** **

** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-K/A**

 

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

 

**CommissionFile Number 1-5103**

 

**BARNWELLINDUSTRIES, 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 area code:**  (808) 531-8400**

 

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

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

 

Securitiesregistered pursuant to Section 12(g) of the Act:  **None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

o Yes  xNo

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

o Yes  xNo

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days.                                                                       x Yes  o No

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.                                                   x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer | o                                               |   | Accelerated filer o          |
|-------------------------|-------------------------------------------------|--------|------------------------------|
| Non-accelerated filer   | o(Do not check if a smaller  reporting company) |   | Smaller reporting  company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).                      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.

 

DocumentsIncorporated by Reference

 

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

 

 

** **

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**Explanatory Note**

**Amendment No. 1**

 

This Amendment No. 1on Form 10-K/A (this “Amendment”) amends Barnwell’s Annual Report on Form 10-Kfor the year ended September 30, 2008, which Barnwell previously filedwith the Securities and Exchange Commission (the “SEC”) on December 18,2008 (the “Original Report”).  We arefiling this Amendment in response to a comment we received from the staff ofthe Division of Corporation Finance of the SEC in connection with the staff’sreview of the Original Report.

 

In preparing the AnnualReport on Form 10-K for the fiscal year ended September 30, 2008, theCompany followed the SEC’s guidance for smaller reporting companies set forthin Release Nos. 33-8876; 34-56994; and 39-2451. Under Item 302(b) of Regulation S-K, registrants engaged in oil andgas producing activities are required to present the information about oil andgas producing activities specified in paragraphs 9 through 34 of SFAS No. 69.  However, Item 302(c) of Regulation S-Kgoes on to state that a registrant that qualifies as a smaller reportingcompany is not required to provide the information required by Item 302.  As a smaller reporting company, Barnwelltherefore did not provide the SFAS No. 69 disclosures in its OriginalReport.

 

In the Original Report,Barnwell provided disclosure of a number of the items required to be disclosedunder SFAS No. 69 elsewhere in the Form 10-K including the netquantities of our interests in proved producing and total proved oil andnatural gas reserves; changes in the net quantities of proved reserves of oiland natural gas during the year; oil and natural gas total capitalized costsand aggregate related accumulated depreciation and depletion; total oil andnatural gas capital expenditures for fiscal 2008; oil and natural gas revenues,production costs, depreciation and depletion, and pre-tax results of operations;and the present value (discounted at 10%) of our estimated future net revenuesfrom total proved oil, natural gas and natural gas liquids reserves.

 

Pursuant to a commentreceived by the SEC staff wherein the SEC staff acknowledged Barnwell’s interpretationof the regulations and notwithstanding Item 302(c) of Regulation S-K,Barnwell is filing this Amendment solely to incorporate the supplementary oiland natural gas information disclosures required under SFAS No. 69 in Note21 of the Notes to Consolidated Financial Statements.  As such, Item 8 - Financial Statements andSupplementary Data of this Form 10-K/A has been revised to include Note21.

 

No other changes to theOriginal Report are included in this Amendment other than to provide currently-datedExhibit Nos. 31.1, 31.2, and 32. Furthermore, this Form 10-K/A does not reflect events occurringafter the filing of the Original Report. Accordingly, this Amendment should beread in conjunction with the Original Report and our other filings with the SECsubsequent to the filing of the Original Report.

 

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**ITEM 8.                  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**Report of Independent RegisteredPublic 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

 

1

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BARNWELL INDUSTRIES, 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

 

2

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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

 

3

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BARNWELL INDUSTRIES, 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

 

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVEINCOME

Years ended September 30,2006, 2007 and 2008

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

 

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BARNWELLINDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Years ended September 30,2006, 2007 and 2008

 

(continued from previouspage)

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

 

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BARNWELLINDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Years ended September 30,2006, 2007 and 2008

 

(continued from previouspage)

 
| ** **                                                                                                                                                                | ** ** | ** **      | ** ** | ** ** | ** **    | ** **     | ** ** | ** **        | ** **    | ** **   | ** ** | **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 Consolidated Financial Statements

 

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**BARNWELLINDUSTRIES, INC.**

 

**ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

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

 

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

 

Theconsolidated financial statements include the accounts of Barnwell Industries, Inc.and all majority-owned subsidiaries, including an indirect 77.6%-owned landinvestment general partnership and two 80%-owned joint ventures, (collectivelyreferred to herein 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.

 

Duringits last three fiscal years, Barnwell was engaged in the following lines ofbusiness: 1) exploring for, developing, producing and selling oil andnatural gas in Canada, 2) investing in leasehold land and other realestate interests in Hawaii, 3) acquiring property for investment anddevelopment of homes for sale in Hawaii (established January 2007), and4) drilling wells and installing and repairing water pumping systems inHawaii.  Barnwell’s oil and natural gasactivities comprise its largest business segment.  Approximately 75% of Barnwell’s revenues and96% of Barnwell’s capital expenditures for the fiscal year ended September 30,2008 were attributable 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.****                                      SIGNIFICANTACCOUNTING POLICIES**

 

*Cash and CashEquivalents*

 

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

 

*AccountsReceivable*

 

Accountsreceivable are recorded 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 toits customers.

 

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*Oil and NaturalGas Properties*

 

Barnwelluses the full cost method of accounting under which all costs incurred in theacquisition, exploration and development of oil and natural gas reserves,including costs related to unsuccessful wells and estimated future siterestoration and abandonment, are capitalized until such time as the aggregateof such costs net of accumulated depletion and oil and 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.

 

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

 

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

 

*Investment inLand Interests*

 

Barnwellaccounts for sales of development rights under option and the Increment Iand Increment II leasehold land interest sales under the full accrualmethod pursuant to the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 66, “Accounting for Sales of Real Estate.”  Gains from such sales are recognized when thebuyer’s investments are adequate to demonstrate a commitment to pay for theproperty, risks and rewards of ownership have been transferred to the buyer,and Barnwell does not have a substantial continuing involvement with theproperty sold.  With regard to the salesof Increment I and Increment II leasehold land interests, inaccordance with SFAS No. 66, the percentage of sales payments arecontingent future profits which will be recognized when they are realized, andall costs of the sales were recognized at the time of sale and none weredeferred to future periods when any contingent profits will be recognized.  Costs incurred for the acquisition andimprovement of leasehold land interests and lot acquisition rights not yet soldare included in the Consolidated Balance Sheets under the caption “Investmentin Land Interests.”  Investment in land 

 

9

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interestsis reported at the lower of the asset carrying value or fair value and isevaluated for impairment whenever events or changes in circumstances indicatethat the recorded investment balance may not be fully recoverable.

 

*ResidentialLots Under Development, Investment in Residential Parcels and Deposits onResidential Parcels*

 

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

 

Residentiallots under development, which include the costs of acquiring land, developmentand construction 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.

 

Barnwellcapitalizes interest costs during development and construction and includesthese costs in cost of sales when homes are sold.

 

*Investment inAffiliate*

 

Barnwellaccounts for its investment in unconsolidated affiliates under the equitymethod when Barnwell’s ownership interest is more than 20% but no more than 50%and Barnwell does not exercise direct or indirect control over theinvestee.  Factors that are considered indetermining whether or not Barnwell exercises control include rights ofpartners regarding significant 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.

 

*ContractDrilling*

 

Revenues,costs and profits applicable to contract drilling contracts are included in theConsolidated Statements of Earnings using the percentage of completion method,principally measured by the percentage of labor dollars incurred to date foreach contract to total estimated labor dollars for each contract.  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*

 

Incometaxes are determined using the asset and liability method.  Deferred tax assets and liabilities arerecognized for the estimated future tax impacts of differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax bases.  Deferred taxassets and liabilities are measured using enacted tax rates in effect for theyear in which those temporary differences are expected to be recovered orsettled.  The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date.

 

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Avaluation allowance is provided when it is more likely than not that someportion or all of the deferred tax asset will not be realized.  Barnwell has established a valuationallowance primarily for the U.S. tax effect of deferred Canadian taxes, accruedliabilities, bad debt allowances and state of Hawaii net operating loss carryforwardswhich may not be realizable in future years as there can be no assurance of anyspecific level of earnings, that the timing of U.S. taxable income willcoincide with the payment of Canadian taxes to enable Canadian taxes to befully deducted (or recoverable) for U.S. tax purposes, or that Canadiandeferred tax assets will provide any incremental benefit for U.S. tax purposesover the amount of benefit for Canadian tax purposes.

 

EffectiveOctober 1, 2007, Barnwell adopted the provisions of FASB Interpretation (“FIN”)No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation ofFASB Statement 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 taxbenefit that is more likely than not of being realized upon ultimate settlementwith a taxing 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.

 

*RetirementPlans*

 

Barnwellsponsors a noncontributory defined benefit pension plan covering substantiallyall of its U.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.

 

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

 

11

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Theestimation of Barnwell’s retirement plan obligations, costs and liabilitiesrequires management to estimate the amount and timing of cash outflows forprojected future payments and cash inflows for maturities and expected returnson plan assets.  These assumptions mayhave an effect on the amount and timing of future contributions.

 

Atthe end of each year, Barnwell determines the discount rate to be used tocalculate the present value of plan liabilities and the net periodic benefitcost.  The discount rate is an estimateof the current 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.

 

Theeffects of actual results differing from the above assumptions or revisions toactuarial assumptions could materially affect Barnwell’s financial conditionand/or results of operations.  Theeffects of changing assumptions are included in unamortized net gains andlosses, which directly affect accumulated other comprehensive income (loss).These unamortized gains and losses are amortized and reclassified to income(loss) over future periods.

 

*Long-livedAssets*

 

Long-livedassets to be held and used, other than oil and natural gas properties, areevaluated for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be fully recoverable.  If 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.

 

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

 

*Inventories*

 

Inventoriesare comprised of drilling materials and are valued at the lower of weighted-averagecost or market value.  Inventory isincluded in the Consolidated Balance Sheets as of September 30, 2008 and2007 under the caption “Other current assets.”

 

*Environmental*

 

Barnwellis subject to extensive environmental laws and regulations.  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 theenvironmental effects of the disposal or release of petroleum or chemicalsubstances at various sites. Environmental expenditures are expensed or capitalized depending ontheir future economic benefit. Expenditures that relate to an existing condition caused by pastoperations 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.

 

12

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*AssetRetirement Obligation*

 

Barnwellaccounts for asset retirement obligations in accordance with 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.

 

*Earnings PerCommon Share*

 

InOctober 2005, Barnwell’s Board of Directors declared a three-for-one stocksplit in the form of a 200% stock dividend. The shares were distributed on November 14, 2005 to allstockholders of record as of October 28, 2005.  All information in this Form 10-K/A hasbeen adjusted where necessary to reflect the stock split for all periodspresented.

 

Basicearnings per share excludes dilution and is computed by dividing net earningsby the weighted-average number of common shares outstanding for theperiod.  Diluted earnings per shareincludes the potentially dilutive effect of outstanding common stock options.

 

Reconciliations between the numerator anddenominator of the basic and diluted earnings per share computations for theyears ended September 30, 2008, 2007 and 2006 are 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 |   |

 

Therewere no anti-dilutive shares for fiscal years 2008, 2007 and 2006.

 

*Share-BasedCompensation*

 

Barnwellaccounts for its share-based compensation plans in accordance with SFAS No. 123(R),“Share-Based Payment,” and SEC SAB No. 107, “Share-Based Payment,” usingthe modified prospective method.  UnderSFAS No. 123(R), share-based compensation cost is measured at fairvalue.  Under the modified prospectivetransition method, 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.

 

UnderSFAS No. 123(R), share-based compensation cost is measured at fairvalue.  Barnwell utilizes a closed-formvaluation model 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.

 

*ForeignCurrency Translation*

 

Assetsand liabilities of foreign operations and subsidiaries are translated at theyear-end exchange rate and resulting translation gains or losses are accountedfor in a stockholders’ equity account entitled “Accumulated other comprehensiveincome, net.”  Operating results offoreign subsidiaries are translated at average exchange rates during theperiod.  Realized foreign currencytransaction gains or losses were not material in fiscal years 2008, 2007, and2006.

 

*Use ofEstimates in the Preparation of Financial Statements*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses and the disclosure of contingent assets andliabilities.  Actual results could differsignificantly from those estimates.  

 

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Significant assumptions are required in thevaluation of deferred tax assets, asset retirement obligations, share-basedpayment arrangements, obligations for retirement plans, contract drilling estimatedcosts to complete, proved oil and natural gas reserves, and the fair value ofother assets, and such assumptions may impact the amount at which such itemsare recorded.

 

*Reclassifications*

 

Certainreclassifications have been made to the September 30, 2007 and 2006consolidated financial statements to conform to classifications used in the September 30,2008 consolidated financial statements.

 

*Recently IssuedAccounting Standards*

 

InSeptember 2006, the Financial Accounting Standards Board (the “FASB”) issuedSFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles, and expandsdisclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements,however, for some entities, the application of SFAS No. 157 will changecurrent practice.  SFAS No. 157 iseffective 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.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115.”  SFAS No. 159provides companies with an option to report selected financial assets andfinancial liabilities at fair value. Unrealized gains and losses on items for which the fair value option hasbeen elected are reported in earnings at each subsequent reporting date.  Upfront costs and fees related to items forwhich the fair value option is elected are recognized in earnings asincurred.  SFAS No. 159 is effectivefor fiscal years beginning after November 15, 2007.  Adoption of SFAS No. 159 will not have amaterial impact on Barnwell’s results of operations, financial condition andliquidity.

 

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

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles.”  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.****                                      ACCOUNTSRECEIVABLE AND CONTRACT COSTS**

 

Accountsreceivable are net of allowances for doubtful accounts of $1,078,000 and$20,000 as of September 30, 2008 and 2007, respectively.  Included in accounts receivable are contractretainage balances of $532,000 and $385,000 as of September 30, 2008 and2007, respectively.  The retainagebalance as of September 30, 2008 is expected to be collected within oneyear, generally within 45 days after the related contracts have received finalacceptance and approval.

 

Theincrease in the allowance for doubtful accounts at September 30, 2008 ascompared to September 30, 2007 is principally due to the bankruptcy ofSemGroup, L.P.  In July 2008, SemGroup,L.P. announced it had filed voluntary petitions for reorganization underChapter 11 of the U.S. Bankruptcy Code as well as an application for 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 $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.

 

Costsand estimated earnings on uncompleted contracts are 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 | ) |

 

Costsand estimated earnings on uncompleted contracts are included in theConsolidated 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-BASEDPAYMENTS**

 

Barnwellhas outstanding stock options issued to certain employees understockholder-approved qualified plans and non-qualified plans at September 30,2008.  The qualified options were grantedin accordance with the 1998 Stock Option Plan with an exercise price equal tothe closing market price of Barnwell’s stock on the date preceding the date ofgrant (110% of the closing market price on the date 

 

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preceding the date of grant for optionsgranted to affiliates), vest annually over four years of continuous service,and expire ten years from the date of grant (five years from date of grant foroptions granted to affiliates).  Thequalified plan permits the grant of share options to employees for up to780,000 shares of common stock.  A totalof 774,000 share options have been granted under this plan.  No option shares were available for grantunder the qualified plan as of the date of this filing.  The non-qualified options were granted withan exercise price equal to the closing market price of Barnwell’s stock on thedate of grant, vest annually over five years of continuous service, and expireten years from the date of grant.  Thenon-qualified options have stock appreciation rights features that permit theholder to receive stock, cash or a combination thereof equal to the amount bywhich the fair market value, at the time of exercise of the option, exceeds theoption price.

 

OnMarch 3, 2008, the stockholders of Barnwell approved the 2008 EquityIncentive Plan (the “2008 Plan”).  Underthe 2008 Plan, the Compensation Committee, which consists of independentmembers of Barnwell’s Board of Directors, is authorized to grant incentivestock options, nonstatutory stock options, stock options with stockappreciation rights, restricted stock, restricted stock units and performanceunits, qualified performance-based awards, and stock grants to employees,consultants and non-employee members of the Board of Directors.  800,000 shares of Barnwell common stock havebeen reserved for issuance pursuant to the 2008 Plan.  A total of 340,000 share options have beengranted under this plan, leaving 460,000 option shares available for grantunder the 2008 Plan at September 30, 2008.

 

Barnwellcurrently has a policy of issuing new shares to satisfy share option exercisesunder both the qualified plans and non-qualified plans when the optioneerequests shares.

 

TheCompany’s share-based compensation expense (benefit) and related income taxeffects 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 | ) |

 

Asof September 30, 2008, there was $839,000 of total unrecognizedcompensation cost related to nonvested equity-classified andliability-classified share options.  Thatcost is expected to be recognized over 3.4 years.  Total share-based compensation expenserelated 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-classifiedAwards*

 

Compensationcost for equity-classified awards, such as Barnwell’s stock options issuedunder the qualified plan, is measured at the grant date based on the fair valueof the award and is recognized as an expense in earnings over the requisiteservice period using a graded vesting method.

 

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A summary of the activityin Barnwell’s equity-classified share options as of the beginning and end ofthe 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 |   |

 

Totalshare-based compensation expense for equity-classified awards vested in theyears ended September 30, 2008, 2007 and 2006 was $35,000, $77,000 and$144,000, respectively.  There was noimpact on income taxes as the expense relates to qualified options.

 

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

 

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

 

*Liability-classifiedAwards*

 

Compensationcost for liability-classified awards, such as Barnwell’s non-qualified stockoptions with stock appreciation rights features, is remeasured at eachperiod-end using a closed-form valuation model based on current values and isrecognized as an expense over the requisite service period.

 

Barnwellgranted stock options to acquire a total of 340,000 shares of Barnwell’s commonstock under non-qualified plans during fiscal 2008.

 

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Thefollowing assumptions were used in estimating fair value for allliability-classified share options outstanding during the years ended 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 |   |

 

Theapplication of alternative assumptions could produce significantly differentestimates of the fair value of stock-based compensation, and consequently, therelated costs reported in the Consolidated Statements of Earnings.

 

Asummary of the activity in Barnwell’s liability-classified share options as ofthe beginning and end of the year ended September 30, 2008 is presentedbelow:

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

 

Totalshare-based compensation for liability-classified awards was a benefit of$437,000 for the year ended September 30, 2008 and expenses of $385,000and $439,000 for the years ended September 30, 2007 and 2006,respectively.  The related income taxeffects were an expense of $149,000 for the year ended September 30, 2008and benefits of $133,000 and $146,000 for the years ended September 30,2007 and 2006, respectively.  Included inshare-based compensation for liability-classified awards for fiscal 2008, 2007and 2006 was $339,000, $331,000 and $740,000, respectively, of compensationexpense related to shares that vested during each respective period and a$776,000 benefit, a $54,000 expense and a $301,000 benefit, respectively, dueto remeasurement at September 30, 2008, 2007 and 2006 of the fair value ofpreviously vested shares.

 

Infiscal 2008, the stock appreciation rights feature of 40,000 shares ofnon-qualified options was exercised and $458,000 was paid in cash byBarnwell.  The tax benefit realized forthe tax deduction 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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Duringfiscal 2007, the stock appreciation rights feature of 104,000 shares ofnon-qualified options was exercised and $2,024,000 was paid in cash byBarnwell.  The tax benefit realized forthe tax deduction 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.

 

Duringfiscal 2006, the stock appreciation rights feature of 90,000 shares ofnon-qualified options was exercised and $1,649,000 was paid in cash byBarnwell.  The tax benefit realized forthe tax deduction 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 ofStock Awards*

 

InJune 1998, Barnwell granted 180,000 stock options under a non-qualifiedplan at a purchase price of $2.60 per share (market price on date ofgrant).  These options have stockappreciation rights that permit the holder to receive stock, cash or acombination thereof equal to the amount by which the fair market value, at thetime of exercise of the option, exceeds the option price.  During the years ended September 30,2008, 2007 and 2006, the stock appreciation rights feature on 40,000 shares,80,000 shares and 60,000 shares, respectively, of these options were exercisedand the differences between the exercise price and the closing prices per shareon the days prior to the dates of exercise were paid by Barnwell.  Barnwell recognized compensation benefits of$108,000 and $359,000 relating to these options in fiscal years 2008 and 2006,respectively, and compensation expense of $229,000 in fiscal 2007.

 

InDecember 1999, Barnwell granted qualified stock options to acquire 582,000shares of Barnwell’s common stock at a weighted-average exercise price pershare of $2.04 (based on grants at market price and 110% of market price atdate of grant).  The remaining 42,000shares of unexercised options outstanding as of September 30, 2008 expirein December 2009.  During the yearsended September 30, 2008 and 2007, Barnwell issued 113,000 shares and91,000 shares, respectively, of its common stock resulting from exercises ofthese qualified stock options; no shares were issued during the year ended September 30,2006.  No compensation cost wasrecognized for these options for the years ended September 30, 2008, 2007and 2006 as these options were fully vested prior to 2005.

 

InDecember 2004, Barnwell granted qualified stock options to acquire 210,000shares of Barnwell’s common stock at a weighted-average exercise price pershare of $9.23 (based on grants at market price and 110% of market price at thedate of grant).  These options vestannually over four years commencing one year from the date of grant and expirein December 2014 and December 2009 (for options granted toaffiliates).  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.

 

InDecember 2004, Barnwell granted stock options to acquire 210,000 shares ofBarnwell’s common stock under a non-qualified plan at a purchase price of $8.80per share (market price on date of grant). These options vest annually over five years commencing one year from thedate of grant and expire in December 2014. These options have stock appreciation rights that permit the holder toreceive stock, cash or a combination thereof equal to the amount by which thefair market value, at the 

 

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timeof exercise of the option, exceeds the option price.  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.

 

InDecember 2007, Barnwell granted stock options to acquire 100,000 shares ofBarnwell’s common stock under a non-qualified plan at a purchase price of$12.92 per share (market price on date of grant).  The stock options were issued in March 2008under the 2008 Plan, which received shareholder approval on March 3,2008.  These options vest annually overfour years commencing 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.

 

InMay 2008, Barnwell granted stock options to acquire 240,000 shares ofBarnwell’s common stock under a non-qualified plan at a purchase price of$11.40 per share (market price on date of grant).  The stock options were issued under the 2008Plan.  These options vest annually overfour years commencing one year from the date of grant and expire in May 2018.  These options have stock appreciation rightsthat permit the holders to receive stock, cash or a combination thereof equalto the amount by which the fair market value, at the time of exercise of theoption, exceeds the option price. Barnwell recognized compensation expense of $157,000 relating to theseoptions in fiscal 2008.

 

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

 

Establishedin fiscal 2007, Kaupulehu 2007, LLLP (“Kaupulehu 2007”), a Hawaii limitedliability limited partnership 80%-owned by Barnwell and 20%-owned by Nearco, Inc.(“Nearco”), a company controlled by a director of Barnwell and minorityinterest owner in certain of Barnwell’s business ventures (see furtherdiscussion on related party interests at Note 9 below), acquires houselots for investment and constructs turnkey single-family homes for futuresale.  Upon establishment, Kaupulehu 2007made nonrefundable initial deposits of $200,000 each to secure the right topurchase seven 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.

 

Asof September 30, 2008, Kaupulehu 2007 owns four parcels in the Lot 4AIncrement I area located approximately six miles north of the KonaInternational Airport in the North Kona District of the island of Hawaii,within and adjacent to the Hualalai Resort at Historic Ka’upulehu, between theQueen Kaahumanu Highway and the Pacific Ocean. Three of the four parcels were acquired in fiscal 2007 and the fourthparcel was acquired in the second quarter of fiscal 2008.  Kaupulehu 2007 is in the process of developingresidences for future sale on two of the parcels and intends to hold theremaining two parcels for investment purposes. The two parcels held for development are classified as “Residential LotsUnder Development” and the other two parcels are classified as “Investment inResidential Parcels” on the Consolidated Balance Sheet at September 30,2008.

 

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InJune 2008, Kaupulehu 2007 sold its investments in two of its threeremaining rights to purchase lots in the Lot 4A Increment I area to anunrelated party at a price of $221,000 each. The $443,000 gain from the sale of lot purchase rights is reflected in “Gasprocessing and other” on the Consolidated Statement of Earnings for the yearended September 30, 2008.  Theunrelated party used the lot purchase rights acquired from Kaupulehu 2007 topurchase two parcels in the Lot 4A Increment I area from WB.  As Kaupulehu 2007 no longer had an obligationto purchase the aforementioned two parcels, Kaupulehu 2007 received a $400,000refund of its original deposits for the two lots at $200,000 per lot.

 

AtSeptember 30, 2008, one deposit of $200,000 remained.  The closing date for Kaupulehu 2007’sobligation to purchase the remaining parcel is being negotiated.

 

Includedin the Consolidated Balance Sheets under the caption “Residential Lots UnderDevelopment” are capitalized costs, which include the costs of acquiring land,development and construction costs, interest, property taxes and general andadministrative expenses related to the development of land and homeconstruction.  Costs that relate to aspecific lot or home are assigned to that lot or home while common costsrelated to multiple lots or homes are allocated to each in proportion to theiranticipated sales value.  Kaupulehu 2007capitalizes interest costs during development and construction and includesthese costs in cost of sales when homes are sold.  These capitalized interest costs totaled$394,000 and $142,000 for the years ended September 30, 2008 and 2007,respectively.

 

Kaupulehu2007 has an agreement with Mr. David Johnston, the son of a director ofBarnwell and minority interest owner in certain of Barnwell’s ventures (seefurther discussion 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.****                                      INVESTMENTIN JOINT VENTURES**

 

Kaupulehu Investors, LLC,a limited liability company80%-owned by Barnwell and 20%-owned by Nearco, a company controlled by adirector of Barnwell and minority interest owner in certain of Barnwell’sbusiness ventures (see further discussion on related party interests atNote 9 below), owns a 1.5% passive minority interest in HualalaiInvestors JV, LLC and in Hualalai Investors II, LLC (hereinafter referred to as“Hualalai Investors”), owners of Hualalai Resort, and Kona Village Investors,LLC, owner of Kona Village Resort.

 

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

 

Kaupulehu Investors, LLC,accounts for its 1.5% passive investments under the cost method.  The investments are evaluated for impairment whenever events or changesin circumstances indicate that the recorded investment balance may not be fullyrecoverable.  These investmentsare reflected in the Consolidated Balance Sheets as of September 30, 2008and 2007 as “Investment in Joint Ventures.”

 

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**7.             INVESTMENT IN LAND INTERESTS**

 

*Background*

 

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

 

Between1986 and 1989, Kaupulehu Developments obtained the state and county zoningchanges necessary to permit development of the Four Seasons Resort Hualalai atHistoric Ka’upulehu and Hualalai Golf Club which opened in 1996, a second golfcourse, and single-family and multi-family residential units.  These projects were developed on leaseholdland acquired from Kaupulehu Developments by Kaupulehu Makai Venture, anunrelated entity, which was subsequently acquired in June 2006 by HualalaiInvestors, an unrelated entity in which Barnwell acquired a 1.5% passiveminority interest in fiscal 2007 (see further discussion in Note 6 above).

 

Between1993 and 2001, Kaupulehu Developments obtained the state and county zoningchanges necessary to permit development of single-family andmulti-family residential units, a golf course and a limited commercial area onapproximately 870 leasehold acres located adjacent to and north of the FourSeasons Resort Hualalai at Historic Ka’upulehu.

 

*DevelopmentRights Under Option*

 

Kaupulehu Developmentsholds development rights for residentially-zoned leasehold land within andadjacent to the Hualalai Golf Club.  Thedevelopment rights are under option to Hualalai Investors, an entity in whichBarnwell acquired a 1.5% passive minority interest through an 80%-owned jointventure in fiscal 2007.  HualalaiInvestors is the ownerand current developer of Hualalai Resort. Revenues, minority interest in earnings and operating profit related tosales of development rights under option for the fiscal years ended September 30,2008, 2007 and 2006 are summarized 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 fromthe sale of development rights of $4,426,000 include $2,656,000 of proceedsreceived for the development rights option that was due on December 31,2007 as well as $1,770,000 of proceeds related to the development rights optiondue on December 31, 2008.

 

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Thetotal amount of remaining future option receipts, if all options are fullyexercised, is $6,198,000 as of September 30, 2008, comprised of$886,000 representing the 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 isnot made, the then remaining development right options will expire.  There is no assurance that any portion of theremaining options will be exercised.

 

Allcapitalized costs associated with Kaupulehu Developments’ development rightswere expensed in previous years.  Thedevelopment rights option revenues, net of related fees, are recorded in theConsolidated Statements of Earnings as “Sale of development rights, net.”

 

*Lot 4AIncrements I and II*

 

InFebruary 2004, Kaupulehu Developments entered into a Purchase and SaleAgreement with WB KD Acquisition, LLC (“WB”) under which Kaupulehu Developmentstransferred its leasehold interest in approximately 870 acres zoned forresort/residential development, in two increments (“Increment I” and “Increment II”),to WB.  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.

 

Withrespect to Increment I, Kaupulehu Developments received an $11,550,000payment in February 2004 and is entitled to receive payments from WB basedon the following percentages of the gross receipts from WB’s sales ofsingle-family residential lots in Increment I: 9% of the gross proceedsfrom single-family lot sales up to aggregate gross proceeds of $100,000,000;10% of such aggregate gross proceeds greater than $100,000,000 but less than$300,000,000; and 14% of such aggregate gross proceeds in excess of$300,000,000.

 

InJune 2006, Kaupulehu Developments entered into an agreement with WB and WBKD Acquisition II, LLC (“WBKD”), under which Kaupulehu Developments sold itsinterest in Increment II to WBKD. There is no affiliation between Kaupulehu Developments and WB orWBKD.  WB and WBKD are both affiliates ofRP-Hualalai Investors, LLC and Westbrook Partners.  Pursuant to the Increment II sale,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 thefuture depending upon a number of variables, including whether the lots aresold prior to improvement.

 

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Thefollowing table summarizes the revenues received from WBfor the sale of Kaupulehu Developments’interest in leasehold land, related minority interest in earnings and operatingprofit for the years ended September 30, 2008, 2007 and 2006:

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

 

WBsold four single-family lots during the year ended September 30, 2008 andpaid Kaupulehu Developments $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 byWB in fiscal 2008 and three of the lots sold by WB in fiscal 2007 werepurchased by Kaupulehu 2007 under a lot purchase contract executed in January 2007(see further discussion in Note 5 above). Percentage of sales payments received by Kaupulehu Developments from WBas a result of Kaupulehu 2007’s lot purchases in fiscal 2008 and 2007 totaled $214,000and $642,000, respectively.  WB is notaffiliated with Barnwell, 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 percentageof sales payments and the Increment 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.

 

*Lot 4C*

 

Lot 4Cis an area of approximately 1,000 acres of vacant leasehold land zonedconservation and is located adjacent to Lot 4A.  Under the terms of the Increment IIAgreement, WBKD has the exclusive right to negotiate with KaupulehuDevelopments with respect to Lot 4C. 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 of Lot 4Czoning, in June 2012.

 

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*Investment inLot Acquisition Rights*

 

KaupulehuMauka Investors, LLC, a limited liability company wholly-owned by Barnwell,holds 14 lot acquisition 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 theMauka Lands is unable to obtain such required land use changes, developmentterms and agreements with respect to the Mauka Lands and Barnwell is thereforeunable to fully recover its investment in the Mauka Lands, we will incur anexpense resulting 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 ofInterests*

 

The land interests held by Barnwell at September 30,2008 include development rights under option, rights to receive varyingpercentages of the gross sales from the sale of lots within approximately 870acres in the Kaupulehu area by WB, approximately 1,000 acres of vacantleasehold land zoned conservation (“Lot 4C”) which is under a right ofnegotiation with WBKD, and lot acquisition rights in agricultural-zonedleasehold land in the upland area of Kaupulehu. There is no assurance that any future development rights option paymentsor percentage of sales payments will be received, nor is there any assurancethat WBKD will enter into an agreement with Kaupulehu Developments regardingLot 4C.  Furthermore, there is noassurance that the required land use reclassification and rezoning from regulatoryagencies will be obtained nor is there any assurance that the necessarydevelopment terms and agreements will be successfully negotiated for the MaukaLands.  Barnwell’s cost of land interestsis included in the September 30, 2008 and 2007 Consolidated Balance Sheetsunder the caption “Investment in Land Interests” and consists of the followingamounts:

 
| ** **                                                           | ** ** | **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.****                                      INVESTMENTIN AFFILIATE**

 

Mauka 3K,LLC (“Mauka 3K”), a limited liability company owned by Barnwell andNearco, 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), provides real estate consultingservices and invests in real estate. Barnwell and Nearco each have a 50% voting interest in Mauka 3K.  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.

 

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

 

Infiscal 2006 Barnwell received net proceeds of $1,440,000 representing its shareof real estate consulting revenues, less related expenses.  The net proceeds are reflected in theConsolidated Statements of Earnings for the year ended September 30, 2006as “Equity in earnings of real estate affiliate, net of tax.”  The tax provision related to equity inearnings of real estate affiliate was $545,000 in fiscal 2006.  There was essentially no activity inMauka 3K during fiscal years 2008 and 2007.  The investment in affiliate is included inthe Consolidated Balance Sheets as of September 30, 2008 and 2007 underthe caption “Other current assets.”

 

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

 

Thissection discusses certain direct and indirect relationships and transactionsinvolving Barnwell and Mr. Terry Johnston, a director of Barnwell andminority interest owner in certain of Barnwell’s business ventures.

 

Mr. Johnstonand his affiliated entities own a direct financial interest in 19.3% ofKaupulehu Developments, a general partnership in which Barnwell has a 77.6%controlling interest.  The developmentrights proceeds received during fiscal years 2008, 2007 and 2006 were reducedby fees of $265,000, $146,000 and $173,000, respectively, the percentage ofsales payment proceeds received during fiscal years 2008, 2007 and 2006 werereduced by fees of $71,000, $215,000 and $220,000, respectively, and the proceedsfrom the Increment II closing payment received in fiscal 2006 were reducedby $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, and CambridgeHawaii Limited Partnership, a 49.9% partner of Kaupulehu Developments in whichBarnwell purchased a 55.2% interest in April 2001, is obligated to payNearco 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.

 

Duringfiscal 2006, Barnwell entered into an agreement with Nearco to formMauka 3K for the purpose of providing real estate consulting services andinvesting in real estate.  Barnwell andNearco each have a 50% voting interest in Mauka 3K.  During fiscal 2006, Barnwell received netproceeds of $1,440,000 representing its share of real estate consultingrevenues, less related expenses.  The net

 

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proceedsare reflected in the Consolidated Statements of Earnings for the year ended September 30,2006 as “Equity in earnings of real estate affiliate, net of tax.”  The tax provision related to equity inearnings of real estate affiliate was $545,000 in fiscal 2006.  There was essentially no activity inMauka 3K during fiscal years 2008 and 2007.

 

Duringfiscal 2007, Barnwell and Nearco entered into a limited liability limitedpartnership, Kaupulehu 2007, to acquire house lots for investment and toconstruct turnkey single-family homes. Nearco has a 20% ownership interest in Kaupulehu 2007.  As noted in Note 5 above, Kaupulehu 2007has an agreement with Mr. David Johnston, the son of Mr. TerryJohnston, under which Mr. David Johnston serves as Kaupulehu 2007’sproject manager.  A significant provisionof this agreement is that in addition to a fixed monthly fee, Mr. DavidJohnston will receive 20% of the sales profit which is contingent on the saleof each of the two homes under construction. During fiscal 2008, Kaupulehu 2007 paid $94,000 in project managementfees to Nearco for project management services. No such fees 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.

 

Kaupulehu2007 has borrowings under a credit facility that is guaranteed jointly andseverally by Barnwell and Mr. Terry Johnston, with Mr. Terry Johnston’sguarantee limited to 20% (see further discussion regarding the credit facilityat Note 11 below).

 

InSeptember 2007, Nearco made a $525,000 loan to Kaupulehu 2007 to partiallyfund Kaupulehu 2007’s acquisition of a third residential lot.  The loan plus accrued interest, at a floatingrate equivalent to the highest interest rate incurred by Kaupulehu 2007 on itsbank debt, was payable upon Kaupulehu 2007’s sale of its second completedhome.  During fiscal 2008, Barnwellcontributed $1,530,000 to Kaupulehu 2007 that was not matched by Nearco inproportion to its ownership interest in Kaupulehu 2007.  This resulted in a $383,000 reduction inNearco’s loan balance to $142,000 and a corresponding increase in the minorityinterest liability.  Kaupulehu 2007repaid this loan, including interest of $20,000, in full in July 2008.

 

Alsoduring fiscal 2007, Nearco paid Barnwell $553,000 to acquire a 20% minorityinterest in Kaupulehu Investors from Barnwell (see discussion in Note 6above).  No gain or loss was recognizedby Barnwell as a result of the transaction.

 

Generaland administrative expenses include fees paid to Nearco for services related toKaupulehu Developments’ leasehold land and Kaupulehu 2007’s residentialproperty.  Fees paid to Nearco byKaupulehu Developments and Kaupulehu 2007 totaled $63,000, $171,000 and$76,000, before minority interest, in fiscal 2008, 2007 and 2006,respectively.  Additionally, Kaupulehu2007 incurred fees to Nearco of $27,000, before minority interest, in fiscal2008 for professional services rendered in connection with Kaupulehu 2007’ssale of two lot purchase rights to an unrelated party.  There were no such fees incurred in fiscalyears 2007 or 2006.

 

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

 

Barnwell’sproperty and equipment is detailed as follows:

 
| ** **                                             | ** ** | ** **        | ** ** | ** **            | ** **      | **Accumulated**        | ** ** | ** **            | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|-----------------------|-----------------|------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **Estimated**     | ** ** | **Gross**             | ** **      | **Depreciation,**      | ** ** | **Net**               | ** ** |
| ** **                                             | ** ** | **Useful**        | ** ** | **Property and** | ** **      | **Depletion and** | ** ** | **Property and** | ** ** |
| ** **                                             | ** ** | **Lives**         | ** ** | **Equipment**         | ** **      | **Amortization**       | ** ** | **Equipment**         | ** ** |
| At  September 30, 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 |   |

 

InOctober 2004, the Government of Alberta enacted amendments to the NaturalGas Royalty Regulation which provide a mechanism to reduce royalties calculatedthrough the Crown royalty system for operators of natural gas wells which havebeen denied the right to produce by the Alberta Energy Utilities Board as aresult of recent bitumen conservation decisions.  In December 2004, royalty reductionswere effected by the Alberta Department of Energy’s Information Letter 2004-36which sets out the details of the royalty adjustment, the impact on theexisting temporary assistance received to date by affected gas well operators,the provisions for potential recapture of the royalty adjustments, and continuationof impacted petroleum and natural gas agreements.  Barnwell received a total of approximately$259,000, $248,000 and $347,000 related to the aforementioned royaltyadjustments for wells in the Thornbury area in fiscal years 2008, 2007 and2006, 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.

 

OnOctober 1, 2002, Barnwell adopted SFAS No. 143, “Accounting for AssetRetirement Obligations,” 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.  During the year ended September 30,2006, the asset retirement obligation was increased by $303,000 to reflectobligations incurred on new wells drilled, increased $302,000 for changes inthe timing and amount of estimated future expenditures, increased $199,000 foraccretion of the asset retirement 

 

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obligation, decreased by$20,000 in payments and increased by $124,000 for changes in foreign 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**

 

Asummary of Barnwell’s long-term debt as of September 30, 2008 and 2007 isas 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 |   |

 

Barnwellhas a credit facility at Royal Bank of Canada, a Canadian bank, for $20,000,000Canadian dollars, or approximately US$18,870,000 at the September 30, 2008exchange rate.  Borrowings under thisfacility were US$15,000,000 and US$14,520,000 at September 30, 2008 and2007, 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.

 

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

 

Thefacility is available in U.S. dollars at the London Interbank Offer Rate plus2.0%, at U.S. prime plus 0.75%, or in Canadian dollars at Canadian prime plus0.75%.  A standby fee of 0.35% per annumis charged on the unused facility balance. Under the financing agreement, the facility is reviewed annually, with thenext review 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).

 

30

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Barnwellhas the option to change the currency denomination and interest rate applicableto the loan at periodic intervals during the term of the loan.  During the year ended September 30,2008, Barnwell paid interest at rates ranging from 4.20% to 6.63%.  The weighted-average interest rate on thefacility at September 30, 2008 was 5.70%. The facility is guaranteed by Barnwell and is collateralized by ageneral security agreement on all of the assets of Barnwell’s oil and naturalgas segment.  No compensating bankbalances are required for this facility.

 

Thebank affirmed that it will not require any repayments under the facility beforeOctober 1, 2009.  Accordingly,Barnwell has classified outstanding borrowings under the facility as long-termdebt.

 

Barnwell,through its 80%-owned real estate joint venture, Kaupulehu 2007, obtaineda $7,500,000 non-revolvingcredit facility in fiscal 2007 to finance the acquisition of real estateparcels and a portion of the initial home construction on those parcels.  In December 2007, Kaupulehu 2007refinanced $6,600,000 of the $7,068,000 outstanding borrowings under thefacility with a new revolving credit facility from another financialinstitution.  The new facility provides$16,000,000 of credit under a revolving line of credit for the purpose ofrefinancing the acquisition of three parcels purchased in fiscal 2007,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.  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 fullyguaranteed by Barnwell and guaranteed 20% by Mr. Terry Johnston, iscollateralized by, among other things, a first mortgage lien on the parcels andhomes to be built.  Kaupulehu 2007incurred a 1% loan commitment fee totaling $160,000.  Borrowings under the facility are subject toa loan advance limitation based on the appraised value of the underlyingsecurity.  The loan advance limitationmay be reduced as a result of a decrease in appraised values of the underlyingsecurity.  If borrowings under thefacility exceed the loan advance limitation, Barnwell will be required to makedebt repayments in the amount of the excess.

 

AtSeptember 30, 2008, Kaupulehu 2007’s borrowings under the credit facilitywere $11,217,000.  The facility expiresin December 2010.  Accordingly, the$11,217,000 is classified as long-term debt on the Consolidated Balance Sheetat 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.

 

Kaupulehu2007 capitalizes interest costs on residential lots under development whiledevelopment and construction is in progress and includes these costs in cost ofsales when homes are sold.  Capitalizedinterest costs totaled $394,000 and $142,000 for the years ended September 30,2008 and 2007, respectively.

 

31

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Asalso discussed in Note 9 above, Nearco made a $525,000 loan to Kaupulehu2007 to partially fund Kaupulehu 2007’s acquisition of a third residential lotin September 2007.  The loan plusaccrued interest, at a floating rate equivalent to the highest interest rateincurred by Kaupulehu 2007 on 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.

 

InMarch 2007, Barnwell completed an agreement to purchase a contractdrilling rig for $731,000, $620,000 of which was financed by a bank loan.  The loan was obtained for a term of fiveyears commencing in April 2007 with payments of $13,000 due monthly at aninterest rate of 7.75%.  Barnwell repaidthis loan in full in August 2008.

 

Interestcosts for the fiscal years ended September 30, 2008, 2007 and 2006 aresummarized 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.****                               SEGMENTAND GEOGRAPHIC INFORMATION**

 

Barnwelloperates four segments: 1) exploring for, developing, producing andselling oil and natural gas in Canada (oil and natural gas); 2) investingin leasehold land 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).

 

32

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The following is certain financial informationrelated to Barnwell’s reporting segments. All revenues reported are from external customers with no intersegmentsales 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 |   |

 

33

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Depletionper 1,000 cubic feet (“MCF”) of natural gas and natural gas equivalent (“MCFE”),converted at a rate of one barrel of oil and natural gas liquids to 5.8 MCFE,was $2.89 in fiscal 2008, $2.49 in fiscal 2007, and $2.17 in fiscal 2006.  The escalating depletion rate is the resultof increased costs of finding and developing proven reserves, as compared toprior years, as well as increases in the average exchange rate of the Canadiandollar to the U.S. dollar of 10% in fiscal 2008, as compared to fiscal 2007,and 3% in fiscal 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)          Primarily located in the Province of Alberta,Canada.

(2)          Located in 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.****                               TAXESON 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 |   |

 

34

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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 |   |

 

Duringthe first quarter of fiscal 2008, the Canadian government enacted reductions inthe corporate tax rate from 20.5%, 20.0%, 19.0%, 18.5% and 18.5% in calendaryears 2008, 2009, 2010, 2011 and 2012, respectively, to 19.5%, 19.0%, 18.0%,16.5% and 15%, respectively.  Thisreduction in Canadian federal tax rates resulted in a $909,000 reduction of thenet deferred tax liability during fiscal 2008. Barnwell’s effective 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%.

 

Includedin the provision for income taxes for fiscal 2006 is a Canadian deferred taxbenefit of $1,094,000 resulting from reductions in Canadian tax rates.  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.

 

Dueto differences in the statutory deduction rates for Barnwell’s Canadian oil andnatural gas capital expenditures under Canadian law as compared to suchdeductions under U.S. tax law, Barnwell has incurred higher U.S. taxliabilities on Canadian source earnings than Canadian tax liabilities on suchearnings in recent years.  As a result,Barnwell has utilized its foreign tax credit carryforwards in recent years, andBarnwell estimates that it will fully utilize its remaining foreign tax creditcarryforward.

 

Infiscal 2008 and 2007, Barnwell recorded tax benefits of $192,000 and $203,000,respectively, related to employees’ disqualification of qualified stock optionswhich were reflected as increases in additional paid-in capital.  There was no such tax benefit related tostock option disqualifications in fiscal 2006.

 

35

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

 
| ** **                                                                                                             | ** ** | **Year ended September 30,** | ** **    |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|---------------|
| ** **                                                                                                             | ** ** | **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 |   |

 

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

 

36

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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,** | ** **      |
|------------------------------------------------------------------------------------------------------------|------------|------------------------|-----------------|
| ** **                                                                                                 | ** ** | **2008**               | ** **      | **2007** | ** ** |
| Deferred income tax assets:                                                                 |       |                   |            |   |   |
| 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 andresidential real estate in excess of  book basis                       |       | **507,000**            |            | 473,000 |   |
| Liabilities accrued  for booksbut not for tax under U.S. tax law                                           |       | **3,036,000**          |            | 3,237,000 |   |
| Liabilities  accrued for booksbut not for tax under Canadian tax law                                       |       | **1,210,000**          |            | 1,506,000 |   |
| Bad debt  allowance for booksbut not for tax under U.S. tax law                                            |       | **374,000**            |            | — |   |
| Bad debt  allowance for booksbut 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 accumulatedtax depreciation and depletionin excess of  book under Canadian tax law |       | **(12,885,000**        | **)**           | (15,216,000 | ) |
| Property and  equipment accumulatedtax depreciation and depletionin 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 | ) |

 

Thetotal valuation allowance decreased $646,000 for the year ended September 30,2008 and increased $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.

 

Avaluation allowance is provided when it is more likely than not that some portionor all of the deferred tax asset will not be realized.  Barnwell has established a valuationallowance primarily for the U.S. tax effect of deferred Canadian taxes, accruedliabilities, bad debt allowances and state of Hawaii net operating loss carryforwardswhich may not be realizable in future years as there can be no assurance of anyspecific level of earnings, that the timing of U.S. taxable income willcoincide with the payment of Canadian taxes to enable Canadian taxes to befully deducted (or recoverable) for U.S. tax purposes, or that Canadiandeferred tax assets will provide any incremental benefit for U.S. tax purposesover the amount of benefit for Canadian tax purposes.

 

37

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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.

 

InJune 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty inIncome Taxes — an interpretation of FASB Statement No. 109.”  This interpretation prescribes a thresholdfor recognizing the financial statement effects of a tax position when it ismore likely than not, based on the technical merits, that the position will besustained upon examination by a taxing authority.  Recognized tax positions are initially andsubsequently measured as the largest amount of tax benefit that is more likelythan not of being realized upon ultimate settlement with a taxing authority ona jurisdiction-by-jurisdiction basis. Liabilities for unrecognized tax benefits related to such tax positionsare included in long-term liabilities unless the tax position is expected to besettled within the upcoming year, in which case the liabilities are included incurrent liabilities.  Interest andpenalties related to unrecognized tax benefits are included in income taxexpense.  Assets for any offsettingforeign tax credit benefits in the U.S. related to liabilities for foreignunrecognized tax benefits are included in current or long-term receivablesdepending upon the estimated timing of settlement.  Effective October 1, 2007, Barnwelladopted the provisions of FIN No. 48. The initial adoption of FIN No. 48 did not have a material impacton Barnwell’s financial statements.

 

Barnwellfiles U.S. federal income tax returns, income tax returns in various U.S.states, and Canadian federal and provincial tax returns.  A number of years may elapse before anuncertain tax position, for which we have unrecognized tax benefits, is auditedand finally resolved.  While it is oftendifficult to predict the final outcome or the timing of resolution of anyparticular uncertain tax position, we believe that our unrecognized tax benefitsreflect the more likely than not outcome. We adjust these unrecognized tax benefits, as well as the relatedinterest, based on ongoing changes in facts and circumstances.  Settlement of any particular position couldrequire the use of cash.  Favorableresolution for an amount less than the amount estimated by Barnwell would berecognized as a decrease in the effective income tax rate in the period ofresolution, and unfavorable resolution in excess of the amount estimated byBarnwell would be recognized as an increase in the effective income tax rate inthe period of resolution.

 

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In January 2008, the U.S. Internal RevenueService notified Barnwell that it would examine Barnwell’s U.S. consolidated incometax return for fiscal 2006.  In June 2008,the Canada Revenue Agency notified Barnwell that it would examine Barnwell ofCanada, Limited’s Canadian federal income tax returns for fiscal 2005 and2006.  Both examinations were in progressas of September 30, 2008.  As aresult of tax authority interactions in the three months ended September 30,2008, Barnwell has provided for unrecognized tax benefits during fiscal 2008 asfollows:

 
| 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 |   |

 

Thetotal amount of unrecognized tax benefits that, if recognized, would affect theeffective tax rate is $357,000.

 

Unrecognizedtax benefits consist primarily of Canadian federal and provincial audit issuesthat involve the timing of oil and natural gas capital expenditure deductionsand transfer pricing adjustments. Because of a lack of clarity and uniformity regarding allowable transferpricing valuations by differing jurisdictions, it is reasonably possible thatthe total amount of unrecognized tax benefits and any offsetting foreign taxcredit benefits may significantly increase or decrease within the next fiscalyear, and the estimated range of any such variance is not currently estimablebased upon facts and circumstances as of September 30, 2008.

 

Included below is a summary of the tax years, byjurisdiction, that remain subject to examination by taxing authorities:

 
| **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.****                              ****RETIREMENT PLANS**

 

Barnwellsponsors a noncontributory defined benefit pension plan (“Pension Plan”)covering substantially all of its U.S. employees, with benefits based on yearsof service and the employee’s highest consecutive five-year averageearnings.  Barnwell’s funding policy isintended to provide for both benefits attributed to service to date and forthose expected to be earned in the future. In addition, Barnwell sponsors a Supplemental Employee Retirement Plan (“SERP”),a noncontributory 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.

 

InSeptember 2006, the FASB issued SFAS No. 158, “Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans — an amendment ofFASB Statements No. 87, 88, 106, and 132(R).”  SFAS No. 158 requires an employer torecognize the over-funded or under-funded status 

 

39

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of defined benefit pension and otherpostretirement plans (collectively referred to as “retirement plans”) as anasset or liability in its statement of financial position and to recognizechanges in that funded status in the year in which the changes occur throughcomprehensive income.  SFAS No. 158also requires the measurement of retirement plan assets and obligations as ofthe date of the fiscal year-end statement of financial position and provideadditional disclosures.  Barnwell adoptedthe recognition and disclosure provisions of SFAS No. 158 on September 30,2007.

 

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

 
| ** **                                      | ** ** | **Pension**            |          | **SERP**   |   | **Postretirement Medical** |       |
|-------------------------------------------------|------------|------------------------|---------------|------------|--------|---------------------------------|------------|
| ** **                                      | ** ** | **September 30,** |          |
| ** **                                      | ** ** | **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 | ) |

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

 

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Forthe fiscal years ended September 30, 2008 and 2007, the followingweighted-average assumptions were used to determine benefit obligations at theend 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 |   |

 

Theoverall investment objective of the Pension Plan is to provide growth in theassets of the plan to fund future benefit obligations while managing risk inorder to meet current benefit obligations. To develop the expected long-term rate of return on assets assumption,historical returns and the future expectations for returns for each asset classwere considered.  Generally, principalrepayments and interest received on government mortgage securities provide cashflows to fund current benefit obligations. Longer-term obligations are generally estimated to be provided for bygrowth in equity securities.  The planassets at September 30, 2008 were invested as follows: 23% in cash, 25% indebt securities, and 52% in equity securities. The plan assets at September 30, 2007 were invested as follows: 12%in cash, 38% in debt securities, and 50% in equity securities.  Target asset allocations are not used, andallocations are adjusted from time to time as dictated by current andanticipated market conditions and required cash flows.

 

Barnwellcontributed $450,000 to the Pension Plan in fiscal 2008.  Barnwell estimates that it will makeapproximately $400,000 in contributions 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’sassets related to its retirement plans have been adversely impacted by theperformance of the equity markets in recent months, especially since September 30,2008.  Subsequent to September 30,2008, the pension plan’s assets declined approximately $450,000 in value.  Such losses will likely cause an increase inBarnwell’s pension expense in future years.

 

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Forthe fiscal years ended September 30, 2008, 2007 and 2006, the followingweighted-average assumptions were used to determine net periodic benefit costfor 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 |   |

 

Thecomponents of net periodic benefit cost are as follows:

 
| ** **                                 | ** ** | **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 |   | $ | — |   |

 

Theamounts that are estimated to be amortized from accumulated other comprehensive(income) loss into net periodic benefit cost in the next fiscal year are asfollows:

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

 

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Theaccumulated benefit obligation differs from the projected benefit obligation inthat it assumes future compensation levels will remain unchanged.  The accumulated benefit obligation for the pensionplan was $2,958,000 and $3,165,000 at September 30, 2008 and 2007,respectively.  The accumulated benefitobligation for the SERP was $389,000 and $406,000 at September 30, 2008and 2007, respectively.

 

Thebenefits expected to be paid under the retirement plans 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 |   |

 

Thefollowing provides the assumed health care cost trend rates related to themeasurement of Barnwell’s postretirement medical obligations for fiscal yearsended 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 |   |

 

Theassumed health care cost trend rates have a significant effect on the amountsreported for the postretirement medical obligations.  A one-percentage-point change in the assumedhealth care cost trend rates would have the following effects:

 
| ** **                                                | ** ** | **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 | ) |

 

In2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003(“Act”) was signed into law.  The Actintroduced a prescription drug benefit under Medicare as well as a potentialfederal subsidy to sponsors of retiree health care benefit plans that provide abenefit that is at least actuarially equivalent to Medicare Part D to helpoffset the costs 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.

 

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**15.****                               SHAREREPURCHASE PROGRAM**

 

InDecember 2005, Barnwell’s Board of Directors authorized the purchase of upto 250,000 shares of its common stock in the open market or in privatelynegotiated transactions.  On September 20,2007, the Board of Directors authorized a stock repurchase program in the openmarket of up to 150,000 shares of these 250,000 shares during the periodcommencing 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.

 

InAugust 2008, the Board of Directors authorized the Company to acquire inthe open market, from time-to-time commencing on August 18, 2008 andending on December 31, 2008, and in accordance with applicable laws, rules andregulations, up to 150,000 shares of the Company’s common stock.  From August 18, 2008 to September 30,2008, Barnwell repurchased 26,600 shares of its common stock for $295,000, orapproximately $11.10 per share.  As of September 30,2008, there were 123,400 shares available for repurchase under the August 2008authorization.

 

**16.****                               COMMITMENTSAND CONTINGENCIES**

 

Barnwellhas committed to compensate certain Canadian personnel pursuant to an incentivecompensation plan, the value of which directly relates to Barnwell’s oil andnatural gas segment’s net income and the value of Barnwell’s oil and naturalgas reserves discovered, commencing in fiscal 2002, for projects developed bysuch personnel.  Barnwell recognizedapproximately $416,000, $495,000 and $359,000 of costs pursuant to this plan infiscal 2008, 2007 and 2006, respectively.

 

Barnwellhas several non-cancelable operating leases for office space and leasehold land.  Rental expense was $649,000 in 2008, $598,000in 2007, and $528,000 in 2006.  Barnwellis committed under these leases for minimum rental payments summarized byfiscal year 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, and Barnwellcurrently 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.

 

Barnwellis committed to pay fees to Nearco, a company controlled by Mr. TerryJohnston, a director of Barnwell and minority interest owner in certain ofBarnwell’s business ventures (see further discussion on related party interestsat Note 9 above).  Under anagreement entered into in 1987, prior to Mr. Johnston’s election toBarnwell’s Board of Directors, Barnwell 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% 

 

44

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interest in April 2001, is obligatedunder an agreement entered into in 1987 to pay Nearco 4% of KaupulehuDevelopments’ gross receipts from real estate transactions.  The fees represent compensation for promotionand marketing of Kaupulehu Developments’ property and were determined based onthe estimated fair value of such services.

 

Inconjunction with the closing of the Increment II transaction in fiscal 2006,Kaupulehu Developments entered into an agreement to pay its external realestate legal counsel 1.5% of all Increment II percentage of sales paymentsreceived by Kaupulehu Developments for services provided by its external realestate legal counsel in the negotiation and closing of the Increment IItransaction.  No amounts were paidpursuant to this arrangement in fiscal 2008, 2007 and 2006.

 

Kaupulehu2007 has an agreement with Mr. David Johnston, the son of Mr. TerryJohnston, a director of Barnwell, under which Mr. David Johnston serves asKaupulehu 2007’s project manager. Kaupulehu 2007 also has an agreement with an independent buildingcontractor for home building services for Kaupulehu 2007’s lots.  A significant provision of these agreementsis that in addition to a monthly fee, Mr. David Johnston and the buildingcontractor will each receive 20% of the sales profit which is contingent on thesale of each of the two homes that are under construction.

 

Barnwell,as an investor in various joint ventures, may be periodically called upon tomake additional capital contributions.

 

Barnwellis occasionally involved in routine litigation and is subject to governmentaland regulatory controls that are incidental to the ordinary course ofbusiness.  Barnwell’s management believesthat all claims and litigation involving Barnwell are not likely to have amaterial adverse effect on its results of operations, financial position orliquidity.

 

**17.****                               FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

Cashand cash equivalents, accounts payable, accrued expenses, drilling advances andpayables to joint interest owners approximate their carrying values due to theshort-term nature of the instruments. The carrying value of long-term debt approximates fair value as theterms approximate current market terms for similar debt instruments ofcomparable risk and maturities.

 

**18.****                               CONCENTRATIONSOF CREDIT RISK**

 

Our oil and natural gassegment’s primary concentration of credit risk is associated with fourindividually significant customers.  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.

 

AtSeptember 30, 2008, Barnwell’s contract drilling subsidiary had accountsreceivables from the federal, 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.

 

Managementdoes not believe significant credit risk related to these trade receivablesexists at September 30, 2008 based on prior historical experience.

 

45

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**19.****                               SUPPLEMENTALSTATEMENTS OF CASH FLOWS INFORMATION**

 

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

 
| ** **                                                                                                      | ** ** | **Year ended September 30,** | ** **     |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                                                                      | ** ** | **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**    |   | $ | — |   | $ | — |   |

 

Duringthe year ended September 30, 2008, 40,000 stock options were exercised bytendering 5,200 shares of Barnwell stock at a market value of $14.95 per shareplus $1,000 of cash, resulting in a $20,000 increase in common stock, a $59,000increase in additional paid-in capital 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.

 

Duringthe years ended September 30, 2008 and 2007, capital expenditure accrualsrelated to oil and natural gas asset retirement obligations decreased $131,000and increased $276,000, respectively.  Additionally, capital expenditure accrualsrelated to oil and natural gas exploration and development increased $825,000and decreased $2,039,000 during the years ended September 30, 2008 and2007, respectively.

 

46

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

 

**20.****                              ****SUMMARY OF SELECTED QUARTERLYFINANCIAL DATA (UNAUDITED)**

 

Disclosure is notrequired as Barnwell qualifies as a smaller reporting company.

 

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

 

Thefollowing tables summarize information relative to Barnwell’s oil and naturalgas operations, which are substantially conducted in Canada.  Proved reserves are the estimated quantitiesof oil, natural gas and natural gas liquids which geological and engineeringdata demonstrate with reasonable certainty to be recoverable in future yearsfrom known reservoirs under existing economic and operating conditions.  Proved producing oil and natural gas reservesare reserves that can be expected to be recovered through existing wells withexisting equipment and operating methods. The estimated net interests in total proved and proved producingreserves are based upon subjective engineering judgments and may be affected bythe limitations inherent in such estimations. The process of estimating reserves is subject to continual revision asadditional information becomes available as a result of drilling, testing,reservoir studies and production history. There can be no assurance that such estimates will not be materiallyrevised in subsequent periods.

 

47

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*(A)**                             **Oil and NaturalGas Reserves*

 

Thefollowing table, based on information prepared by independent petroleumengineers, Paddock Lindstrom & Associates Ltd., summarizes changes inthe estimates of Barnwell’s net interests in total proved reserves of oil andnatural gas liquids (“NGL”) and natural gas (“MCF” means 1,000 cubic feet ofnatural gas) which are all in Canada. All of Barnwell’s oil and natural gas reserves are developed reserves inall years presented; Barnwell had no undeveloped reserves in these years:

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

 
| ** **                     | ** ** | **OIL & NGL** | ** ** | **GAS**        | ** ** |
|--------------------------------|------------|-----------------------------|------------|----------------|------------|
| ** **                     | ** ** | **(Barrels)**               | ** ** | **(MCF)**      | ** ** |
| Proved producing  reserves at: |       |                        |       |           |       |
| September 30,  2005       |       | 1,102,000                   |       | 21,842,000     |       |
| September 30,  2006       |       | 1,069,000                   |       | 18,558,000     |       |
| September 30,  2007       |       | 1,095,000                   |       | 18,858,000     |       |
| **September 30,  2008**   | ** ** | **1,092,000**               | ** ** | **18,814,000** | ** ** |

 

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

 

All capitalized costsrelating to oil and natural gas producing activities, both proved propertiesand unproved properties, were being depleted in all years.

 
| ** **                              | ** ** | **September 30,** | ** **      |
|-----------------------------------------|------------|------------------------|-----------------|
| ** **                              | ** ** | **2008**               | ** **      | **2007** | ** ** | **2006** | ** ** |
| Proved  properties                      | ** ** | **$**                  | **186,085,000** |   | $ | 179,404,000 |   | $ | 146,542,000 |   |
| Unproved  properties                    | ** ** | **11,050,000**         |            | 12,650,000 |   | 11,020,000 |   |
| Total  capitalized costs                | ** ** | **197,135,000**        |            | 192,054,000 |   | 157,562,000 |   |
| Accumulated  depletion and depreciation | ** ** | **111,895,000**        |            | 104,706,000 |   | 80,823,000 |   |
| Net capitalized  costs                  | ** ** | **$**                  | **85,240,000**  |   | $ | 87,348,000 |   | $ | 76,739,000 |   |

 

48

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*(C)**                            **Costs Incurredin Oil and Natural Gas Property Acquisition, Exploration and Development*

 
| ** **                  | ** ** | **Year ended September 30,** | ** **     |
|-----------------------------|------------|---------------------------------------------|----------------|
| ** **                  | ** ** | **2008**                                    | ** **     | **2007** | ** ** | **2006** | ** ** |
| Acquisition of  properties: |       |                                        |           |   |   |   |   |
| Unproved                    | ** ** | **$**                                       | **268,000**    |   | $ | 968,000 |   | $ | 3,052,000 |   |
| Proved                      | ** ** | **$**                                       | **—**     |   | $ | — |   | $ | — |   |
|                        |       |                                        |           |   |   |   |   |
| Exploration  costs          | ** ** | **$**                                       | **4,770,000**  |   | $ | 4,406,000 |   | $ | 8,935,000 |   |
|                        |       |                                        |           |   |   |   |   |
| Development  costs          | ** ** | **$**                                       | **12,624,000** |   | $ | 8,790,000 |   | $ | 13,962,000 |   |

 

*(D)**                            **The Results ofOperations of Barnwell’s Oil and Natural Gas Producing Activities*

 
| ** **                      | ** ** | **Year ended September 30,** | ** **     |
|---------------------------------|------------|---------------------------------------------|----------------|
| ** **                      | ** ** | **2008**                                    | ** **     | **2007** | ** ** | **2006** | ** ** |
| Gross revenues                  | ** ** | **$**                                       | **64,502,000** |   | $ | 44,759,000 |   | $ | 51,197,000 |   |
| Royalties, net  of credit       | ** ** | **15,061,000**                              |           | 10,160,000 |   | 13,293,000 |   |
| Net revenues                    | ** ** | **49,441,000**                              |           | 34,599,000 |   | 37,904,000 |   |
| Production costs                | ** ** | **10,581,000**                              |           | 10,203,000 |   | 8,217,000 |   |
| Depletion and  depreciation     | ** ** | **14,150,000**                              |           | 12,753,000 |   | 11,130,000 |   |
| Pre-tax results  of operations* | ** ** | **24,710,000**                              |           | 11,643,000 |   | 18,557,000 |   |
| Estimated income  tax expense   | ** ** | **8,649,000**                               |           | 4,424,000 |   | 7,423,000 |   |
| Results of  operations*         | ** ** | **$**                                       | **16,061,000** |   | $ | 7,219,000 |   | $ | 11,134,000 |   |

 

----

*                       Before general and administrative expenses, interest expense, andforeign exchange gains and losses.

 

*(E)**                             **StandardizedMeasure, Including Year-to-Year Changes Therein, of Estimated Discounted FutureNet Cash Flows*

 

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

 

Theestimated future cash flows are based on sales prices, costs, and statutoryincome tax rates in existence at September 30, 2008, 2007 and 2006.  Material revisions to reserve estimates mayoccur in the future, development and production of the oil and natural gasreserves may not occur in the periods assumed and actual prices realized andactual costs incurred are expected to vary significantly from those used.  Management does not rely upon thisinformation in making investment and operating decisions; rather, those decisionsare based upon a wide range of factors, including estimates of probablereserves as well as proved reserves and price and cost assumptions differentthan those reflected herein.

 

49

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StandardizedMeasure of Estimated Discounted Future Net Cash Flows

 
| ** **                                                             | ** ** | **As of September 30,** | ** **      |
|------------------------------------------------------------------------|------------|----------------------------------------|-----------------|
| ** **                                                             | ** ** | **2008**                               | ** **      | **2007** | ** ** | **2006** | ** ** |
| Future cash  inflows                                                   | ** ** | **$**                                  | **245,977,000** |   | $ | 224,114,000 |   | $ | 147,246,000 |   |
|                                                                   |       |                                   | ** **      |   |   |   |   |
| Future  production costs                                               | ** ** | **(79,014,000**                        | **)**           | (75,216,000 | ) | (53,961,000 | ) |
|                                                                   |       |                                   | ** **      |   |   |   |   |
| Future  development costs                                              | ** ** | **(4,854,000**                         | **)**           | (4,775,000 | ) | (5,024,000 | ) |
|                                                                   |       |                                   | ** **      |   |   |   |   |
| Future net cash  flows before income taxes                        | ** ** | **162,109,000**                        | ** **      | 144,123,000 |   | 88,261,000 |   |
|                                                                   |       |                                   | ** **      |   |   |   |   |
| Future income  tax expenses                                            | ** ** | **(38,153,000**                        | **)**           | (35,416,000 | ) | (20,552,000 | ) |
|                                                                   |       |                                   | ** **      |   |   |   |   |
| Future net cash  flows                                                 | ** ** | **123,956,000**                        | ** **      | 108,707,000 |   | 67,709,000 |   |
|                                                                   |       |                                   | ** **      |   |   |   |   |
| 10% annual  discount for timing of cash flows                     | ** ** | **(35,710,000**                        | **)**           | (30,407,000 | ) | (17,786,000 | ) |
|                                                                   |       |                                   | ** **      |   |   |   |   |
| Standardized  measure of estimated discounted future net cash flows(1) | ** ** | **$**                                  | **88,246,000**  | ** ** | $ | 78,300,000 |   | $ | 49,923,000 |   |

 

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(1)          Based on natural gas prices of $5.94, $5.37 and $3.34 per 1,000 cubicfeet, and oil prices of $92.76, $76.75 and $54.99 per barrel, as of September 30,2008, 2007 and 2006, respectively.

 

50

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Changesin the Standardized Measure of Estimated Discounted Future Net Cash Flows

 
| ** **                                                                       | ** ** | **Year ended September 30,** | ** **     |
|----------------------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                                       | ** ** | **2008**                                    | ** **     | **2007** | ** ** | **2006** | ** ** |
|                                                                             |       |                                        |           |   |   |   |   |
| Beginning of  year                                                               | ** ** | **$**                                       | **78,300,000** |   | $ | 49,923,000 |   | $ | 119,762,000 |   |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Sales of oil and  natural gas produced, net of production costs        | ** ** | **(38,860,000**                             | **)**          | (24,299,000 | ) | (29,735,000 | ) |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Net changes in  prices and production costs, net of royalties and wellhead taxes | ** ** | **30,542,000**                              | ** **     | 29,674,000 |   | (85,254,000 | ) |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Extensions and  discoveries                                                      | ** ** | **10,691,000**                              | ** **     | 8,775,000 |   | 11,356,000 |   |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Revisions of  previous quantity estimates                                        | ** ** | **13,589,000**                              | ** **     | 9,681,000 |   | (5,006,000 | ) |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Net change in  Canadian dollar translation rate                             | ** ** | **(2,908,000**                              | **)**          | 3,165,000 |   | 4,189,000 |   |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Changes in the  timing of future production and other                            | ** ** | **1,362,000**                               | ** **     | 6,411,000 |   | (385,000 | ) |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Net change in  income taxes                                                      | ** ** | **(11,830,000**                             | **)**          | (10,619,000 | ) | 22,529,000 |   |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Accretion of  discount                                                           | ** ** | **7,360,000**                               | ** **     | 5,589,000 |   | 12,467,000 |   |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| Net change                                                                       | ** ** | **9,946,000**                               | ** **     | 28,377,000 |   | (69,839,000 | ) |
|                                                                             |       |                                        | ** **     |   |   |   |   |
| End of year                                                                      | ** ** | **$**                                       | **88,246,000** | ** ** | $ | 78,300,000 |   | $ | 49,923,000 |   |

 

**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                                                                        |       | 1        |
|       | Consolidated Balance Sheets – September 30, 2008  and 2007                                                                            |       | 2        |
|       | Consolidated Statements of Earnings – for the three  years ended September 30, 2008                                                   |       | 3        |
|       | Consolidated Statements of Cash Flows – for the three  years ended September 30, 2008                                                 |       | 4        |

 

51

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|   | Consolidated Statements of Stockholders’ Equity and  Comprehensive Income for the three years ended September 30, 2008                                        |                                                                                                                                                                                         | 5-7    |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | Notes to Consolidated Financial Statements                                                                                                                              |                                                                                                                                                                                         | 8      |
|   |                                                                                                                                                                    |                                                                                                                                                                                         |   |
|   | 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(7)                                                                                                                                                                      |
|   | No. 23                                                                                                                                                             | Consent of KPMG LLP(7)                                                                                                                                                                       |
|   | No. 31.1                                                                                                                                                           | Certification of Chief Executive Officer Pursuant To  Section 302 of the Sarbanes-Oxley Act of 2002(8)                                                                                  |
|   | No. 31.2                                                                                                                                                           | Certification of Chief Financial Officer Pursuant To  Section 302 of the Sarbanes-Oxley Act of 2002(8)                                                                                  |
|   | 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(9) |
|        |                                                                                                                                                                         |                                                                                                                                                                                              |        |  |

 

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

(2)          Incorporatedby reference to the Registrant’s Form 8-K filed December 12, 2007.

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

(4)          Incorporatedby reference to Form 10-K for the year ended September 30, 1989.

(5)          Incorporatedby reference to Form 10-K for the year ended September 30, 1992.

(6)          Incorporatedby reference to Form 10-KSB for the year ended September 30, 2000.

(7)          Previouslyfiled with the Form 10-K on December 18, 2008.

(8)          Filedwith this Form 10-K/A.

(9)          Furnishedwith this Form 10-K/A.

 

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this amendment to this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

BARNWELLINDUSTRIES, INC.

(Registrant)

 

 
|   | /s/ Russell M.  Gifford                                                     |   |   |
|--------|-----------------------------------------------------------------------------|--------|--------|
| By:    | Russell M.  Gifford                                                         |   |   |
|   | Chief Financial  Officer, Executive Vice President, Treasurer and Secretary |   |   |
| Date:  | April 6, 2009                                                          |   |   |

 

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