8,248,581** | ** ** | ** ** | ** ** | **$** | **1.42** | ** ** | ** ** |
| Effect of  dilutive securities - common  stock options | ** ** | ** **                   | **-**      | ** ** | ** ** | ** ** | **190,333** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Diluted earnings  per share                            | ** ** | ** **                   | **$**      | **11,732,000** | ** ** | ** ** | ** ** | **8,438,914** | ** ** | ** ** | ** ** | **$** | **1.39** | ** ** | ** ** |

 
| ** **                                             | ** ** | 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 | ** ** | ** ** |

 

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| ** **                                            | ** ** | 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 | ** ** | ** ** |

 

There were no anti-dilutiveshares for fiscal years 2008, 2007 and 2006.

 

*Share-Based Compensation*

 

Barnwell accounts for itsshare-based compensation plans in accordance with SFAS No. 123(R), “Share-BasedPayment,” and SEC SAB No. 107, “Share-Based Payment,” using the modifiedprospective method.  Under SFAS No. 123(R),share-based compensation cost is measured at fair value.  Under the modified prospective transitionmethod, compensation cost recognized in the years ended September 30,2008, 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 cumulativeeffect, net of income taxes, of the impact of adoption of SFAS No. 123(R) onliability-classified awards on October 1, 2005, was not material to theconsolidated financial statements.

 

Under SFAS No. 123(R),share-based compensation cost is measured at fair value.  Barnwell utilizes a closed-form valuationmodel to determine the fair value of each option award.  Expected volatilities are based on thehistorical volatility of Barnwell’s stock over a period consistent with that ofthe 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.  Therisk-free rates for periods within the contractual life of the options arebased on the yields of U.S. Treasury instruments with terms comparable to theestimated option terms.  Expecteddividends are based on current and historical dividend payments.  Share-based compensation expense recognizedin earnings for the years ended September 30, 2008, 2007 and 2006 arereflected in “General and administrative” expenses in the ConsolidatedStatements of Earnings.

 

*Foreign Currency Translation*

 

Assets and liabilities offoreign 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 foreignsubsidiaries are translated at average exchange rates during the period.  Realized foreign currency transaction gainsor losses were not material in fiscal years 2008, 2007, and 2006.

 

*Use of Estimates in the Preparation of Financial Statements*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expensesand the disclosure of contingent assets and liabilities.  Actual results could differ significantlyfrom those estimates.  Significantassumptions are required in the valuation of deferred tax assets, asset retirement

 

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obligations, share-based payment arrangements,obligations for retirement plans, contract drilling estimated costs tocomplete, proved oil and natural gas reserves, and the fair value of otherassets, and such assumptions may impact the amount at which such items arerecorded.

 

*Reclassifications*

 

Certain reclassificationshave been made to the September 30, 2007 and 2006 consolidated financialstatements to conform to classifications used in the September 30, 2008consolidated financial statements.

 

*Recently Issued Accounting Standards*

 

In September 2006, theFinancial Accounting Standards Board (the “FASB”) issued SFAS No. 157, “FairValue Measurements.”  SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements.  SFAS No. 157does not require any new fair value measurements, however, for some entities,the application of SFAS No. 157 will change current practice.  SFAS No. 157 is effective for fiscalyears beginning after November 15, 2007. Adoption of SFAS No. 157 will not have a material impact onBarnwell’s results of operations, financial condition and liquidity.

 

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial 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 onitems for which the fair value option has been elected are reported in earningsat each subsequent reporting date. Upfront costs and fees related to items for which the fair value optionis elected are recognized in earnings as incurred.  SFAS No. 159 is effective for fiscalyears beginning after November 15, 2007. Adoption of SFAS No. 159 will not have a material impact onBarnwell’s results of operations, financial condition and liquidity.

 

In December 2007, theFASB issued SFAS No. 160 “Noncontrolling Interests in ConsolidatedFinancial Statements — an amendment to Accounting Research Bulletin No. 51.”  SFAS No. 160 establishes accounting andreporting standards that require the ownership interest in subsidiaries held byparties other than the parent be clearly identified and presented in theConsolidated Balance Sheets within equity, but separate from the parent’sequity; the amount of consolidated net income attributable to the parent andthe noncontrolling interest be clearly identified and presented on the face ofthe Consolidated Statement of Earnings; and changes in a parent’s ownershipinterest while the parent retains its controlling financial interest in itssubsidiary be accounted for consistently. This statement is effective for fiscal years beginning on or after December 15,2008.  Barnwell’s management is currentlyevaluating the impact of these provisions on Barnwell’s results of operations,financial condition and liquidity.

 

In May 2008, the FASBissued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples.”  SFAS No. 162identifies the sources of accounting principles and the framework for selectingthe principles used in the preparation of financial statements that arepresented in conformity with generally accepted accounting principles.  SFAS No. 162 becomes effective 60 daysfollowing the SEC’s approval of the Public Company Accounting Oversight Boardamendment to AU Section 411, “The Meaning of Present Fairly in ConformityWith Generally Accepted Accounting Principles.” Barnwell does not expect that the adoption of SFAS No. 162 willhave a material impact on its financial statements.

 

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**3.****             ACCOUNTS RECEIVABLE AND CONTRACT COSTS**

 

Accounts receivable are netof allowances for doubtful accounts of $1,078,000 and $20,000 as of September 30,2008 and 2007, respectively.  Included inaccounts receivable are contract retainage balances of $532,000 and $385,000 asof September 30, 2008 and 2007, respectively.  The retainage balance as of September 30,2008 is expected to be collected within one year, generally within 45 daysafter the related contracts have received final acceptance and approval.

 

The increase in theallowance for doubtful accounts at September 30, 2008 as compared to September 30,2007 is principally due to the bankruptcy of SemGroup, L.P.  In July 2008, SemGroup, L.P. announcedit had filed voluntary petitions for reorganization under Chapter 11 of theU.S. Bankruptcy Code as well as an application for creditor protection underthe Companies’ Creditors Arrangement Act in Canada.  A subsidiary of SemGroup, L.P. was asignificant marketer of Barnwell’s oil and natural gas.  As a result of the SemGroup, L.P. bankruptcyfilings, Barnwell recorded an $857,000 allowance for doubtful accounts and baddebt expense during the year ended September 30, 2008 for production soldto the SemGroup, L.P. subsidiary in June and July 2008.  August 2008 and subsequent productionwas moved to a different marketer.

 

Costs and estimated earnings on uncompleted contractsare as follows:

 
| ** **                               | ** ** | September 30, | ** **    |
|------------------------------------------|------------|--------------------|---------------|
| ** **                               | ** ** | **2008**           |          |   | 2007 | ** ** |
| Costs incurred  on uncompleted contracts | ** ** | ** **         | **$**         | **7,629,000** |   |   |   | $ | 6,365,000 |   |
| Estimated  earnings                      | ** ** | ** **         | **1,271,000** |   |   |   | 751,000 |   |
| ** **                               |       |               | **8,900,000** |   |   |   | 7,116,000 |   |
| Less billings to  date                   | ** ** | ** **         | **8,252,000** |   |   |   | 7,173,000 |   |
| ** **                               |       |               | **$**         | **648,000** |   |   |   | $ | (57,000 | ) |

 

Costs and estimated earnings on uncompleted contractsare included in the Consolidated Balance Sheets as follows:

 
| ** **                                                                                                            | ** ** | ** ** | September 30, | ** **  |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------|--------------------|-------------|
| ** **                                                                                                            | ** ** | ** ** | **2008**           | ** **  | ** ** | ** ** | 2007 | ** ** |
| Costs and  estimated earnings in excess of billings on uncompleted contracts (included  in other current assets)      | ** ** | ** ** | **$**              | **884,000** |   |   |   | $ | 598,000 |   |
| Billings in  excess of costs and estimated earnings on uncompleted contracts (included in  other current liabilities) | ** ** | ** ** | **(236,000**       | **)**       |   |   | (655,000 | ) |
| ** **                                                                                                            |       |       | **$**              | **648,000** | ** ** |   |   | $ | (57,000 | ) |

 

**4.****             SHARE-BASED PAYMENTS**

 

Barnwell has outstandingstock options issued to certain employees under stockholder-approved qualifiedplans and non-qualified plans at September 30, 2008.  The qualified options were granted inaccordance with the 1998 Stock Option Plan with an exercise price equal to theclosing market price of Barnwell’s stock on the date preceding the date ofgrant (110% of the closing market price on the date preceding the date of grantfor options granted to affiliates), vest annually over four years of continuousservice, and expire ten years from the date of grant (five years from date ofgrant for options granted to affiliates). The qualified plan permits the grant of share options to employees forup to 780,000 shares of common stock.  Atotal of 774,000 share options have been granted under 

 

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this plan.  Nooption shares were available for grant under the qualified plan as of the dateof this filing.  The non-qualifiedoptions were granted with an exercise price equal to the closing market priceof Barnwell’s stock on the date of grant, vest annually over five years ofcontinuous service, and expire ten years from the date of grant.  The non-qualified options have stockappreciation rights features 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.

 

On March 3, 2008, thestockholders of Barnwell approved the 2008 Equity Incentive Plan (the “2008Plan”).  Under the 2008 Plan, theCompensation Committee, which consists of independent members of Barnwell’sBoard of Directors, is authorized to grant incentive stock options,nonstatutory stock options, stock options with stock appreciation rights,restricted stock, restricted stock units and performance units, qualifiedperformance-based awards, and stock grants to employees, consultants andnon-employee members of the Board of Directors. 800,000 shares of Barnwell common stock have been reserved for issuancepursuant to the 2008 Plan.  A total of340,000 share options have been granted under this plan, leaving 460,000 optionshares available for grant under the 2008 Plan at September 30, 2008.

 

Barnwell currently has apolicy of issuing new shares to satisfy share option exercises under both thequalified plans and non-qualified plans when the optionee requests shares.

 

The Company’s share-based compensation expense(benefit) and related income tax effects are as follows:

 
| ** **                                  | ** ** | Year ended September 30, | ** **         |
|---------------------------------------------|------------|-----------------------------------------|--------------------|
| ** **                                  | ** ** | **2008**                                |               | 2007 |   | 2006 | ** ** |
|                                        |       |                                    |               |   |   |   |   |   |   |   |
| Share-based  compensation (benefit) expense | ** ** | ** **                              | **$(402,000**      | **)** |   | **  ** | $ 462,000 |   |   | **  ** | $ 583,000 |   |   |
|                                        |       |                                    |               | ** ** |   |   |   |   |   |   |   |   |   |
| Income tax  effect - provision (benefit)    | ** ** | ** **                              | **$ 149,000** | ** ** |   |   | $(133,000 | ) |   |   | $(146,000 | ) |   |

 

As of September 30,2008, there was $839,000 of total unrecognized compensation cost related tononvested equity-classified and liability-classified share options.  That cost is expected to be recognized over3.4 years.  Total share-based compensationexpense related to the vesting of awards in the years ended September 30,2008, 2007 and 2006 was $374,000, $408,000 and $884,000, respectively.  Share-based compensation expense recognizedin earnings for the years ended September 30, 2008, 2007 and 2006 arereflected in “General and administrative” expenses in the ConsolidatedStatements 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.

 

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A summary of the activity in Barnwell’sequity-classified share options as of the beginning and end of the year ended September 30,2008 is presented below:

 
| ** **                              | ** ** |   | ** ** | ** ** | ** ** | Weighted-   | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|--------|------------|------------|------------|-------------|------------|------------|------------|
|                                    |       |   |       | Weighted-  |       | Average     |       |       | ** ** |
|                                    |       |   |       | Average    |       | Remaining   |       | Aggregate  | ** ** |
|                                    |       |   |       | Exercise   |       | Contractual |       | Intrinsic  | ** ** |
| Options                                 |       | Shares |       | Price      |       | Term        |       | Value      | ** ** |
| Outstanding at  October 1, 2007    |       |   | 345,000    |       |       |        | $          | 5.96       |       |   |   |   |   |   |   |   |   |   |
| Granted                                 |       |   | -          |       |       |        |       |       |       |   |   |   |   |   |   |   |   |
| Exercised                               |       |   | (123,000   | )          |       |        | $          | 2.59       |       |   |   |   |   |   |   |   |   |   |
| Forfeited/Expired                       |       |   | -          |       |       |        |       |       |       |   |   |   |   |   |   |   |   |
| Outstanding at  September 30, 2008 |       |   | 222,000    |       |       |        | $          | 7.83       |       |   |   | 2.5 |   |   |   | $ | 365,000 |   |   |
|                                    |       |   |       |       |       |        |       |       |       |   |   |   |   |   |   |   |   |
| Exercisable at  September 30, 2008 |       |   | 169,500    |       |       |        | $          | 7.39       |       |   |   | 2.5 |   |   |   | $ | 352,000 |   |   |

 

Total share-basedcompensation expense for equity-classified awards vested in the years ended September 30,2008, 2007 and 2006 was $35,000, $77,000 and $144,000, respectively.  There was no impact on income taxes as theexpense relates to qualified options.

 

The total intrinsic value ofequity options exercised during the years ended September 30, 2008, 2007and 2006 was $1,077,000, $1,733,000 and nil, respectively.

 

Barnwell recorded taxbenefits related to employees’ disqualification of qualified stock options of$192,000 and $203,000 during the years ended September 30, 2008 and 2007,respectively.  The tax benefits werereflected as increases in additional paid-in capital in fiscal 2008 and2007.  There were no stock optiondisqualifications in fiscal 2006.

 

*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 as anexpense over the requisite service period.

 

Barnwell granted stockoptions to acquire a total of 340,000 shares of Barnwell’s common stock undernon-qualified plans during fiscal 2008.

 

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The following assumptions were used in estimating fairvalue for all liability-classified share options outstanding during the yearsended September 30, 2008, 2007 and 2006:

 
|                        |   | Year ended  September 30, |   |
|-----------------------------|--------|--------------------------------|--------|
|                        |   | 2008                           |   | 2007 |   | 2006 |   |
|                        |   |                           |   |   |   |   |   |
| Expected volatility range   |   | 37.4% to 43.4%                 |   | 35.0% to 35.2% |   | 28.4% to 42.0% |   |
| Weighted-average volatility |   | 39.4%                          |   | 35.2% |   | 33.0% |   |
| Expected dividends          |   | 2.4%                           |   | 1.2% to 1.3% |   | 1.0% |   |
| Expected term (in years)    |   | 6.2 to 9.6                     |   | 0.7 to 4.8 |   | 0.8 to 6.0 |   |
| Risk-free interest rate     |   | 3.2% to 3.9%                   |   | 4.1% to 4.2% |   | 4.7% to 4.9% |   |
| Expected forfeitures        |   | None                           |   | None |   | None |   |

 

The application ofalternative assumptions could produce significantly different estimates of thefair value of stock-based compensation, and consequently, the related costsreported in the Consolidated Statements of Earnings.

 

A summary of the activity in Barnwell’sliability-classified share options as of the beginning and end of the yearended September 30, 2008 is presented below:

 
| ** **                              | ** ** |   | ** ** | ** ** | ** ** | Weighted-   | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|--------|------------|------------|------------|-------------|------------|------------|------------|
|                                    |       |   |       | Weighted-  |       | Average     |       |       | ** ** |
|                                    |       |   |       | Average    |       | Remaining   |       | Aggregate  | ** ** |
|                                    |       |   |       | Exercise   |       | Contractual |       | Intrinsic  | ** ** |
| Options                                 |       | Shares |       | Price      |       | Term        |       | Value      | ** ** |
| Outstanding at  October 1, 2007    |       |   | 196,000    |       |       |        | $          | 7.54       |       |   |   |   |   |   |   |   |   |   |
| Granted                                 |       |   | 340,000    |       |       |        | $          | 11.85      |       |   |   |   |   |   |   |   |   |   |
| Exercised                               |       |   | (40,000    | )          |       |        | $          | 2.60       |       |   |   |   |   |   |   |   |   |   |
| Forfeited/Expired                       |       |   | -          |       |       |        |       |       |       |   |   |   |   |   |   |   |   |
| Outstanding at  September 30, 2008 |       |   | 496,000    |       |       |        | $          | 10.89      |       |   |   | 8.4 |   |   |   | $ | 103,000 |   |   |
|                                    |       |   |       |       |       |        |       |       |       |   |   |   |   |   |   |   |   |
| Exercisable at  September 30, 2008 |       |   | 72,000     |       |       |        | $          | 8.80       |       |   |   | 6.2 |   |   |   | $ | 48,000 |   |   |

 

Total share-basedcompensation for liability-classified awards was a benefit of $437,000 for theyear ended September 30, 2008 and expenses of $385,000 and $439,000 forthe years ended September 30, 2007 and 2006, respectively.  The related income tax effects were anexpense of $149,000 for the year ended September 30, 2008 and benefits of$133,000 and $146,000 for the years ended September 30, 2007 and 2006,respectively.  Included in share-basedcompensation for liability-classified awards for fiscal 2008, 2007 and 2006 was$339,000, $331,000 and $740,000, respectively, of compensation expense relatedto shares that vested during each respective period and a $776,000 benefit, a$54,000 expense and a $301,000 benefit, respectively, due to remeasurement at September 30,2008, 2007 and 2006 of the fair value of previously vested shares.

 

In fiscal 2008, the stockappreciation rights feature of 40,000 shares of non-qualified options wasexercised and $458,000 was paid in cash by Barnwell.  The tax benefit realized for the taxdeduction of these exercised options was $156,000 for the year ended September 30,2008.  There were no otherliability-classified share option exercises, expirations, or forfeitures in theyear ended September 30, 2008.

 

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During fiscal 2007, thestock appreciation rights feature of 104,000 shares of non-qualified optionswas exercised and $2,024,000 was paid in cash by Barnwell.  The tax benefit realized for the taxdeduction of the exercised options was $705,000 for the year ended September 30,2007.  There were no otherliability-classified share option grants, exercises, expirations, orforfeitures in the year ended September 30, 2007.

 

During fiscal 2006, thestock appreciation rights feature of 90,000 shares of non-qualified options wasexercised and $1,649,000 was paid in cash by Barnwell.  The tax benefit realized for the taxdeduction of the exercised options was $577,000 for the year ended September 30,2006.  There were no otherliability-classified share option grants, exercises, expirations, orforfeitures in the year ended September 30, 2006.

 

*Summary of Stock Awards*

 

In June 1998, Barnwellgranted 180,000 stock options under a non-qualified plan at a purchase price of$2.60 per share (market price on date of grant).  These options have stock appreciation rightsthat permit the holder to receive stock, cash or a combination thereof equal tothe amount by which the fair market value, at the time of exercise of theoption, exceeds the option price.  Duringthe years ended September 30, 2008, 2007 and 2006, the stock appreciationrights feature on 40,000 shares, 80,000 shares and 60,000 shares, respectively,of these options were exercised and the differences between the exercise priceand the closing prices per share on the days prior to the dates of exercisewere paid by Barnwell.  Barnwellrecognized compensation benefits of $108,000 and $359,000 relating to theseoptions in fiscal years 2008 and 2006, respectively, and compensation expenseof $229,000 in fiscal 2007.

 

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).  The remaining 42,000 shares of unexercisedoptions outstanding as of September 30, 2008 expire in December 2009.  During the years ended September 30,2008 and 2007, Barnwell issued 113,000 shares and 91,000 shares, respectively,of its common stock resulting from exercises of these qualified stock options;no shares were issued during the year ended September 30, 2006.  No compensation cost was recognized for theseoptions for the years ended September 30, 2008, 2007 and 2006 as theseoptions were fully vested prior to 2005.

 

In December 2004,Barnwell granted qualified stock options to acquire 210,000 shares of Barnwell’scommon stock at a weighted-average exercise price per share of $9.23 (based ongrants at market price and 110% of market price at the date of grant).  These options vest annually over four yearscommencing one year from the date of grant and expire in December 2014 andDecember 2009 (for options granted to affiliates).  During the years ended September 30,2008 and 2007, Barnwell issued 10,000 and 20,000 shares of its common stock,respectively, resulting from exercises of these stock options.  No shares were issued during the year ended September 30,2006.  Barnwell recognized compensationexpense of $35,000, $77,000 and $144,000 relating to these options in fiscalyears 2008, 2007 and 2006, respectively.

 

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 optionsvest annually over five years commencing one year from the date of grant andexpire in December 2014.  Theseoptions have stock appreciation rights that permit the holder to receive stock,cash or a combination thereof equal to the amount by which the fair marketvalue, at the 

 

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time of exercise of the option, exceeds the optionprice.  During the years ended September 30,2007 and 2006, the stock appreciation rights feature of 24,000 shares and30,000 shares, respectively, of these options were exercised and thedifferences between the exercise price and the closing prices per share on thedays prior to the dates of exercise were paid by Barnwell; no options wereexercised during fiscal 2008.  Barnwellrecognized a compensation benefit of $590,000 relating to these options infiscal 2008 and compensation expense of $156,000 and $798,000 in fiscal years2007 and 2006, respectively.

 

In December 2007,Barnwell granted stock options to acquire 100,000 shares of Barnwell’s commonstock under a non-qualified plan at a purchase price of $12.92 per share(market price on date of grant).  Thestock options were issued in March 2008 under the 2008 Plan, whichreceived shareholder approval on March 3, 2008.  These options vest annually over four yearscommencing one year from the date of grant and expire in December 2017.  These options have stock appreciation rightsthat permit the holder to receive stock, cash or a combination thereof equal tothe amount by which the fair market value, at the time of exercise of theoption, exceeds the option price. Barnwell recognized compensation expense of $104,000 relating to theseoptions in fiscal 2008.

 

In May 2008, Barnwellgranted stock options to acquire 240,000 shares of Barnwell’s common stock undera non-qualified plan at a purchase price of $11.40 per share (market price ondate of grant).  The stock options wereissued under the 2008 Plan.  Theseoptions vest annually over four years commencing one year from the date ofgrant and expire in May 2018.  Theseoptions have stock appreciation rights that permit the holders 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 optionprice.  Barnwell recognized compensationexpense of $157,000 relating to these options in fiscal 2008.

 

**5.****             DEPOSITS ONRESIDENTIAL PARCELS, INVESTMENT IN RESIDENTIAL PARCELS AND RESIDENTIAL LOTSUNDER DEVELOPMENT**

 

Established in fiscal 2007,Kaupulehu 2007, LLLP (“Kaupulehu 2007”), a Hawaii limited liability limitedpartnership 80%-owned by Barnwell and 20%-owned by Nearco, Inc. (“Nearco”),a company controlled by a director of Barnwell and minority interest owner incertain of Barnwell’s business ventures (see further discussion on relatedparty interests at Note 9 below), acquires house lots for investment andconstructs turnkey single-family homes for future sale.  Upon establishment, Kaupulehu 2007 madenonrefundable initial deposits of $200,000 each to secure the right to purchaseseven parcels at a purchase price of $2,378,000 each in the Lot 4AIncrement I area of Kaupulehu, North Kona, Hawaii from 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.

 

As of September 30,2008, Kaupulehu 2007 owns four parcels in the Lot 4A Increment I arealocated approximately six miles north of the Kona International Airport in theNorth Kona District of the island of Hawaii, within and adjacent to theHualalai Resort at Historic Ka’upulehu, between the Queen Kaahumanu Highway andthe Pacific Ocean.  Three of the fourparcels were acquired in fiscal 2007 and the fourth parcel was acquired in thesecond quarter of fiscal 2008.  Kaupulehu2007 is in the process of developing residences for future sale on two of theparcels and intends to hold the remaining two parcels for investmentpurposes.  The two parcels held fordevelopment are classified as 

 

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“Residential Lots Under Development” and the othertwo parcels are classified as “Investment in Residential Parcels” on theConsolidated Balance Sheet at September 30, 2008.

 

In June 2008, Kaupulehu2007 sold its investments in two of its three remaining rights to purchase lotsin the Lot 4A Increment I area to an unrelated party at a price of$221,000 each.  The $443,000 gain fromthe sale of lot purchase rights is reflected in “Gas processing and other” onthe Consolidated Statement of Earnings for the year ended September 30,2008.  The unrelated party used the lotpurchase rights acquired from Kaupulehu 2007 to purchase two parcels in theLot 4A Increment I area from WB. As Kaupulehu 2007 no longer had an obligation to purchase theaforementioned two parcels, Kaupulehu 2007 received a $400,000 refund of itsoriginal deposits for the two lots at $200,000 per lot.

 

At September 30, 2008,one deposit of $200,000 remained.  Theclosing date for Kaupulehu 2007’s obligation to purchase the remaining parcelis being negotiated.

 

Included in the ConsolidatedBalance Sheets under the caption “Residential Lots Under Development” are capitalizedcosts, which include the costs of acquiring land, development and constructioncosts, interest, property taxes and general and administrative expenses relatedto the development of land and home construction.  Costs that relate to a specific lot or homeare assigned to that lot or home while common costs related to multiple lots orhomes are allocated to each in proportion to their anticipated salesvalue.  Kaupulehu 2007 capitalizesinterest costs during development and construction and includes these costs incost of sales when homes are sold.  Thesecapitalized interest costs totaled $394,000 and $142,000 for the years ended September 30,2008 and 2007, respectively.

 

Kaupulehu 2007 has anagreement with Mr. David Johnston, the son of a director of Barnwell andminority interest owner in certain of Barnwell’s ventures (see furtherdiscussion on related party interests at Note 9 below), under which Mr. DavidJohnston serves as Kaupulehu 2007’s project manager.  Kaupulehu 2007 also has an agreement with anindependent building contractor for home building services for Kaupulehu 2007’slots.  A significant provision of theseagreements is that in addition to a monthly fee, Mr. David Johnston andthe building contractor will each receive 20% of the sales profit which iscontingent on the sale of each of the two homes that are under construction.

 

**6.****             INVESTMENT INJOINT VENTURES**

 

Kaupulehu Investors, LLC, a limited liability company 80%-owned by Barnwell and 20%-owned byNearco, a company controlled by a director of Barnwell and minority interestowner in certain of Barnwell’s business ventures (see further discussion onrelated party interests at Note 9 below), owns a 1.5% passiveminority interest in Hualalai Investors JV, LLC and in Hualalai Investors II,LLC (hereinafter referred to as “Hualalai Investors”), owners of HualalaiResort, and Kona Village Investors, LLC, owner of Kona Village Resort.

 

Nearco purchased its 20% interest in KaupulehuInvestors, LLC, from Barnwell in fiscal 2007. No gain or loss was recognized by Barnwell on this sale and Barnwell’sinterest in Kaupulehu Investors, LLC was reduced to 80% as a result of thistransaction.

 

Kaupulehu Investors, LLC, accounts for its 1.5%passive investments under the cost method. The investmentsare evaluated for impairment whenever events or changes in circumstancesindicate that the recorded investment balance may not be fully recoverable.  These investments are reflected in 

 

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theConsolidated Balance Sheets as of September 30, 2008 and 2007 as “Investmentin Joint Ventures.”

 

**7.****             INVESTMENT IN LAND INTERESTS**

 

*Background*

 

Barnwell owns a 77.6%controlling interest in Kaupulehu Developments, a Hawaii general partnershipthat owns interests in leasehold land and development rights for propertylocated approximately six miles north of the Kona International Airport in theNorth Kona District of the island of Hawaii.

 

Between 1986 and 1989,Kaupulehu Developments obtained the state and county zoning changes necessaryto permit development of the Four Seasons Resort Hualalai at Historic Ka’upulehuand Hualalai Golf Club which opened in 1996, a second golf course, andsingle-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, an unrelated entity in which Barnwell acquired a 1.5% passiveminority interest in fiscal 2007 (see further discussion in Note 6 above).

 

Between 1993 and 2001,Kaupulehu Developments obtained the state and county zoning changes necessaryto 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.

 

*Development Rights Under Option*

 

Kaupulehu Developments holds development rights forresidentially-zoned leasehold land within and adjacent to the Hualalai GolfClub.  The development rights are underoption to Hualalai Investors, an entity in which Barnwell acquired a 1.5%passive minority interest through an 80%-owned joint venture in fiscal2007.  Hualalai Investors is the owner and current developer of HualalaiResort.  Revenues, minority interest inearnings and operating profit related to sales of development rights underoption for the fiscal years ended September 30, 2008, 2007 and 2006 aresummarized as follows:

 
| ** **                                          | ** ** | Year ended September 30, | ** **    |
|-----------------------------------------------------|------------|-------------------------------|---------------|
| ** **                                          | ** ** | **2008**                      |          |   | 2007 |   |   | 2006 | ** ** | ** ** |
| Sale of  development rights under option:           |       |                          |          |   |   |   |   |   |   |   |
| Proceeds                                            | ** ** | ** **                    | **$**         | **4,426,000** |   |   |   | $ | 2,438,000 |   |   |   | $ | 2,875,000 |   |   |
| Fees                                                |       |                          | **(265,000**  | **)** |   |   | (146,000 | ) |   |   | (173,000 | ) |   |
| Revenues - sale  of development rights, net         | ** ** | ** **                    | **4,161,000** | ** ** |   |   | 2,292,000 |   |   |   | 2,702,000 |   |   |
| Minority  interest in earnings                      | ** ** | ** **                    | **(910,000**  | **)** |   |   | (501,000 | ) |   |   | (591,000 | ) |   |
| Operating profit  - sale of development rights, net | ** ** | ** **                    | **$**         | **3,251,000** |   |   |   | $ | 1,791,000 |   |   |   | $ | 2,111,000 |   |   |

 

Fiscal 2008 proceeds from the sale of developmentrights of $4,426,000 include $2,656,000 of proceeds received for thedevelopment rights option that was due on December 31, 2007 as well as$1,770,000 of proceeds related to the development rights option due on December 31,2008.

 

The total amount ofremaining future option receipts, if all options are fully exercised, is$6,198,000 as of September 30, 2008, comprised of $886,000representing the balance of the option 

 

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due onDecember 31, 2008, and two payments of $2,656,000 due on December 31,2009 and December 31, 2010.  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.

 

All capitalized costsassociated with Kaupulehu Developments’ development rights were expensed inprevious years.  The development rightsoption revenues, net of related fees, are recorded in the ConsolidatedStatements of Earnings as “Sale of development rights, net.”

 

*Lot 4A Increments I and II*

 

In February 2004,Kaupulehu Developments entered into a Purchase and Sale Agreement with WB KDAcquisition, LLC (“WB”) under which Kaupulehu Developments transferred itsleasehold interest in approximately 870 acres zoned for resort/residentialdevelopment, in two increments (“Increment I” and “Increment II”), toWB.  There is no affiliation betweenKaupulehu Developments and WB.  WB isaffiliated with RP-Hualalai Investors, LLC, a managing member of HualalaiInvestors, and Westbrook Partners, developers of Kuki’o Resort located adjacentto Hualalai Resort.  Increment I isan area planned for approximately 80 single-family lots and a beach club on theportion of the property bordering the Pacific Ocean.  The purchasers of the 80 single-family lotswill have the right to apply for membership in the Kuki’o Resort Golf and BeachClub, which is located adjacent to and south of the Four Seasons ResortHualalai at Historic Ka’upulehu. Increment II is the remaining portion of the approximately 870-acreproperty and is zoned for single-family and multi-family residential units anda 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.

 

In June 2006, KaupulehuDevelopments entered into an agreement with WB and WB KD Acquisition II, LLC (“WBKD”),under which Kaupulehu Developments sold its interest in Increment II toWBKD.  There is no affiliation betweenKaupulehu Developments and WB or WBKD. WB and WBKD are both affiliates of RP-Hualalai Investors, LLC andWestbrook Partners.  Pursuant to theIncrement II sale, Kaupulehu Developments received a $10,000,000 closingpayment 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 following tablesummarizes the revenues received from WBfor the sale of Kaupulehu Developments’ interest in leasehold land, relatedminority interest in earnings and operating profit for the years ended September 30,2008, 2007 and 2006:

 

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| ** **                                                  | ** ** | Year ended September 30, | ** **   |
|-------------------------------------------------------------|------------|-------------------------------|--------------|
| ** **                                                  | ** ** | **2008**                      |         | 2007 |   | 2006 | ** ** |
| Sale of interest in leasehold land:                         |       |                          |         |   |   |   |   |   |   |   |
| Revenues from  percentage of sales payments                 | ** ** | ** **                    | **$**        | **517,000** |   |   |   | $ | 3,585,000 |   |   |   | $ | 3,660,000 |   |   |
| Revenues from  Increment II closing payment                 |       |                          | **-**        |   |   |   | - |   |   |   | 10,000,000 |   |   |
| Capitalized  costs relating to Increment II sale       | ** ** | ** **                    | **-**        |   |   |   | - |   |   |   | (2,983,000 | ) |   |
| Legal costs  relating to Increment II sale                  | ** ** | ** **                    | **-**        | ** ** |   |   | - |   |   |   | (220,000 | ) |   |
| Fees                                                        | ** ** | ** **                    | **(71,000**  | **)** |   |   | (215,000 | ) |   |   | (820,000 | ) |   |
| Revenues - sale  of interest in leasehold land, net         | ** ** | ** **                    | **446,000**  | ** ** |   |   | 3,370,000 |   |   |   | 9,637,000 |   |   |
| Minority  interest in earnings                              | ** ** | ** **                    | **(243,000** | **)** |   |   | (737,000 | ) |   |   | (2,328,000 | ) |   |
| Operating profit  - sale of interest in leasehold land, net | ** ** | ** **                    | **$**        | **203,000** | ** ** |   |   | $ | 2,633,000 |   |   |   | $ | 7,309,000 |   |   |

 

WB sold four single-familylots during the year ended September 30, 2008 and paid KaupulehuDevelopments $1,182,000 in percentage of sales payments.  WB sold seven single-family lots during theyear ended September 30, 2007 and paid Kaupulehu Developments $3,585,000in percentage of sales payments.  WB soldfive single-family lots during the year ended September 30, 2006 and paidKaupulehu Developments $3,660,000 in percentage of sales payments.

 

One of the lots sold by WB in fiscal 2008 and three ofthe lots sold by WB in fiscal 2007 were purchased by Kaupulehu 2007 under a lotpurchase contract executed in January 2007 (see further discussion inNote 5 above).  Percentage of salespayments received by Kaupulehu Developments from WB as a result of Kaupulehu2007’s lot purchases in fiscal 2008 and 2007 totaled $214,000 and $642,000,respectively.  WB is not affiliated withBarnwell, Kaupulehu Developments or Kaupulehu 2007.  Percentage of sales revenues resulting fromKaupulehu 2007’s lot purchases were previously not eliminated.  In the three months ended September 30,2008, Barnwell concluded that its share of all such revenues should beeliminated, resulting in a $665,000 non-cash reduction in revenues reported as “Saleof interest in leasehold land, net” in the Consolidated Statements of Earnings,with corresponding $333,000 and $332,000 reductions in the carrying value of “ResidentialLots Under Development” and “Investment in Residential Parcels,” respectively,on the Consolidated Balance Sheet at September 30, 2008.  Impacts on all periods affected were notmaterial.

 

Revenues from percentage of sales payments and theIncrement II closing payment, net of related costs, are recorded in the Consolidated Statements ofEarnings for the years ended September 30, 2008, 2007 and 2006,respectively, as “Sale of interest in leasehold land, net.”  There is no assurance that any futurepayments will be received.

 

*Lot 4C*

 

Lot 4C is an area ofapproximately 1,000 acres of vacant leasehold land zoned conservation and islocated adjacent to Lot 4A.  Underthe terms of the Increment II Agreement, WBKD has the exclusive right tonegotiate with Kaupulehu Developments with respect to Lot 4C.  This right expires in June 2009 or, ifWBKD 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.

 

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*Investment in Lot Acquisition Rights*

 

Kaupulehu Mauka Investors,LLC, a limited liability company wholly-owned by Barnwell, holds 14 lotacquisition rights as to lots within approximately 5,000 acres ofagricultural-zoned leasehold land in the upland area of Kaupulehu (“Mauka Lands”)situated between the Queen Kaahumanu Highway and the Mamalahoa Highway atKaupulehu, North Kona, island and state of Hawaii.  The 14 lot acquisition rights give Barnwellthe right to acquire 14 residential lots, each of which is currently estimatedto be two to five acres in size, which may be developed on the MaukaLands.  These lands are currentlyclassified as agricultural by the state of Hawaii and, accordingly, thedeveloper of these lands (Hualalai Investors) will need to pursue both stateand county of Hawaii approvals for reclassification and rezoning to permit aresidential subdivision and negotiate development terms.  There is no assurance that the developer ofthe Mauka Lands will obtain the necessary land use reclassification, rezoning,permits, approvals, and development terms and agreements needed to develop theMauka Lands.  If the developer of the MaukaLands is unable to obtain such required land use changes, development terms andagreements with respect to the Mauka Lands and Barnwell is therefore unable tofully recover its investment in the Mauka Lands, we will incur an expenseresulting from a write-off of the lot acquisition rights.  The investment is evaluated for impairmentwhenever events or changes in circumstances indicate that the recordedinvestment balance may not be fully recoverable.  Barnwell’s cost of land interests is includedin the Consolidated Balance Sheets as of September 30, 2008 and 2007 underthe caption “Investment in Land Interests.”

 

*Summary of Interests*

 

The land interests held byBarnwell at September 30, 2008 include development rights under option,rights to receive varying percentages of the gross sales from the sale of lotswithin approximately 870 acres in the Kaupulehu area by WB, 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 in the upland area of Kaupulehu.  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 for the Mauka Lands.  Barnwell’s cost of land interests is includedin the September 30, 2008 and 2007 Consolidated Balance Sheets under thecaption “Investment in Land Interests” and consists of the following amounts:

 
| ** **                                                           | ** ** | September 30, | ** **    |
|----------------------------------------------------------------------|------------|--------------------|---------------|
| ** **                                                           | ** ** | **2008**           |          | 2007 |
| 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** |   |   |   | 1,400,000 |   |
| Development  rights under option                                     |       |               | **-**         |   |   |   | - |   |
|                                                                 |       |               |          |   |   |   |   |   |
| Total investment  in land interests                                  |       |               | **$**         | **1,450,000** |   |   |   | $ | 1,450,000 |   |

 

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**8.****             INVESTMENT IN AFFILIATE**

 

Mauka 3K, LLC (“Mauka 3K”),a limited liability company owned by Barnwell and Nearco, a company controlledby a director of Barnwell and minority interest owner in certain of Barnwell’sbusiness ventures (see further discussion on related party interests atNote 9 below), provides real estate consulting services and invests inreal estate.  Barnwell and Nearco eachhave a 50% voting interest in Mauka 3K. Barnwell does not have a controlling interest in Mauka 3K and thusaccounts for its investment utilizing the equity method of accounting.  Under the equity method of accounting,Barnwell’s proportionate share of its affiliate’s income is included in equityin earnings of real estate affiliate.

 

Revenues from real estateconsulting services are recognized when services have been rendered and theterms of the consulting agreement have been satisfied.

 

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 in the Consolidated Statements ofEarnings for the year ended September 30, 2006 as “Equity in earnings ofreal estate affiliate, net of tax.”  Thetax provision related to equity in earnings of real estate affiliate was$545,000 in fiscal 2006.  There wasessentially no activity in Mauka 3K during fiscal years 2008 and2007.  The investment in affiliate isincluded in the Consolidated Balance Sheets as of September 30, 2008 and2007 under the caption “Other current assets.”

 

**9.****             RELATED PARTY 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 and hisaffiliated entities own a direct financial interest in 19.3% of KaupulehuDevelopments, a general partnership in which Barnwell has a 77.6% controllinginterest.  The development rightsproceeds received during fiscal years 2008, 2007 and 2006 were reduced by feesof $265,000, $146,000 and $173,000, respectively, the percentage of salespayment proceeds received during fiscal years 2008, 2007 and 2006 were reducedby fees of $71,000, $215,000 and $220,000, respectively, and the proceeds fromthe Increment II closing payment received in fiscal 2006 were reduced by$600,000 of fees; these fees were paid to Nearco, a company controlled by Mr. TerryJohnston.  Under agreements entered intoin 1987, prior to Mr. Johnston’s election to Barnwell’s Board ofDirectors, Barnwell’s wholly-owned subsidiary, Barnwell Hawaiian Properties, Inc.,a 50.1% partner of Kaupulehu Developments, is obligated to pay Nearco 2% ofKaupulehu 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 obligatedto pay Nearco 4% of Kaupulehu Developments’ gross receipts from real estatetransactions.  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 2006, Barnwellentered into an agreement with Nearco to form Mauka 3K for the purpose ofproviding real estate consulting services and investing in real estate.  Barnwell and Nearco each have a 50% votinginterest in Mauka 3K.  During fiscal2006, Barnwell received net proceeds of $1,440,000 representing its share of realestate consulting revenues, less related expenses.  The net proceeds are reflected in theConsolidated Statements of Earnings for the year ended September 30, 

 

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2006 as “Equity in earnings of real estateaffiliate, net of tax.”  The taxprovision related to equity in earnings of real estate affiliate was $545,000in fiscal 2006.  There was essentially noactivity in Mauka 3K during fiscal years 2008 and 2007.

 

During fiscal 2007, Barnwelland Nearco entered into a limited liability limited partnership, Kaupulehu2007, to acquire house lots for investment and to construct turnkeysingle-family homes.  Nearco has a 20%ownership interest in Kaupulehu 2007.  Asnoted in Note 5 above, Kaupulehu 2007 has an agreement with Mr. DavidJohnston, the son of Mr. Terry Johnston, under which Mr. DavidJohnston serves as Kaupulehu 2007’s project manager.  A significant provision of this agreement isthat in addition to a fixed monthly fee, Mr. David Johnston will receive20% of the sales profit which is contingent on the sale of each of the twohomes under construction.  During fiscal2008, Kaupulehu 2007 paid $94,000 in project management fees to Nearco forproject management services.  No suchfees were paid during fiscal years 2007 or 2006.  These costs are being capitalized as they areproject costs associated with the development and construction of a real estateproject and are included in “Residential Lots Under Development” on theConsolidated Balance Sheet at September 30, 2008.

 

Kaupulehu 2007 hasborrowings under a credit facility that is guaranteed jointly and severally byBarnwell and Mr. Terry Johnston, with Mr. Terry Johnston’s guaranteelimited to 20% (see further discussion regarding the credit facility atNote 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 a floating rate equivalent to thehighest interest rate incurred by Kaupulehu 2007 on its bank debt, was payableupon Kaupulehu 2007’s sale of its second completed home.  During fiscal 2008, Barnwell contributed$1,530,000 to Kaupulehu 2007 that was not matched by Nearco in proportion toits ownership interest in Kaupulehu 2007. This resulted in a $383,000 reduction in Nearco’s loan balance to$142,000 and a corresponding increase in the minority interest liability.  Kaupulehu 2007 repaid this loan, includinginterest of $20,000, in full in July 2008.

 

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 loss was recognized by Barnwell asa result of the transaction.

 

General and administrativeexpenses include fees paid to Nearco for services related to KaupulehuDevelopments’ leasehold land and Kaupulehu 2007’s residential property.  Fees paid to Nearco by Kaupulehu Developmentsand Kaupulehu 2007 totaled $63,000, $171,000 and $76,000, before minorityinterest, in fiscal 2008, 2007 and 2006, respectively.  Additionally, Kaupulehu 2007 incurred fees toNearco of $27,000, before minority interest, in fiscal 2008 for professionalservices rendered in connection with Kaupulehu 2007’s sale of two lot purchaserights to an unrelated party.  There wereno such fees incurred in fiscal years 2007 or 2006.

 

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

 

Barnwell’s property and equipment is detailed asfollows:

 
|                                |       | ** ** | ** **        |         |       | Accumulated   |        |            |
|-------------------------------------|------------|------------|-------------------|--------------|------------|---------------|-------------|-----------------|
|                                |       | Estimated  |              | Gross        |       | Depreciation, |        | Net             |
|                                |       | Useful     |              | Property and |       | Depletion and |        | Property and    |
|                                |       | Lives      |              | Equipment    |       | Amortization  |        | Equipment       |
| At  September 30, 2008:        |       |       |              |         |       |          |        |            |   |   |   |   |   |   |   |   |
| Land                                |       |       |              |         |       |          | $           | 365,000         |   |   |   | $ | - |   |   |   | $ | 365,000 |   |
| Oil and natural  gas properties     |       |       |              |         |       |          |        |            |   |   |   |   |   |   |   |   |
|   (full  cost accounting) |       |       |              |         |       |          | 197,135,000 |            |   |   | (111,895,000 | ) |   |   | 85,240,000 |   |
| Drilling rigs  and equipment        |       |       | 3 – 10 years |         |       |          | 5,524,000   |            |   |   | (3,774,000 | ) |   |   | 1,750,000 |   |
| Office                              |       |       | 40 years          |         |       |          | 857,000     |            |   |   | (102,000 | ) |   |   | 755,000 |   |
| Other property  and equipment       |       |       | 3 – 17 years |         |       |          | 3,791,000   |            |   |   | (3,211,000 | ) |   |   | 580,000 |   |
| Total                               | ** ** | ** ** | ** **        | ** **   | ** ** | ** **    | **$**       | **207,672,000** | ** ** | ** ** | ** ** | **$** | **(118,982,000** | **)** | ** ** | ** ** | **$** | **88,690,000** | ** ** |
|                                |       |       |              | ** **   | ** ** | ** **    | ** **  |            |   |   |   |   |   |   |   |   |
| 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 |   |

 

In October 2004, theGovernment of Alberta enacted amendments to the Natural Gas Royalty Regulationwhich provide a mechanism to reduce royalties calculated through the Crownroyalty system for operators of natural 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 were effected by the Alberta Department of Energy’sInformation Letter 2004-36 which sets out the details of the royaltyadjustment, the impact on the existing temporary assistance received to date byaffected gas well operators, the provisions for potential recapture of theroyalty adjustments, and continuation of impacted petroleum and natural gasagreements.  Barnwell received a total ofapproximately $259,000, $248,000 and $347,000 related to the aforementionedroyalty adjustments for wells in the Thornbury area in fiscal years 2008, 2007and 2006, respectively.  It is Barnwell’sestimation that the subject Thornbury wells will not recommence production,thus no returns to the Government of Alberta of the royalty adjustmentsreceived would be required under the recapture provisions.  Accordingly, the receipts are payments fordeemed production by the Government of Alberta to Barnwell for condemnation ofthe wells, and such receipts were credited to oil and natural gas propertiesfor book purposes.

 

On October 1, 2002,Barnwell adopted SFAS No. 143, “Accounting for Asset RetirementObligations,” which requires that the fair value of a liability for an assetretirement obligation be recognized in the period in which it is incurred if areasonable estimate of fair value can be made. During the year ended September 30, 2006, the assetretirement obligation was increased by $303,000 to reflect obligations incurredon new wells drilled, increased $302,000 for changes in the timing and amountof estimated future expenditures, increased $199,000 for accretion of the assetretirement obligation, decreased by $20,000 in payments and increased by$124,000 for changes in foreign 

 

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currencytranslation rates.  During fiscal 2007, the asset retirementobligation was increased by $300,000 to reflect obligations incurred on newwells drilled, decreased $7,000 for changes in the timing and amount ofestimated future expenditures, increased $232,000 for accretion of the assetretirement obligation, decreased by $42,000 in payments, and increased by$498,000 for changes in foreign currency translation rates.  During the year ended September 30,2008, the asset retirement obligation was increased by $101,000 to reflectobligations incurred on new wells drilled, decreased $232,000 for changes inthe timing and amount of estimated future expenditures, increased $314,000 foraccretion of the asset retirement obligation, decreased by $48,000 in payments,and decreased by $304,000 for changes in foreign currency translation rates.

 

**11.          LONG-TERMDEBT**

 

A summary of Barnwell’s long-term debt as of September 30,2008 and 2007 is as follows:

 
|                                       | September 30, |
|--------------------------------------------|--------------------|
|                                       | **2008**           |   | 2007 |
| Canadian  revolving credit facility        | ** **         | **$** | **15,000,000** | ** ** |   |   | $ | 14,520,000 |   |
| Real estate  revolving credit facility     | ** **         | **11,217,000** | ** ** |   |   | - |   |
| Real estate  non-revolving credit facility | ** **         | **-** | ** ** |   |   | 6,845,000 |   |
| Related party  loan                        | ** **         | **-** | ** ** |   |   | 525,000 |   |
| Drill rig  financing                       | ** **         | **-** | ** ** |   |   | 568,000 |   |
| Less current  portion                      | ** **         | **-** | ** ** |   |   | (354,000 | ) |
| Total long-term  debt                      | ** **         | **$** | **26,217,000** | ** ** |   |   | $ | 22,104,000 |   |

 

Barnwell has a creditfacility at Royal Bank of Canada, a Canadian bank, for $20,000,000 Canadiandollars, or approximately US$18,870,000 at the September 30, 2008 exchangerate.  Borrowings under this facilitywere US$15,000,000 and US$14,520,000 at September 30, 2008 and 2007,respectively, and are included in long-term debt.  At September 30, 2008, Barnwell hadunused credit available under this facility of approximately US$3,870,000.

 

Subsequent to September 30,2008, exchange rates declined, resulting in a decrease in the amount of creditavailable under the Canadian revolving credit facility.  As of the beginning of December 2008,Barnwell had unused credit available under this facility of approximatelyUS$1,000,000.

 

The facility is available inU.S. dollars at the London Interbank Offer Rate plus 2.0%, at U.S. prime plus0.75%, or in Canadian dollars at Canadian prime plus 0.75%.  A standby fee of 0.35% per annum is chargedon the unused facility balance.  Underthe financing agreement, the facility is reviewed annually, with the nextreview planned for April 2009. Subject to that review, the facility may be extended one year with norequired debt repayments for one year or converted to a two-year term loan bythe 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 adjust the total amount of thecredit facility during its next review. If the facility is converted to a two-year term loan, Barnwell hasagreed to the following repayment schedule of the then outstanding loanbalance:  first year of the term period –20% (5% per quarter), and in the second year of the term period – 80% (5% perquarter for the first three quarters and 65% in the final quarter).

 

Barnwell has the option tochange the currency denomination and interest rate applicable to the loan atperiodic intervals during the term of the loan. During the year ended September 30, 2008, 

 

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Barnwell paid interest at rates ranging from 4.20%to 6.63%.  The weighted-average interestrate on the facility at September 30, 2008 was 5.70%.  The facility is guaranteed by Barnwell and iscollateralized by a general security agreement on all of the assets of Barnwell’soil and natural gas segment.  Nocompensating bank balances are required for this facility.

 

The bank affirmed that itwill not require any repayments under the facility before October 1,2009.  Accordingly, Barnwell hasclassified outstanding borrowings under the facility as long-term debt.

 

Barnwell, through its80%-owned real estate joint venture, Kaupulehu 2007, obtained a $7,500,000 non-revolving credit facility infiscal 2007 to finance the acquisition of real estate parcels and a portion ofthe initial home construction on those parcels. In December 2007, Kaupulehu 2007 refinanced $6,600,000 ofthe $7,068,000 outstanding borrowings under the facility with a new revolvingcredit facility from another financial institution.  The new facility provides $16,000,000 ofcredit under a revolving line of credit for the purpose of refinancing theacquisition of three parcels purchased in fiscal 2007, financing theacquisition of a fourth parcel purchased in January 2008, and financingcosts of home construction on the said four lots.  Under the terms of the facility, financingfor home construction is limited to a maximum of two unsold homes underconstruction at any given time.  The termof the loan is 36 months and advances shall not exceed: (i) 75% of theappraised as-is value of each parcel, or (ii) 80% of the appraised valueof the completed home and parcel for each home under construction.  The interest rate available for borrowingsunder this facility is a floating rate equal to the financial institution’sfloating base rate or the one-month London Interbank Offer Rate plus2.50%.  Kaupulehu 2007 will be requiredto make a principal payment upon the sale of a home and lot in an amount equalto 100% of the net sales proceeds of the home and lot; the loan agreementdefines net sales proceeds as the gross sales price of the home and lot, lessreasonable real estate commissions, closing costs, and fees of the buildingcontractor and project manager, as approved by the financial institution.  The credit facility, which is fully guaranteedby Barnwell and guaranteed 20% by Mr. Terry Johnston, is collateralizedby, among other things, a first mortgage lien on the parcels and homes to bebuilt.  Kaupulehu 2007 incurred a 1% loancommitment fee totaling $160,000. Borrowings under the facility are subject to a loan advance limitationbased on the appraised value of the underlying security.  The loan advance limitation may be reduced asa result of a decrease in appraised values of the underlying security.  If borrowings under the facility exceed theloan advance limitation, Barnwell will be required to make debt repayments inthe amount of the excess.

 

At September 30, 2008,Kaupulehu 2007’s borrowings under the credit facility were $11,217,000.  The facility expires in December 2010.  Accordingly, the $11,217,000 is classified aslong-term debt on the Consolidated Balance Sheet at September 30,2008.  At September 30, 2008,Barnwell had unused credit available under this facility of approximately$4,783,000.  The $428,000 portion of theoutstanding loan balance under the non-revolving facility that was notrefinanced was repaid in full in July 2008.

 

Kaupulehu 2007 capitalizesinterest costs on residential lots under development while development andconstruction is in progress and includes these costs in cost of sales whenhomes are sold.  Capitalized interestcosts totaled $394,000 and $142,000 for the years ended September 30, 2008and 2007, respectively.

 

As also discussed inNote 9 above, Nearco made a $525,000 loan to Kaupulehu 2007 to partiallyfund Kaupulehu 2007’s acquisition of a third residential lot in September 2007.  The loan plus accrued interest, at a floatingrate equivalent to the highest interest rate incurred by Kaupulehu 2007 on 

 

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its bank debt, was payable upon Kaupulehu 2007’ssale of its second completed home. During fiscal 2008, Barnwell contributed $1,530,000 to Kaupulehu 2007that was not matched by Nearco in proportion to its ownership interest inKaupulehu 2007.  This resulted in anon-cash $383,000 reduction in Nearco’s loan balance to $142,000 and acorresponding increase in the minority interest liability.  Kaupulehu 2007 repaid this loan, includinginterest of $20,000, in full in July 2008.

 

In March 2007, Barnwellcompleted an agreement to purchase a contract drilling rig for $731,000,$620,000 of which was financed by a bank loan. The loan was obtained for a term of five years commencing in April 2007with payments of $13,000 due monthly at an interest rate of 7.75%.  Barnwell repaid this loan in full in August 2008.

 

Interest costs for the fiscal years ended September 30,2008, 2007 and 2006 are summarized as follows:

 
|                                | Year ended  September 30, |
|-------------------------------------|--------------------------------|
|                                | **2008**                       |   | 2007 |   | 2006 |
| Interest costs  incurred            | ** **                     | **$** | **1,437,000** |   |   |   | $ | 1,141,000 |   |   |   | $ | 833,000 |   |
| Less interest  costs capitalized on |                           |   |   |   |   |   |   |   |   |   |   |
| residential lots  under development | ** **                     | **394,000** |   |   |   | 142,000 |   |   |   | -     |   |
| Interest expense                    | ** **                     | **$** | **1,043,000** |   |   |   | $ | 999,000 |   |   |   | $ | 833,000 |   |

 

**12.          SEGMENT AND GEOGRAPHIC INFORMATION**

 

Barnwell operates foursegments: 1) exploring for, developing, producing and selling oil andnatural gas in Canada (oil and natural gas); 2) investing in leaseholdland and other real estate interests in Hawaii (land investment);3) drilling wells and installing and repairing water pumping systems inHawaii (contract drilling); and 4) acquiring property for investment anddevelopment of homes for sale in Hawaii (residential real estate, established January 2007).

 

93

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The following is certainfinancial information related to Barnwell’s reporting segments.  All revenues reported are from externalcustomers with no intersegment sales or transfers.

 
|                                                                                    | Year ended  September 30, |
|-----------------------------------------------------------------------------------------|--------------------------------|
|                                                                                    | **2008**                       |   | 2007 |   | 2006 |
| Revenues:                                                                               |                           |   |   |   |   |   |   |   |   |   |   |
| Oil and natural  gas                                                                    | ** **                     | **$** | **49,441,000** |   |   |   | $ | 34,599,000 |   |   |   | $ | 37,904,000 |   |
| Land investment                                                                         | ** **                     | **4,607,000** |   |   |   | 5,662,000 |   |   |   | 12,339,000 |   |
| Contract  drilling                                                                      | ** **                     | **9,787,000** |   |   |   | 5,993,000 |   |   |   | 5,866,000 |   |
| Residential real  estate                                                                | ** **                     | **443,000** |   |   |   | - |   |   |   | - |   |
| Other                                                                                   | ** **                     | **1,108,000** |   |   |   | 867,000 |   |   |   | 765,000 |   |
| Total before  gain on sale and interest income                                | ** **                     | **65,386,000** |   |   |   | 47,121,000 |   |   |   | 56,874,000 |   |
| Gain on sale of  drill rig                                                              | ** **                     | **-** |   |   |   | - |   |   |   | 700,000 |   |
| Interest income                                                                         | ** **                     | **258,000** |   |   |   | 315,000 |   |   |   | 386,000 |   |
| Total revenues                                                                          | ** **                     | **$** | **65,644,000** |   |   |   | $ | 47,436,000 |   |   |   | $ | 57,960,000 |   |
|                                                                                    |                           |   |   |   |   |   |   |   |   |   |   |
| Depreciation,  depletion and amortization:                                              |                           |   |   |   |   |   |   |   |   |   |   |
| Oil and natural  gas                                                                    | ** **                     | **$** | **14,150,000** |   |   |   | $ | 12,753,000 |   |   |   | $ | 11,130,000 |   |
| Contract  drilling                                                                      | ** **                     | **392,000** |   |   |   | 224,000 |   |   |   | 189,000 |   |
| Other                                                                                   | ** **                     | **184,000** |   |   |   | 197,000 |   |   |   | 258,000 |   |
| Total  depreciation, depletion and amortization                                    | ** **                     | **$** | **14,726,000** |   |   |   | $ | 13,174,000 |   |   |   | $ | 11,577,000 |   |
|                                                                                    |                           |   |   |   |   |   |   |   |   |   |   |
| Operating profit  (before general and administrative expenses):                         |                           |   |   |   |   |   |   |   |   |   |   |
| Oil and natural  gas                                                                    | ** **                     | **$** | **24,710,000** |   |   |   | $ | 11,643,000 |   |   |   | $ | 18,557,000 |   |
| Land investment,  net of minority interest                                              | ** **                     | **3,454,000** |   |   |   | 4,424,000 |   |   |   | 9,420,000 |   |
| Contract  drilling                                                                      | ** **                     | **1,711,000** |   |   |   | 830,000 |   |   |   | 968,000 |   |
| Residential real  estate, net of minority interest                                 | ** **                     | **354,000** |   |   |   | - |   |   |   | - |   |
| Other                                                                                   | ** **                     | **924,000** |   |   |   | 670,000 |   |   |   | 507,000 |   |
| Total operating  profit                                                                 | ** **                     | **31,153,000** |   |   |   | 17,567,000 |   |   |   | 29,452,000 |   |
|                                                                                    |                           |   |   |   |   |   |   |   |   |   |   |
| General and  administrative expenses, net of minority interest                | ** **                     | **(12,297,000** | **)** |   |   | (10,207,000 | ) |   |   | (11,508,000 | ) |
| Bad debt expense                                                                        | ** **                     | **(1,091,000** | **)** |   |   | - |   |   |   | - |   |
| Interest  expense, net of minority interest                                             | ** **                     | **(1,007,000** | **)** |   |   | (999,000 | ) |   |   | (833,000 | ) |
| Interest income                                                                         | ** **                     | **258,000** |   |   |   | 315,000 |   |   |   | 386,000 |   |
| Gain on sale of  drill rig                                                              | ** **                     | **-** |   |   |   | - |   |   |   | 700,000 |   |
| Earnings before  income taxes and equity in earnings of real estate affiliate | ** **                     | **$** | **17,016,000** |   |   |   | $ | 6,676,000 |   |   |   | $ | 18,197,000 |   |
|                                                                                    |                           |   |   |   |   |   |   |   |   |   |   |
| Capital  expenditures:                                                                  |                           |   |   |   |   |   |   |   |   |   |   |
| Oil and natural  gas                                                                    | ** **                     | **$** | **17,662,000** |   |   |   | $ | 14,164,000 |   |   |   | $ | 25,949,000 |   |
| Contract  drilling                                                                      | ** **                     | **658,000** |   |   |   | 1,230,000 |   |   |   | 247,000 |   |
| Other                                                                                   | ** **                     | **52,000** |   |   |   | 84,000 |   |   |   | 178,000 |   |
| Total                                                                                   | ** **                     | **$** | **18,372,000** |   |   |   | $ | 15,478,000 |   |   |   | $ | 26,374,000 |   |

 

94

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Depletion per 1,000 cubicfeet (“MCF”) of natural gas and natural gas equivalent (“MCFE”), converted at arate of one barrel of oil and natural gas liquids to 5.8 MCFE, was $2.89 infiscal 2008, $2.49 in fiscal 2007, and $2.17 in fiscal 2006.  The escalating depletion rate is the result ofincreased costs of finding and developing proven reserves, as compared to prioryears, as well as increases in the average exchange rate of the Canadian dollarto the U.S. dollar of 10% in fiscal 2008, as compared to fiscal 2007, and 3% infiscal 2007, as compared to fiscal 2006.

 

*Assets BySegment:*

 

|                         | September 30, |
|------------------------------|--------------------|
|                         | **2008**           |   | 2007 |
| Oil and natural gas (1)      | ** **         | **$** | **91,673,000** | ** ** | **69** | **%** |   |   |   | $ | 94,243,000 |   | 76 | % |   |
| Land investment (2)          | ** **         | **1,450,000** | ** ** | **1** | **%** |   |   |   | 1,450,000 |   | 1 | % |   |
| Residential real  estate (2) | ** **         | **13,784,000** | ** ** | **11** | **%** |   |   |   | 8,192,000 |   | 7 | % |   |
| Contract  drilling (2)       | ** **         | **5,005,000** | ** ** | **4** | **%** |   |   |   | 4,358,000 |   | 3 | % |   |
| Other:                       |               |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents   | ** **         | **13,618,000** | ** ** | **10** | **%** |   |   |   | 10,107,000 |   | 8 | % |   |
| Corporate and  other         | ** **         | **6,832,000** | ** ** | **5** | **%** |   |   |   | 6,215,000 |   | 5 | % |   |
| Total                        | ** **         | **$** | **132,362,000** | ** ** | **100** | **%** |   |   |   | $ | 124,565,000 |   | 100 | % |   |

 

----

(1)       Primarilylocated in the Province of Alberta, Canada.

(2)       Locatedin Hawaii.

 

*Long-LivedAssets By Geographic Area:*

 

|          | September 30, |
|---------------|--------------------|
|          | **2008**           |   | 2007 |
| United States | ** **         | **$** | **4,651,000** | ** ** | **5** | **%** |   |   |   | $ | 4,484,000 |   | 5 | % |   |
| Canada        | ** **         | **85,489,000** | ** ** | **95** | **%** |   |   |   | 87,645,000 |   | 95 | % |   |
| Total         | ** **         | **$** | **90,140,000** | ** ** | **100** | **%** |   |   |   | $ | 92,129,000 |   | 100 | % |   |

 

*Revenue ByGeographic Area:*

 

|                                                             | Year ended  September 30, |
|------------------------------------------------------------------|--------------------------------|
|                                                             | **2008**                       |   | 2007 |   | 2006 |
| United States                                                    |                           | **$** | **15,211,000** |   |   |   | $ | 11,896,000 |   |   |   | $ | 18,425,000 |   |
| Canada                                                           | ** **                     | **50,175,000** |   |   |   | 35,225,000 |   |   |   | 38,449,000 |   |
| Total (excluding  interest income and gain on sale of drill rig) | ** **                     | **$** | **65,386,000** |   |   |   | $ | 47,121,000 |   |   |   | $ | 56,874,000 |   |

 

**13.          TAXES ON INCOME**

 

Thecomponents of earnings before income taxes are as follows:

 

|                                     | Year ended September 30, |
|------------------------------------------|-------------------------------|
|                                     | **2008**                      |   | 2007 |   | 2006 |
| Earnings (loss)  before income taxes in: |                          |   |   |   |   |   |   |   |   |   |   |
| United States                            | ** **                    | **$** | **(1,327,000** | **)** |   |   | $ | 45,000 |   |   |   | $ | 4,008,000 |   |
| Canada                                   | ** **                    | **18,343,000** |   |   |   | 6,631,000 |   |   |   | 14,189,000 |   |
|                                     | ** **                    | **$** | **17,016,000** |   |   |   | $ | 6,676,000 |   |   |   | $ | 18,197,000 |   |

 

95

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Thecomponents of the income tax provision related to the above earnings are asfollows:

 

|                           | Year ended  September 30, |
|--------------------------------|--------------------------------|
|                           | **2008**                       |   | 2007 |   | 2006 |
| Current  provision:            |                           |   |   |   |   |   |   |   |   |   |   |
| United States –  Federal  | ** **                     | **$** | **76,000** |   |   |   | $ | 260,000 |   |   |   | $ | 723,000 |   |
| United States –  State    | ** **                     | **54,000** |   |   |   | 1,000 |   |   |   | 235,000 |   |
|                           | ** **                     | **130,000** |   |   |   | 261,000 |   |   |   | 958,000 |   |
| Canadian                       | ** **                     | **7,558,000** |   |   |   | 1,443,000 |   |   |   | 2,335,000 |   |
| Total current                  | ** **                     | **7,688,000** |   |   |   | 1,704,000 |   |   |   | 3,293,000 |   |
|                           | ** **                     |   |   |   |   |   |   |   |   |   |   |
| Deferred  provision (benefit): | ** **                     |   |   |   |   |   |   |   |   |   |   |
| United States                  | ** **                     | **(855,000** | **)** |   |   | 765,000 |   |   |   | (555,000 | ) |
| Canadian                       | ** **                     | **(1,549,000** | **)** |   |   | 691,000 |   |   |   | 1,717,000 |   |
| Total deferred                 | ** **                     | **(2,404,000** | **)** |   |   | 1,456,000 |   |   |   | 1,162,000 |   |
|                           | ** **                     | **$** | **5,284,000** |   |   |   | $ | 3,160,000 |   |   |   | $ | 4,455,000 |   |

 

During the first quarter offiscal 2008, the Canadian government enacted reductions in the corporate taxrate from 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.  This reduction in Canadianfederal tax rates resulted in a $909,000 reduction of the net deferred taxliability during fiscal 2008.  Barnwell’seffective consolidated income tax rate for the year ended September 30,2008, excluding the aforementioned $909,000 impact of the reduction in Canadianincome tax rates, was approximately 36%.

 

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 in the provision for incometaxes for fiscal 2006 is the recognition of a deferred income tax benefit of$4,130,000 due to a reduction in the valuation allowance for foreign tax creditcarryforwards.  There were no reductionsin the valuation allowance for foreign tax credit carryforwards in fiscal 2008or 2007.  A minor reduction in Canadianfederal tax rates in fiscal 2007 resulted in a $100,000 reduction in netdeferred tax liabilities in fiscal 2007.

 

Due to differences in thestatutory deduction rates for Barnwell’s Canadian oil and natural gas capitalexpenditures under Canadian law as compared to such deductions under U.S. taxlaw, Barnwell has incurred higher U.S. tax liabilities on Canadian sourceearnings than Canadian tax liabilities on such earnings in recent years.  As a result, Barnwell has utilized itsforeign tax credit carryforwards in recent years, and Barnwell estimates thatit will fully utilize its remaining foreign tax credit carryforward.

 

In fiscal 2008 and 2007,Barnwell recorded tax benefits of $192,000 and $203,000, respectively, relatedto employees’ disqualification of qualified stock options which were reflectedas increases in additional paid-in capital. There was no such tax benefit related to stock option disqualificationsin fiscal 2006.

 

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A reconciliation between the reported provision forincome taxes and the amount computed by multiplying the earnings before incometaxes by the U.S. federal tax rate of 35% is as follows:

 

|                                       | Year ended  September 30, |
|--------------------------------------------|--------------------------------|
|                                       | **2008**                       |   | 2007 |   | 2006 |
| Tax expense  computed                      |                           |   |   |   |   |   |   |   |   |   |   |
| by applying  statutory rate                | ** **                     | **$** | **5,956,000** |   |   |   | $ | 2,336,000 |   |   |   | $ | 6,369,000 |   |
|                                       | ** **                     |   |   |   |   |   |   |   |   |   |   |
| Effect of  reduction of Canadian           | ** **                     |   |   |   |   |   |   |   |   |   |   |
| tax rates on  Canadian deferred taxes      | ** **                     | **(909,000** | **)** |   |   | (100,000 | ) |   |   | (1,094,000 | ) |
|                                       | ** **                     |   |   |   |   |   |   |   |   |   |   |
| Effect of the  foreign tax provision,      | ** **                     |   |   |   |   |   |   |   |   |   |   |
| excluding effect  of reduction in Canadian | ** **                     |   |   |   |   |   |   |   |   |   |   |
| tax rates, on  the total tax provision     | ** **                     | **(12,000** | **)** |   |   | 672,000 |   |   |   | 2,689,000 |   |
|                                       | ** **                     |   |   |   |   |   |   |   |   |   |   |
| State income  taxes                        | ** **                     | **54,000** |   |   |   | 1,000 |   |   |   | 235,000 |   |
|                                       | ** **                     |   |   |   |   |   |   |   |   |   |   |
| Effect of  reduction of the valuation      | ** **                     |   |   |   |   |   |   |   |   |   |   |
| allowance for  foreign tax credit          | ** **                     |   |   |   |   |   |   |   |   |   |   |
| carryforwards                              | ** **                     | **-** |   |   |   | - |   |   |   | (4,130,000 | ) |
|                                       | ** **                     |   |   |   |   |   |   |   |   |   |   |
| State net  operating                       | ** **                     |   |   |   |   |   |   |   |   |   |   |
| losses utilized                            | ** **                     | **-** |   |   |   | - |   |   |   | 45,000 |   |
|                                       | ** **                     |   |   |   |   |   |   |   |   |   |   |
| Other                                      | ** **                     | **195,000** |   |   |   | 251,000 |   |   |   | 341,000 |   |
|                                       | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
|                                       | ** **                     | **$** | **5,284,000** |   |   |   | $ | 3,160,000 |   |   |   | $ | 4,455,000 |   |

 

Equity in earnings of realestate affiliate is shown net of income taxes in the Consolidated Statement ofEarnings for fiscal 2006.  The taxprovision relating to equity in earnings of real estate affiliate was $545,000in fiscal 2006, representing a 38% effective tax rate.

 

97

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Thetax effects of temporary differences that give rise to significant portions ofthe deferred tax assets and deferred tax liabilities at September 30, 2008and 2007 are as follows:

 
|                                                                                                         | September 30, |
|--------------------------------------------------------------------------------------------------------------|--------------------|
| Deferred income  tax assets:                                                                                 | **2008**           |   | 2007 |
| U.S. tax effect  of deferred Canadian taxes                                                                  | ** **         | **$** | **3,878,000** |   |   |   | $ | 4,662,000 |   |
| Foreign tax  credit carryforwards                                                                            | ** **         | **122,000** |   |   |   | 290,000 |   |
| Tax basis of  investment in land and residential real estate in excess of book basis                         |               | **507,000** |   |   |   | 473,000 |   |
| Liabilities  accrued for books but not for tax under U.S. tax law                                            |               | **3,036,000** |   |   |   | 3,237,000 |   |
| Liabilities  accrued for books but not for tax under Canadian tax law                                        |               | **1,210,000** |   |   |   | 1,506,000 |   |
| Bad debt  allowance for books but not for tax under U.S. tax law                                             |               | **374,000** |   |   |   | - |   |
| Bad debt  allowance for books but not for tax under Canadian tax law                                         |               | **269,000** |   |   |   | - |   |
| Other                                                                                                        | ** **         | **621,000** |   |   |   | 506,000 |   |
| Total gross  deferred tax assets                                                                             | ** **         | **10,017,000** |   |   |   | 10,674,000 |   |
| Less valuation  allowance                                                                                    | ** **         | **(5,918,000** | **)** |   |   | (6,564,000 | ) |
| Net deferred  income tax assets                                                                              | ** **         | **4,099,000** |   |   |   | 4,110,000 |   |
|                                                                                                         |               |   |   |   |   |   |   |
| Deferred income  tax liabilities:                                                                            |               |   |   |   |   |   |   |
| Property and  equipment accumulated tax depreciation and depletion in excess of book under  Canadian tax law |               | **(12,885,000** | **)** |   |   | (15,216,000 | ) |
| Property and  equipment accumulated tax depreciation and depletion in excess of book under  U.S. tax law     |               | **(3,205,000** | **)** |   |   | (5,946,000 | ) |
| Other                                                                                                        | ** **         | **(250,000** | **)** |   |   | (76,000 | ) |
| Total deferred  income tax liabilities                                                                       | ** **         | **(16,340,000** | **)** |   |   | (21,238,000 | ) |
|                                                                                                         |               |   |   |   |   |   |   |
| Net deferred  income tax liability                                                                           | ** **         | **$** | **(12,241,000** | **)** |   |   | $ | (17,128,000 | ) |

 

The total valuationallowance decreased $646,000 for the year ended September 30, 2008 andincreased $405,000 for the year ended September 30, 2007.  The change in the valuation allowance infiscal 2008 relates primarily to the U.S. tax effects of a decrease in deferredCanadian taxes while the change in the valuation allowance in fiscal 2007relates primarily to the U.S. tax effect of an increase in deferred Canadiantaxes.

 

A valuation allowance isprovided when it is more likely than not that some portion or all of thedeferred tax asset will not be realized. Barnwell has established a valuation allowance primarily for the U.S.tax effect of deferred Canadian taxes, accrued liabilities, bad debt allowancesand 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, that the timing of U.S. taxable income will coincide with thepayment of Canadian taxes to enable Canadian taxes to be fully deducted (orrecoverable) for U.S. tax purposes, or that Canadian deferred tax assets willprovide any incremental benefit for U.S. tax purposes over the amount ofbenefit for Canadian tax purposes.

 

98

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Netdeferred tax assets at September 30, 2008 of $4,099,000 consists primarilyof $3,092,000 related to liabilities accrued for book purposes but not for taxpurposes, $507,000 related to the excess of the cost basis of investment inland and residential real estate for tax purposes over the cost basis ofinvestment in land and residential real estate for book purposes, $352,000related to allowance for doubtful accounts, and $122,000 for foreign tax creditcarryforwards.  Canadian deferred taxassets related to liabilities accrued for book purposes but not for taxpurposes are estimated to be realized through future Canadian income taxdeductions against future Canadian oil and natural gas earnings.  U.S. deferred tax assets related toliabilities accrued for book purposes but not for tax purposes and the excessof the cost basis of investment in land and residential real estate for taxpurposes over the cost basis of investment in land and residential real estatefor book purposes are estimated to be realized from deductions against futureU.S. earnings from percentage of sales payments, sales of interests inleasehold land, sales of land development rights, and sales of residential realestate.  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 30,2008, foreign tax credit carryforwards totaled $122,000 and expire in fiscal2015; management currently estimates that all of the foreign tax creditcarryforwards will be utilized before expiration.  The amount of deferred income tax assetsconsidered realizable may be reduced if estimates of future taxable income arereduced.

 

In June 2006, the FASBissued FIN No. 48, “Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement No. 109.” This interpretation prescribes a threshold for recognizing the financialstatement effects of a tax position when it is more likely than not, based onthe technical merits, that the position will be sustained upon examination by ataxing authority.  Recognized taxpositions are initially and subsequently measured as the largest amount of taxbenefit that is more likely than not of being realized upon ultimate settlementwith a taxing authority on a jurisdiction-by-jurisdiction basis.  Liabilities for unrecognized tax benefitsrelated to such tax positions are included in long-term liabilities unless thetax position is expected to be settled within the upcoming year, in which casethe liabilities are included in current liabilities.  Interest and penalties related tounrecognized tax benefits are included in income tax expense.  Assets for any offsetting foreign tax creditbenefits in the U.S. related to liabilities for foreign unrecognized taxbenefits are included in current or long-term receivables depending upon theestimated timing of settlement. Effective October 1, 2007, Barnwell adopted the provisions of FIN No. 48.  The initial adoption of FIN No. 48 didnot have a material impact on Barnwell’s financial statements.

 

Barnwell files U.S. federalincome tax returns, income tax returns in various U.S. states, and Canadianfederal and provincial tax returns.  Anumber of years may elapse before an uncertain tax position, for which we haveunrecognized tax benefits, is audited and finally resolved.  While it is often difficult to predict thefinal outcome or the timing of resolution of any particular uncertain taxposition, we believe that our unrecognized tax benefits reflect the more likelythan not outcome.  We adjust theseunrecognized tax benefits, as well as the related interest, based on ongoingchanges in facts and circumstances. Settlement of any particular position could require the use ofcash.  Favorable resolution for an amountless than the amount estimated by Barnwell would be recognized as a decrease inthe effective income tax rate in the period of resolution, and unfavorableresolution in excess of the amount estimated by Barnwell would be recognized asan increase in the effective income tax rate in the period of resolution.

 

In January 2008, theU.S. Internal Revenue Service notified Barnwell that it would examine Barnwell’sU.S. consolidated income tax return for fiscal 2006.  In June 2008, the Canada Revenue Agencynotified Barnwell that it would examine Barnwell of Canada, Limited’s Canadianfederal 

 

99

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income tax returns for fiscal 2005 and 2006.  Both examinations were in progress as of September 30,2008.  As a result of tax authorityinteractions in the three months ended September 30, 2008, Barnwell hasprovided for unrecognized tax benefits during fiscal 2008 as follows:

 
| Balance as of October 1, 2007 |   | $        | -       |   |
|--------------------------------------------------------|--------|----------|---------|--------|
| Additions for  tax positions taken during prior years  |   | 981,000  |    |
| Accrued interest                                       |   | 298,000  |    |
| Foreign tax  credit benefits for U.S. taxes            |   | (922,000 | )       |
| Balance as of  September 30, 2008                 |   | $        | 357,000 |   |

 

The total amount ofunrecognized tax benefits that, if recognized, would affect the effective taxrate is $357,000.

 

Unrecognized tax benefitsconsist primarily of Canadian federal and provincial audit issues that involvethe timing of oil and natural gas capital expenditure deductions and transferpricing adjustments.  Because of a lackof clarity and uniformity regarding allowable transfer pricing valuations bydiffering jurisdictions, it is reasonably possible that the total amount ofunrecognized tax benefits and any offsetting foreign tax credit benefits maysignificantly increase or decrease within the next fiscal year, and theestimated range of any such variance is not currently estimable based uponfacts and circumstances as of September 30, 2008.

 

Included below is a summaryof the tax years, by jurisdiction, that remain subject to examination by taxingauthorities:

 
| Jurisdiction                |   | Fiscal Years Open |   |
|-----------------------------|--------|-----------------------------|--------|
| U.S. federal                |   | 2005 – 2007            |   |
| Various U.S.  states        |   | 2005 – 2007            |   |
| Canada federal              |   | 2001 – 2007            |   |
| Various Canadian  provinces |   | 2001 – 2007            |   |

 

**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’s funding policy is intended toprovide for both benefits attributed to service to date and for those expectedto be earned in the future.  In addition,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 defined benefit pension plan. In December 2006, Barnwell adopted a postretirement medicalinsurance benefits plan (“Postretirement Medical”) covering U.S. employees whohave attained at least 20 years of service with Barnwell and served at least 10years at the position of Vice President or higher.  Health benefits are also provided to spousesand qualifying dependents of eligible officers.

 

In September 2006, theFASB 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. 158requires an employer to recognize the over-funded or under-funded status ofdefined benefit pension and other postretirement plans (collectively referredto as “retirement 

 

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plans”) as an asset or liability in its statement offinancial position and to recognize changes in that funded status in the yearin which the changes occur through comprehensive income.  SFAS No. 158 also requires themeasurement of retirement plan assets and obligations as of the date of thefiscal year-end statement of financial position and provide additionaldisclosures.  Barnwell adopted therecognition and disclosure provisions of SFAS No. 158 on September 30,2007.

 

The following tables detail the changes in benefitobligations, fair values of plan assets and reconciliations of the fundedstatus of the retirement plans:

 
| * *                                  |       | Pension            |       | SERP          |       | Postretirement Medical |       |
|-------------------------------------------|------------|--------------------|------------|---------------|------------|-----------------------------|------------|
| * *                                  |       | September 30, |       |
| * *                                  |       | **2008**           | ** ** | 2007          |       | **2008**                    | ** ** | 2007 |   | **2008** | ** ** | 2007 |   |
| * *                                  |       | ** **         | ** ** |          |       | ** **                  | ** ** |   |   | ** ** | ** ** |   |   |
| *Change in Projected Benefit Obligation:* | ** ** |               |       |          | ** ** |                        |       |   | ** ** |   |   |
| * *                                  |       |               | ** ** |          |       |                        | ** ** |   |   |   | ** ** |   |   |
| Benefit obligation  at beginning of year  | ** ** | ** **         | **$**      | **4,702,000** | ** ** | ** **                  |       | $ | 4,558,000 |   | ** ** | ** ** | ** $** | **722,000** | ** ** | ** ** |   |  $ | 655,000 |   | ** ** | ** ** | ** $** | **861,000** | ** ** | ** ** |   |  $ | - |   |   |
|                                      | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Service cost                              | ** ** | ** **         | ** ** | **221,000**   | ** ** | ** **                  |       |   | 214,000 |   | ** ** | ** ** | ** ** | **36,000** | ** ** | ** ** |   |   | 35,000 |   | ** ** | ** ** | ** ** | **10,000** | ** ** | ** ** |   |   | 9,000 |   |   |
|                                      | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Interest cost                             | ** ** | ** **         | ** ** | **290,000**   | ** ** | ** **                  |       |   | 260,000 |   | ** ** | ** ** | ** ** | **46,000** | ** ** | ** ** |   |   | 40,000 |   | ** ** | ** ** | ** ** | **52,000** | ** ** | ** ** |   |   | 43,000 |   |   |
|                                      | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Plan amendment                            | ** ** | ** **         | ** ** | **-**         | ** ** | ** **                  |       |   | - |   | ** ** | ** ** | ** ** | **-** | ** ** | ** ** |   |   | - |   | ** ** | ** ** | ** ** | **-** | ** ** | ** ** |   |   | 942,000 |   |   |
|                                      | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Actuarial gain                            | ** ** | ** **         | ** ** | **(782,000**  | **)**      | ** **                  |       |   | (192,000 | ) |   | ** ** | ** ** | **(128,000** | **)** | ** ** |   |   | (2,000 | ) |   | ** ** | ** ** | **(219,000** | **)** | ** ** |   |   | (133,000 | ) |   |
|                                      | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Benefits paid                             | ** ** | ** **         | ** ** | **(121,000**  | **)**      | ** **                  |       |   | (130,000 | ) |   | ** ** | ** ** | **(6,000** | **)** | ** ** |   |   | (6,000 | ) |   | ** ** | ** ** | **-** | ** ** | ** ** |   |   | - |   |   |
|                                      | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Administrative  expenses paid             | ** ** | ** **         | ** ** | **(11,000**   | **)**      | ** **                  |       |   | (8,000 | ) |   | ** ** | ** ** | **-** | ** ** | ** ** |   |   | - |   |   | ** ** | ** ** | **-** | ** ** | ** ** |   |   | - |   |   |
|                                      | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Benefit  obligation at end of year        | ** ** | ** **         | ** ** | **4,299,000** | ** ** | ** **                  |       |   | 4,702,000 |   |   | ** ** | ** ** | **670,000** | ** ** | ** ** |   |   | 722,000 |   | ** ** | ** ** | ** ** | **704,000** | ** ** | ** ** |   |   | 861,000 |   |   |

 
| *Change  in Plan Assets:*                       | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** |   |   |      |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   |
|-------------------------------------------------|------------|------------|------------|---------------|------------|------------|--------|--------|-----------|--------|--------|------------|-------------|--------------|------------|------------|--------|---------|----------|--------|--------|------------|-------------|--------------|------------|------------|--------|---------|----------|--------|--------|
|                                            | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** |   |   |      |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   |
| Fair value of  plan assets at beginning of year | ** ** | ** ** | ** ** | **3,893,000** | ** ** | ** ** |   |   | 3,415,000 |   |   | ** ** | ** **  | **-**        | ** ** | ** ** |   |    | -        |   |   | ** ** | ** **  | **-**        | ** ** | ** ** |   |    | -        |   |   |
|                                            | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** |   |   |      |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   |
| Actual return on  plan assets                   | ** ** | ** ** | ** ** | **(584,000**  | **)**      | ** ** |   |   | 366,000   |   |   | ** ** | ** **  | **-**        | ** ** | ** ** |   |    | -        |   |   | ** ** | ** **  | **-**        | ** ** | ** ** |   |    | -        |   |   |
|                                            | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** |   |   |      |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   |
| Employer  contribution                          | ** ** | ** ** | ** ** | **450,000**   | ** ** | ** ** |   |   | 250,000   |   |   | ** ** | ** **  | **6,000**    | ** ** | ** ** |   |    | 6,000    |   |   | ** ** | ** **  | **-**        | ** ** | ** ** |   |    | -        |   |   |
|                                            | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** |   |   |      |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   |
| Benefits paid                                   | ** ** | ** ** | ** ** | **(121,000**  | **)**      | ** ** |   |   | (130,000  | )      |   | ** ** | ** **  | **(6,000**   | **)**      | ** ** |   |    | (6,000   | )      |   | ** ** | ** **  | **-**        | ** ** | ** ** |   |    | -        |   |   |
|                                            | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** |   |   |      |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   |
| Administrative  expenses paid                   | ** ** | ** ** | ** ** | **(11,000**   | **)**      | ** ** |   |   | (8,000    | )      |   | ** ** | ** **  | **-**        | ** ** | ** ** |   |    | -        |   |   | ** ** | ** **  | **-**        | ** ** | ** ** |   |    | -        |   |   |
|                                            | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** |   |   |      |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   |
| Fair value of  plan assets at end of year       | ** ** | ** ** | ** ** | **3,627,000** | ** ** | ** ** |   |   | 3,893,000 |   |   | ** ** | ** **  | **-**        | ** ** | ** ** |   |    | -        |   |   | ** ** | ** **  | **-**        | ** ** | ** ** |   |    | -        |   |   |
|                                            | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** |   |   |      |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   | ** ** | ** **  | ** **   | ** ** | ** ** |   |    |     |   |   |
| Funded status                                   | ** ** | ** ** | **$**      | **(672,000**  | **)**      | ** ** |   | $      | (809,000  | )      |   | ** ** | ** $** | **(670,000** | **)**      | ** ** |   |  $ | (722,000 | )      |   | ** ** | ** $** | **(704,000** | **)**      | ** ** |   |  $ | (861,000 | )      |   |

 

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| * *                                                                |       | Pension            |       | SERP          |       | Postretirement Medical |       |
|-------------------------------------------------------------------------|------------|--------------------|------------|---------------|------------|-----------------------------|------------|
| * *                                                                |       | September 30, |       |
| * *                                                                |       | **2008**           | ** ** | 2007          |       | **2008**                    | ** ** | 2007 |   | **2008** | ** ** | 2007 |   |
| * *                                                                |       | ** **         | ** ** |          |       | ** **                  | ** ** |   |   | ** ** | ** ** |   |   |
| *Amounts recognized in the Consolidated Balance  Sheets:*               |       |               | ** ** |          |       |                        | ** ** |   |   |
|                                                                    |       |               | ** ** |          |       |                        | ** ** |   |   |   | ** ** |   |   |
| Current assets                                                          | ** ** | ** **         | **$**      | **-**         | ** ** | ** **                  |       | $ | - |   | ** ** | ** ** | **$** | **-** | ** ** | ** ** |   | $ | - |   | ** ** | ** ** | **$** | **-** | ** ** | ** ** |   | $ | - |   |   |
|                                                                    | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Current  liabilities                                                    | ** ** | ** **         | ** ** | **-**         | ** ** | ** **                  |       |   | - |   | ** ** | ** ** | ** ** | **(5,000** | **)** | ** ** |   |   | (5,000 | ) | ** ** | ** ** | ** ** | **-** | ** ** | ** ** |   |   | - |   |   |
|                                                                    | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Noncurrent  liabilities                                                 | ** ** | ** **         | ** ** | **(672,000**  | **)**      | ** **                  |       |   | (809,000 | ) | ** ** | ** ** | ** ** | **(665,000** | **)** | ** ** |   |   | (717,000 | ) | ** ** | ** ** | ** ** | **(704,000** | **)** | ** ** |   |   | (861,000 | ) |   |
|                                                                    | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Net amount                                                              | ** ** | ** **         | **$**      | **(672,000**  | **)**      | ** **                  |       | $ | (809,000 | ) | ** ** | ** ** | **$** | **(670,000** | **)** | ** ** |   | $ | (722,000 | ) | ** ** | ** ** | **$** | **(704,000** | **)** | ** ** |   | $ | (861,000 | ) |   |
|                                                                    | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| *Amounts recognized in accumulated other  comprehensive (income) loss:* | ** ** | ** **         |       |          |       |                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
|                                                                    | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Net loss (gain)                                                         | ** ** | ** **         | **$**      | **996,000**   | ** ** | ** **                  |       | $ | 917,000 |   | ** ** | ** ** | **$** | **78,000** | ** ** | ** ** |   | $ | 214,000 |   | ** ** | ** ** | **$** | **(348,000** | **)** | ** ** |   | $ | (133,000 | ) |   |
|                                                                    | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Prior service  cost (credit)                                            | ** ** | ** **         | ** ** | **114,000**   | ** ** | ** **                  |       |   | 120,000 |   |   | ** ** | ** ** | **(80,000** | **)** | ** ** |   |   | (75,000 | ) |   | ** ** | ** ** | **692,000** | ** ** | ** ** |   |   | 828,000 |   |   |
|                                                                    | ** ** | ** **         | ** ** | ** **    | ** ** | ** **                  |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Accumulated  other  comprehensive (income) loss                         | ** ** | ** **         | **$**      | **1,110,000** |       | ** **                  |       | $ | 1,037,000 |   |   | ** ** | **$** | **(2,000** | **)** | ** ** |   | $ | 139,000 |   |   | ** ** | **$** | **344,000** |   | ** ** |   | $ | 695,000 |   |   |

 

For the fiscal years ended September 30, 2008 and2007, the following weighted-average assumptions were used to determine benefitobligations at the end of the fiscal years:

 
|                                                                      |       | Pension            |     | SERP     |       | Postretirement Medical |     |
|---------------------------------------------------------------------------|------------|--------------------|----------|----------|------------|------------------------|----------|
|                                                                      |       | September 30, |     |
| ** **                                                                | ** ** | **2008**           |     | 2007     | ** ** | **2008**               |     | 2007 | ** ** | **2008** |   | 2007 |   |
| ** **                                                                | ** ** | ** **         |     |     | ** ** | ** **             |     |   | ** ** | ** ** |   |   |   |
| *Assumptions  used to determine the fiscal year-end benefit obligations:* | * *   | * *           | * * | * * | * *   | * *               | * * |
| * *                                                                  | * *   | * *           | * * | * * | * *   | * *               | * * |
| Discount rate                                                             | ** ** | **7.25%**          |     | 6.00%    | ** ** | **7.25%**              |     | 6.00% | ** ** | **7.25%** |   | 6.00% |   |
|                                                                      | ** ** | ** **         |     |     | ** ** | ** **             |     |   | ** ** | ** ** |   |   |   |
| Rate of compensation increase                                             | ** ** | **5.00%**          |     | 5.00%    | ** ** | **5.00%**              |     | 5.00% | ** ** | **N/A** |   | N/A |   |

 

The overall investmentobjective of the Pension Plan is to provide growth in the assets of the plan tofund future benefit obligations while managing risk in order to meet currentbenefit 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 interestreceived on government mortgage securities provide cash flows to fund currentbenefit obligations.  Longer-termobligations are generally estimated to be provided for by growth in equitysecurities.  The plan assets at September 30,2008 were invested as follows: 23% in cash, 25% in debt securities, and 52% inequity securities.  The plan assets at September 30,2007 were invested as follows: 12% in cash, 38% in debt securities, and 50% inequity securities.  Target assetallocations are not used, and allocations are adjusted from time to time asdictated by current and anticipated market conditions and required cash flows.

 

Barnwell contributed$450,000 to the Pension Plan in fiscal 2008. Barnwell estimates that it will make approximately $400,000 incontributions to the pension plan during fiscal 2009.  Barnwell does not expect to make any benefitpayments under the Postretirement Medical plan during fiscal 2009.  Fluctuations in actual equity market returnsas well as changes in general interest rates will result in changes in themarket value of plan assets and may result in increased or decreased retirementbenefits costs and contributions in future periods.

 

Barnwell’s assets related toits retirement plans have been adversely impacted by the performance of theequity markets in recent months, especially since September 30, 2008.  Subsequent 

 

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to September 30, 2008, the pension plan’sassets declined approximately $450,000 in value.  Such losses will likely cause an increase inBarnwell’s pension expense in future years.

 

For the fiscal years ended September 30, 2008,2007 and 2006, the following weighted-average assumptions were used todetermine net periodic benefit cost for the fiscal years shown:

 
|                                                            |       | Pension                       |     | SERP     |     | Postretirement Medical |       |
|-----------------------------------------------------------------|------------|-------------------------------|----------|----------|----------|------------------------|------------|
|                                                            |       | Year ended September 30, |     |
| ** **                                                      | ** ** | **2008**                      |     | 2007     |     | 2006                   | ** ** | **2008** |   | 2007 |   | 2006 | ** ** | **2008** |   | 2007 |   | 2006 |   |
| ** **                                                      | ** ** | ** **                    |     |     |     |                   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |   |
| *Assumptions  used to determine the net periodic benefit cost:* | * *   | * *                      | * * | * * | * * | * *               | * *   | * * | * * | * * | * * | * * | * * |
| * *                                                        | * *   | * *                      | * * | * * | * * | * *               | * *   | * * | * * | * * | * * | * * | * * |
| Discount rate                                                   | ** ** | **6.00%**                     |     | 5.50%    |     | 5.25%                  | ** ** | ** ** | **6.00%** |   |   | 5.50% |   |   | 5.25% | ** ** | ** ** | **6.00%** |   |   | 5.50% |   | 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, | * *    |
| * *                                  | * *   | **2008**                       | * *    | 2007           | * * | 2006                   | * *   | **2008** | * * | 2007 | * * | 2006 | * * | **2008** | * * | 2007 | * * | 2006 | * * |
| * *                                  | * *   | ** **                     | * *    |           | * * |                   | * *   | ** ** | * * |   | * * |   | * * | ** ** | * * |   | * * |   | * * |
| *Net periodic benefit cost for the year:* | * *   | * *                       | * *    | * *       | * * | * *               | * *   | * * | * * | * * | * * | * * |
| * *                                  |
| Service cost                              | ** ** | **$**                          | **221,000** |           | $        | 214,000                |       | $ | 206,000 | ** ** | **$** | **36,000** |   | $ | 35,000 |   | $ | 36,000 | ** ** | **$** | **10,000** |   | $ | 9,000 |   | $ | - |   |
|                                      | ** ** | ** **                     |        |           |     |                   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |   |
| Interest cost                             | ** ** | **290,000**                    |        | 260,000        |     | 226,000                | ** ** | **46,000** |   | 40,000 |   | 39,000 | ** ** | **52,000** |   | 43,000 |   | - |   |
|                                      | ** ** | ** **                     |        |           |     |                   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |   |
| Expected return  on plan assets           |       | **(305,000**                   | **)**       | (268,000       | )        | (182,000               | )          | **-** |   | - |   | - |   | **-** |   | - |   | - |   |
|                                      |       | ** **                     |        |           |     |                   |       | ** ** |   |   |   |   |   | ** ** |   |   |   |   |   |
| Recognized net  actuarial gain            |       | **-**                          |        | -              |     | -                      |       | **-** |   | - |   | - |   | **(4,000** | **)** | - |   | - |   |
|                                      |       | ** **                     |        |           |     |                   |       | ** ** |   |   |   |   |   | ** ** |   |   |   |   |   |
| Amortization of  prior service cost       |       | **6,000**                      |        | 5,000          |     | 1,000                  |       | **4,000** |   | 4,000 |   | 10,000 |   | **136,000** |   | 114,000 |   | - |   |
|                                      |       | ** **                     |        |           |     |                   |       | ** ** |   |   |   |   |   | ** ** |   |   |   |   |   |
| Amortization of  net actuarial loss       |       | **28,000**                     |        | 45,000         |     | 48,000                 |       | **8,000** |   | 10,000 |   | 10,000 |   | **-** |   | - |   | - |   |
|                                      |       | ** **                     |        |           |     |                   |       | ** ** |   |   |   |   |   | ** ** |   |   |   |   |   |
| Net periodic  benefit cost                |       | **$   240,000** |        | $ 256,000 |     | $  299,000   |       | **$    94,000** |   | $   89,000 |   | $  95,000 |   | **$  194,000** |   | $  166,000 |   | $    - |   |
|                                           |            |                                |             |                |          |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amounts that are estimated to be amortized fromaccumulated other comprehensive (income) loss into net periodic benefit cost inthe next fiscal year are as follows:

 
|                |   |    |   |   |   | Postretirement |   |
|---------------------|--------|---------|--------|--------|--------|----------------|--------|
|                |   | Pension |   | SERP   |   | Medical        |   |
|                |   |
| Prior service  cost |   | $       | 5,000  |   | $      | 4,000          |   | $ | 136,000 |   |
| Net loss (gain)     |   | 25,000  |   | -      |   | (27,000        | )      |
|                |   |    |   |   |   |           |   |
|                |   | $       | 30,000 |   | $      | 4,000          |   | $ | 109,000 |   |
|                     |        |         |        |        |        |                |        |  |  |  |  |  |  |  |  |  |

 

The accumulated benefitobligation differs from the projected benefit obligation in that it assumesfuture compensation levels will remain unchanged.  The accumulated benefit obligation for thepension plan was $2,958,000 and $3,165,000 at September 30, 2008 and 2007,respectively.  The 

 

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accumulated benefit obligation for the SERP was$389,000 and $406,000 at September 30, 2008 and 2007, respectively.

 

The benefits expected to be paid under the retirementplans as of September 30, 2008 are as follows:

 
|                                                      |     |    |      |   |   | Postretirement |   |
|-----------------------------------------------------------|----------|---------|-----------|--------|--------|----------------|--------|
|                                                      |     | Pension |      | SERP   |   | Medical        |   |
| *Expected  Benefit Payments:*                             | * * |
| Fiscal year  ending September 30, 2009               |     | $       | 145,000   |   | $      | 5,000          |   | $ | - |   |
| Fiscal year  ending September 30, 2010               |     | $       | 137,000   |   | $      | 5,000          |   | $ | 11,000 |   |
| Fiscal year  ending September 30, 2011               |     | $       | 128,000   |   | $      | 4,000          |   | $ | 12,000 |   |
| Fiscal year  ending September 30, 2012               |     | $       | 119,000   |   | $      | 4,000          |   | $ | 13,000 |   |
| Fiscal year  ending September 30, 2013               |     | $       | 111,000   |   | $      | 3,000          |   | $ | 15,000 |   |
| Fiscal years  ending September 30, 2014 through 2018 |     | $       | 1,143,000 |   | $      | 52,000         |   | $ | 119,000 |   |
|                                                           |          |         |           |        |        |                |        |  |  |  |  |  |  |  |  |  |

 

The following provides the assumed health care costtrend rates related to the measurement of Barnwell’s postretirement medicalobligations for fiscal years ended September 30, 2008, 2007 and 2006.

 

|                                                |       | Year ended  September 30, |     |
|-----------------------------------------------------|------------|--------------------------------|----------|
| ** **                                          | ** ** | **2008**                       |     | 2007 |   | 2006 |   |
| Health care cost trend rates assumed for next year  | ** ** | ** **                     | **8.5%** | ** ** |   |   | 9.0% |   |   |   | N/A |   |   |
| Ultimate cost trend rate                            | ** ** | ** **                     | **6.0%** | ** ** |   |   | 6.0% |   |   |   | N/A |   |   |
| Year that the  rate reaches the ultimate trend rate | ** ** | ** **                     | **2014** | ** ** |   |   | 2010 |   |   |   | N/A |   |   |

 

The assumed health care cost trend rates have asignificant effect on the amounts reported for the postretirement medicalobligations.  A one-percentage-pointchange in the assumed health care cost trend rates would have the followingeffects:

 
|                                                      |   | 1-Percentage   |                      | 1-Percentage     |   |
|-----------------------------------------------------------|--------|----------------|---------------------------|------------------|--------|
|                                                      |   | Point Increase |                      | Point (Decrease) |   |
| Effect on total  service and interest cost components     |   |           | $   19,000 |             |   |   | $   (14,000) |   |   |
| Effect on  accumulated postretirement benefit obligations |   |           | $ 176,000            |             |   |   | $ (132,000) |   |   |

 

In 2003, the MedicarePrescription Drug, Improvement and Modernization Act of 2003 (“Act”) was signedinto 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 the accumulatedpostretirement benefit obligation or net periodic postretirement benefit costin the consolidated financial statements or accompanying notes for fiscal 2008do not reflect the effects of the Act on the Postretirement Medical insurancebenefits plan.

 

**15.          SHARE REPURCHASE PROGRAM**

 

In December 2005,Barnwell’s Board of Directors authorized the purchase of up to 250,000 sharesof its common stock in the open market or in privately negotiatedtransactions.  On 

 

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September 20, 2007, the Board of Directorsauthorized a stock repurchase program in the open market of up to 150,000shares of these 250,000 shares during the period commencing on September 24,2007 and ending on March 24, 2008. During the year ended September 30, 2007, Barnwell repurchased10,000 shares for an aggregate purchase price of $155,000, or approximately$15.50 per share, pursuant to the plan. From October 1, 2007 to March 24, 2008, Barnwell repurchased106,500 shares of its common stock for $1,597,000, or approximately $15.00 pershare.  Of these amounts, 71,500 shareswere purchased for $1,063,000, or approximately $14.87 per share, on the openmarket under the September 20, 2007 authorization, and 35,000 shares werepurchased for $15.25 per share, the closing market price on the date of thetransaction, or approximately $534,000, in a privately negotiated transactionwith an officer/director of Barnwell.

 

In August 2008, theBoard of Directors authorized the Company to acquire in the open market, fromtime-to-time commencing on August 18, 2008 and ending on December 31,2008, and in accordance with applicable laws, rules and regulations, up to150,000 shares of the Company’s common stock. From August 18, 2008 to September 30, 2008, Barnwellrepurchased 26,600 shares of its common stock for $295,000, or approximately$11.10 per share.  As of September 30,2008, there were 123,400 shares available for repurchase under the August 2008authorization.

 

**16.          COMMITMENTSAND CONTINGENCIES**

 

Barnwell has committed tocompensate certain Canadian personnel pursuant to an incentive compensationplan, the value of which directly relates to Barnwell’s oil and natural gas segment’snet income and the value of Barnwell’s oil and natural gas reserves discovered,commencing in fiscal 2002, for projects developed by such personnel.  Barnwell recognized approximately $416,000,$495,000 and $359,000 of costs pursuant to this plan in fiscal 2008, 2007 and2006, respectively.

 

Barnwell has severalnon-cancelable operating leases for office space and leasehold land.  Rental expense was $649,000 in 2008, $598,000in 2007, and $528,000 in 2006.  Barnwell iscommitted under these leases for minimum rental payments summarized by fiscalyear as follows: 2009 - $604,000, 2010 - $575,000, 2011 - $516,000, 2012 -$503,000, 2013 - $514,000 and thereafter through 2026 an aggregate of$1,154,000.  The lease payments for landwere subject to renegotiation as of January 1, 2006.  Per the lease agreement, the lease paymentswill remain unchanged pending an appraisal, whereupon the lease rent could beadjusted to fair market value.  Barnwelldoes not know the amount of the new lease payments which could be effectiveupon performance of the appraisal; they may remain unchanged or increase, andBarnwell currently expects 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.

 

Barnwell is committed to payfees to Nearco, a company controlled by 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).  Under an agreement entered into in 1987,prior to Mr. Johnston’s election to Barnwell’s Board of Directors,Barnwell is obligated to pay Nearco 2% of Kaupulehu Developments’ grossreceipts 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 

 

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compensation for promotion and marketing ofKaupulehu Developments’ property and were determined based on the estimatedfair value of such services.

 

In conjunction with theclosing of the Increment II transaction in fiscal 2006, KaupulehuDevelopments entered into an agreement to pay its external real estate legalcounsel 1.5% of all Increment II percentage of sales payments received byKaupulehu Developments for services provided by its external real estate legalcounsel in the negotiation and closing of the Increment IItransaction.  No amounts were paidpursuant to this arrangement in fiscal 2008, 2007 and 2006.

 

Kaupulehu 2007 has anagreement with Mr. David Johnston, the son of Mr. Terry Johnston, adirector of Barnwell, under which Mr. David Johnston serves as Kaupulehu2007’s project manager.  Kaupulehu 2007also has an agreement with an independent building contractor for home buildingservices for Kaupulehu 2007’s lots.  Asignificant provision of these agreements is that in addition to a monthly fee,Mr. David Johnston and the building contractor will each receive 20% ofthe sales profit which is contingent on the sale of each of the two homes thatare under construction.

 

Barnwell, as an investor invarious joint ventures, may be periodically called upon to make additionalcapital contributions.

 

Barnwell is occasionallyinvolved in routine litigation and is subject to governmental and regulatorycontrols that are incidental to the ordinary course of business.  Barnwell’s management believes that allclaims and litigation involving Barnwell are not likely to have a materialadverse effect on its results of operations, financial position or liquidity.

 

**17.          FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

Cash and cash equivalents,accounts payable, accrued expenses, drilling advances and payables to jointinterest owners approximate their carrying values due to the short-term natureof the instruments.  The carrying valueof long-term debt approximates fair value as the terms approximate currentmarket terms for similar debt instruments of comparable risk and maturities.

 

**18.          CONCENTRATIONSOF CREDIT RISK**

 

Our oil and natural gas segment’s primaryconcentration of credit risk is associated with four individually significantcustomers.  At September 30, 2008, these customers,ProGas Limited, Glencoe Resources Ltd., Mercuria Energy Canada Inc., and ShellTrading Canada, accounted for approximately 33%, 17%, 18% and 15%, respectively, of our oil and natural gasreceivables.  No other customer accountedfor more than 10% of our oil and natural gas receivables.  At September 30, 2008, these customersaccounted for approximately $3,454,000of our oil and natural gas receivables.

 

At September 30, 2008,Barnwell’s contract drilling subsidiary had accounts receivables from thefederal, state of Hawaii and county entities totaling approximately$509,000.  Barnwell has lien rights onwells drilled and pumps installed for federal, state of Hawaii, county andprivate entities.

 

Management does not believesignificant credit risk related to these trade receivables exists at September 30,2008 based on prior historical experience.

 

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**19.          SUPPLEMENTALSTATEMENTS OF CASH FLOWS INFORMATION**

 

The following details the effect of changes in currentassets and liabilities on the Consolidated Statements of Cash Flows, andpresents supplemental cash flow information:

 
| * *                                                                                                        |       | Year ended  September 30, |       |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| * *                                                                                                        |       | **2008**                       |       | 2007 |   | 2006 |   |
| *Increase (decrease) from changes in:*                                                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Receivables                                                                                                     | ** ** | ** **                     | **$**      | **(2,362,000** | **)** |   |   |   | $ | (904,000 | ) |   |   |   | $ | 2,519,000 |   |   |
| Other  current assets                                                                                           | ** ** | ** **                     | ** ** | **383,000** | ** ** |   |   |   |   | 1,079,000 |   |   |   |   |   | (1,963,000 | ) |   |
| Accounts  payable                                                                                               | ** ** | ** **                     | ** ** | **(38,000** | **)** |   |   |   |   | 1,717,000 |   |   |   |   |   | (2,291,000 | ) |   |
| Accrued  incentive plan and other compensation costs                                                            |       |                           |       | **(301,000** | **)** |   |   |   |   | (338,000 | ) |   |   |   |   | 1,466,000 |   |   |
| Other  current liabilities                                                                                      | ** ** | ** **                     | ** ** | **3,013,000** | ** ** |   |   |   |   | (255,000 | ) |   |   |   |   | 2,821,000 |   |   |
|                                                                                                            |       |                           |       |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Increase  from changes in current assets and liabilities                                         | ** ** | ** **                     | **$**      | **695,000** | ** ** |   |   |   | $ | 1,299,000 |   |   |   |   | $ | 2,552,000 |   |   |
| * *                                                                                                        | * *   | * *                       | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| *Supplemental disclosure of cash flow information:*                                                             | * *   | * *                       | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Cash  paid during the year for:                                                                                 |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest,  net of amount capitalized                                                                            | ** ** | ** **                     | **$**      | **931,000** |   |   |   |   | $ | 1,000,000 |   |   |   |   | $ | 833,000 |   |   |
| Income  taxes                                                                                                   | ** ** | ** **                     | **$**      | **3,957,000** |   |   |   |   | $ | 859,000 |   |   |   |   | $ | 5,273,000 |   |   |
|                                                                                                            |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Supplemental disclosure of  non-cash investing and financing activities:*                                      | * *   | * *                       | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Capitalized  interest financed and not paid in cash                                                        | ** ** | ** **                     | **$**      | **68,000** |   |   |   |   | $ | 141,000 |   |   |   |   | $ | - |   |   |
| Long-term  debt borrowings financed                                                                             | ** ** | ** **                     | **$**      | **6,600,000** |   |   |   |   | $ | - |   |   |   |   | $ | - |   |   |
| Debt  assumed in purchase of drilling rig                                                                       | ** ** | ** **                     | **$**      | **-** |   |   |   |   | $ | 620,000 |   |   |   |   | $ | - |   |   |
| Debt  assumed in purchase of residential parcel held for investment                                             | ** ** | ** **                     | **$**      | **2,178,000** |   |   |   |   | $ | - |   |   |   |   | $ | - |   |   |
| Reduction  in deposits on residential parcels with corresponding increase in investment  in residential parcels | ** ** | ** **                     | **$**      | **200,000** |   |   |   |   | $ | - |   |   |   |   | $ | - |   |   |

 

During the year ended September 30,2008, 40,000 stock options were exercised by tendering 5,200 shares of Barnwellstock at a market value of $14.95 per share plus $1,000 of cash, resulting in a$20,000 increase in common stock, a $59,000 increase in additional paid-incapital and a $78,000 increase in treasury stock.  During the year ended September 30,2007, 20,000 stock options were exercised by tendering 1,900 shares of Barnwellstock at an average market value of $21.09 per share, resulting in a $10,000increase in common stock, a $30,000 increase in additional paid-in capital anda $40,000 increase in treasury stock.

 

During the years ended September 30,2008 and 2007, capital expenditure accruals related to oil and natural gasasset retirement obligations decreased $131,000 and increased $276,000,respectively.  Additionally, capitalexpenditure accruals related to oil and natural gas exploration and 

 

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development increased$825,000 and decreased $2,039,000 during the years ended September 30,2008 and 2007, respectively.

 

During the year ended September 30,2008, accruals related to residential lots under development increased$855,000.  The increase in accrualsrelated to residential lots under development during the year ended September 30,2007 was not significant.

 

**20.          SUMMARY OF SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**

** **

Disclosure is not required as Barnwell qualifies as asmaller reporting company.

 

**21.          SUPPLEMENTARYOIL AND NATURAL GAS INFORMATION (UNAUDITED)**

** **

Disclosure is not required as Barnwell qualifies as asmaller reporting company.

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

** **

None.

 
| **ITEM 9A(T).** | **CONTROLS AND PROCEDURES** |
|-----------------|-----------------------------|

 

**Disclosure Controls and Procedures**

** **

Wehave established disclosure controls and procedures to ensure that materialinformation relating to Barnwell, including its consolidated subsidiaries, ismade known to the officers who certify Barnwell’s financial reports and toother members of executive management and the Board of Directors.

 

Asof September 30, 2008, an evaluation was carried out by Barnwell’s ChiefExecutive Officer and Chief Financial Officer of the effectiveness of Barnwell’sdisclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer have concluded that Barnwell’s disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) were effective as of September 30,2008  to ensure that information requiredto be disclosed by Barnwell in reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the Securities Exchange Act of 1934 andthe rules thereunder.

 

**Management’s Annual Report on Internal Control Over FinancialReporting**

 

Barnwell’smanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting for Barnwell, as such term is defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934.  Under the supervision and with theparticipation of Barnwell’s management, including our Chief Executive Officerand Chief Financial Officer, Barnwell conducted an evaluation of theeffectiveness of its internal control over financial reporting based on theframework in *Internal Control over FinancialReporting — Guidance for Smaller Public Companies*issued by theCommittee of Sponsoring Organizations of the Treadway Commission (the “COSO 

 

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Framework”).  Based on this evaluation under the COSOFramework, which was completed on November 26, 2008, management concludedthat its internal control over financial reporting was effective as of September 30,2008.

 

Thisannual report does not include an attestation report of Barnwell’s registeredpublic accounting firm regarding internal control over financialreporting.  Management’s report was notsubject to attestation by Barnwell’s registered public accounting firm pursuantto temporary rules of the Securities and Exchange Commission that permitBarnwell to provide only management’s report in this annual report.

 

**Changes in Internal Control Over Financial Reporting**

 

Therewas no change in Barnwell’s internal control over financial reporting duringthe quarter ended September 30, 2008, that materially affected, or isreasonably likely to materially affect, Barnwell’s internal control overfinancial reporting.

 
| **ITEM 9B.** | **OTHER INFORMATION** |
|--------------|-----------------------|

 

None.

 

**PART III**

 
| **ITEM 10.** | **DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE  GOVERNANCE** |
|--------------|-------------------------------------------------------------|

** **

The information required isomitted pursuant to General Instruction G(3) of Form 10-K, since theRegistrant will file its definitive proxy statement for the 2009 Annual Meetingof Stockholders no later than 120 days after the close of its fiscal year endedSeptember 30, 2008, which proxy statement is incorporated herein byreference.

 

Barnwell adopted a Code ofEthics that applies to its Chief Executive Officer and the ChiefFinancial Officer.  This Code of Ethicshas been posted on Barnwell’s website at www.brninc.com.

 
| **ITEM 11.** | **EXECUTIVE COMPENSATION** |
|--------------|----------------------------|

 

The information required isomitted pursuant to General Instruction G(3) of Form 10-K, since theRegistrant will file its definitive proxy statement for the 2009 Annual Meetingof Stockholders no later than 120 days after the close of its fiscal year endedSeptember 30, 2008, which proxy statement is incorporated herein byreference.

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

 

The information required isomitted pursuant to General Instruction G(3) of Form 10-K, since theRegistrant will file its definitive proxy statement for the 2009 Annual Meetingof Stockholders no later than 120 days after the close of its fiscal year endedSeptember 30, 2008, which proxy statement is incorporated herein byreference.

 

109

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*Equity Compensation PlanInformation*

* *

The following table providesinformation about Barnwell’s common stock that may be issued upon exercise ofoptions and rights under all of Barnwell’s existing equity compensation plansas of September 30, 2008:

 
|                                                        |   | (a)               |    | (b)         |   | (c)                       |
|-------------------------------------------------------------|--------|-------------------|---------|-------------|--------|---------------------------|
|                                                        |   | Number of         |    | Weighted-   |   | Number of securities      |
|                                                        |   | securities        |    | average     |   | remaining available       |
|                                                        |   | to be issued      |    | price of    |   | for future issuance       |
|                                                        |   | upon exercise     |    | outstanding |   | under equity              |
|                                                        |   | of outstanding    |    | options,    |   | compensation plans        |
|                                                        |   | options, warrants |    | warrants    |   | (excluding securities     |
| Plan Category                                               |   | and rights        |    | and rights  |   | reflected  in column (a)) |
| Equity compensation plans approved by security  holders     |   |              | 718,000 |        |   |                      | $9.94 |   |   |   | 466,000 |   |
| Equity compensation plans not approved by security  holders |   |              | -       |        |   |                      | - |   |   |   | - |   |
| Total                                                       |   |              | 718,000 |        |   |                      | $9.94 |   |   |   | 466,000 |   |

** **

**ITEM 13.****                                             ****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

** **

The information required isomitted pursuant to General Instruction G(3) of Form 10-K, since theRegistrant will file its definitive proxy statement for the 2009 Annual Meetingof Stockholders no later than 120 days after the close of its fiscal year endedSeptember 30, 2008, which proxy statement is incorporated herein byreference.

 

**ITEM 14.****                                             ****PRINCIPAL ACCOUNTING FEES ANDSERVICES**

** **

The information required isomitted pursuant to General Instruction G(3) of Form 10-K, since theRegistrant will file its definitive proxy statement for the 2009 Annual Meetingof Stockholders no later than 120 days after the close of its fiscal year endedSeptember 30, 2008, which proxy statement is incorporated herein by reference.

 

**PART IV**

** **

**ITEM 15.****                                             ****EXHIBITS, FINANCIAL STATEMENTSCHEDULES**

** **
| (a)    |   | Financial  Statements                                                                                                                          |   |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                           |   |   |
|   |   | The following  consolidated financial statements of Barnwell Industries, Inc. and its  subsidiaries are included in Part II, Item 8: |   | Page   |
|   |   |                                                                                                                                           |   |   |   |
|   |   | Report of  Independent Registered Public Accounting Firm – KPMG LLP                                                                       |   | 62     |
|   |   |                                                                                                                                           |   |   |   |
|   |   | Consolidated  Balance Sheets – September 30, 2008 and 2007                                                                           |   | 63     |

 

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|   |   | Consolidated  Statements of Earnings – for the three years ended September 30, 2008                                                                            |                                                                                                                                                                                       | 64     |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                     |                                                                                                                                                                                       |   |   |
|   |   | Consolidated  Statements of Cash Flows – for the three years ended September 30, 2008                                                                          |                                                                                                                                                                                       | 65     |
|   |   |                                                                                                                                                                     |                                                                                                                                                                                       |   |   |
|   |   | Consolidated Statements of Stockholders’ Equity and  Comprehensive Income for the three years ended September 30, 2008                                         |                                                                                                                                                                                       | 66-68  |
|   |   |                                                                                                                                                                     |                                                                                                                                                                                       |   |   |
|   |   | Notes to  Consolidated Financial Statements                                                                                                                              |                                                                                                                                                                                       | 69     |
|   |   |                                                                                                                                                                     |                                                                                                                                                                                       |   |   |
|   |   | 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(2)                                                                                                                                                           |   |   |
|   |   |                                                                                                                                                                     |                                                                                                                                                                                       |   |   |
|   |   | No. 4.0                                                                                                                                                             | Form of the  Registrant’s certificate of common stock, par value $.50 per share.(3)                                                                                              |   |   |
|   |   |                                                                                                                                                                     |                                                                                                                                                                                       |   |   |
|   |   | No. 10.1                                                                                                                                                            | The Barnwell Industries, Inc.  Employees’ Pension Plan (restated as of October 1, 1989).(4)                                                                            |   |   |
|   |   |                                                                                                                                                                     |                                                                                                                                                                                       |   |   |
|   |   | No. 10.2                                                                                                                                                            | Phase I Makai  Development Agreement dated June 30, 1992, by and between Kaupulehu  Makai Venture and Kaupulehu Developments.(5)                                                      |   |   |
|   |   |                                                                                                                                                                     |                                                                                                                                                                                       |   |   |
|   |   | No. 10.3                                                                                                                                                            | KD/KMV Agreement  dated June 30, 1992 by and between Kaupulehu Makai Venture and Kaupulehu  Developments.(5)                                                                          |   |   |
|   |   |                                                                                                                                                                     |                                                                                                                                                                                       |   |   |
|   |   | No. 10.4                                                                                                                                                            | Barnwell  Industries, Inc.’s letter to Warren D. Steckley dated May 6, 1998,  regarding certain terms of employment.(6)                                                     |   |   |
|   |   |                                                                                                                                                                     |                                                                                                                                                                                       |   |   |
|   |   | No. 21                                                                                                                                                              | List of  Subsidiaries                                                                                                                                                                      |   |   |
|   |   |                                                                                                                                                                     |                                                                                                                                                                                       |   |   |
|   |   | No. 23                                                                                                                                                              | Consent of KPMG  LLP                                                                                                                                                                       |   |   |
|   |   |                                                                                                                                                                     |                                                                                                                                                                                       |   |   |
|   |   | 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 Registrant’s Form 8-K filed December 12, 2007.                                                                                                                  |
| (3) | Incorporated by  reference to the registration statement on Form S-1 originally filed by  the Registrant January 29, 1957 and as amended  February 15, 1957 and February 19, 1957. |
| (4) | Incorporated by  reference to Form 10-K for the year ended September 30, 1989.                                                                                                                         |
| (5) | Incorporated by  reference to Form 10-K for the year ended September 30, 1992.                                                                                                                         |
| (6) | Incorporated by  reference to Form 10-KSB for the year ended September 30, 2000.                                                                                                                       |

 

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SIGNATURES

 

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

 
| BARNWELL  INDUSTRIES, INC. |                       |
|----------------------------|----------------------------|
| (Registrant)               |                       |
|                       |                       |   |
|                       |                       |   |
|                       | /s/ Russell M.  Gifford    |   |
| By:                        | RUSSELL M.  GIFFORD        |   |
|                       | Chief Financial  Officer,  |   |
|                       | Executive Vice  President, |   |
|                       | Treasurer and  Secretary   |   |
| Date:                      | December 5,  2008     |   |

 

112

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SIGNATURES (continued)

 

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 5, 2008                                       |                                 |
|                                                               |                                 |
|                                                               |                                 |
|        /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 5, 2008                                       | Secretary and  Director              |
|                                                               | Date:  December 5, 2008         |
|                                                               |                                 |
|                                                               |                                 |
|        /s/ Martin Anderson      |                                 |        /s/ Murray C. Gardner            |   |
| MARTIN ANDERSON,  Director                                         | MURRAY C.  GARDNER, Director         |
| Date:  December 5, 2008                                       | Date: December 5,  2008         |
|                                                               |                                 |
|                                                               |                                 |
|        /s/ Ahron H. Haspel      |                                 |        /s/ Alan D. Hunter               |   |
| AHRON H. HASPEL,  Director                                         | ALAN D. HUNTER,  Director            |
| Date:  December 5, 2008                                       | Date:  December 5, 2008         |
|                                                               |                                 |
|                                                               |                                 |
|        /s/ Diane G. Kranz       |                                 |        /s/ Terry Johnston               |   |
| DIANE G. KRANZ,  Director                                          | TERRY JOHNSTON,  Director            |
| Date:  December 5, 2008                                       | Date:  December 5, 2008         |
|                                                               |                                 |
|                                                               |                                 |
|        /s/ Kevin K. Takata      |                                 |        /s/ Robert J.  Inglima, Jr. |   |
| KEVIN K. TAKATA,  Director                                         | ROBERT J.  INGLIMA, JR., Director    |
| Date:  December 5, 2008                                       | Date:  December 5, 2008         |

 

113

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