UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-KSB

                                ý       ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2005

                                o         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-5103

BARNWELL INDUSTRIES, INC.

(Name of small business issuer in its charter)

1100 Alakea Street, Suite 2900, Honolulu, Hawaii  96813-2833

(Address of principal executive offices)          (Zip code)

(808) 531-8400

(Issuer’s telephone number)

Securities registered under Section 12(b) of the Exchange Act:

Securities registered under Section 12(g) of the Exchange Act:  None

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

                                                                              Yes       ý                        No         o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.                                                                                      ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

                                                                              Yes       o                        No         ý

Issuer’s revenues for the fiscal year ended September 30, 2005: $44,210,000

The aggregate market value of the voting stock held by non-affiliates (3,169,552 shares) of the Registrant on December 20, 2005, based on the closing price of $20.50 on that date on the American Stock Exchange, was $64,976,000.

As of December 20, 2005 there were 8,169,060 shares of common stock, par value $0.50, outstanding.

Documents Incorporated by Reference

                                1.    Proxy statement to be forwarded to shareholders on or about January 19, 2006 is incorporated by reference in Part III hereof.

Transitional Small Business Disclosure Format                                         Yes  o   No   ý

TABLE OF CONTENTS

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PART I

Forward-Looking Statements

This Form 10-KSB, and the documents incorporated herein by reference, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including various forecasts, projections of Barnwell Industries, Inc.’s (referred to herein together with its subsidiaries as “Barnwell”) future performance, statements of Barnwell’s plans and objectives and other similar types of information.  Although Barnwell believes that its expectations are based on reasonable assumptions, it cannot assure that the expectations contained in such forward-looking statements will be achieved.  Such statements involve risks, uncertainties and assumptions, including, but not limited to, those relating to the factors discussed below, in other portions of this Form 10-KSB, in the Notes to Consolidated Financial Statements, and in other documents filed by Barnwell with the Securities and Exchange Commission from time to time, which could cause actual results to differ materially from those contained in such statements.  These forward-looking statements speak only as of the date of filing of this Form 10-KSB, and Barnwell expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein.

Barnwell’s oil and natural gas operations are affected by domestic and international political, legislative, economic, regulatory and legal actions.  Such actions may include changes in the policies of the Organization of Petroleum Exporting Countries or other developments involving or affecting oil-producing countries, including military conflict, embargoes, internal instability or actions or reactions of the government of the United States in anticipation of or in response to such developments.  Domestic and international economic conditions, such as recessionary trends, inflation, interest costs, monetary exchange rates and labor costs, as well as changes in the availability and market prices of crude oil, natural gas and other petroleum products, may also have a significant effect on Barnwell’s oil and natural gas operations.  While Barnwell maintains reserves for anticipated liabilities and carries various levels of insurance, Barnwell could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings.  In addition, climate and weather can significantly affect Barnwell in several of its operations.  Barnwell’s oil and gas operations are also affected by political developments and laws and regulations, particularly in the United States and Canada, such as restrictions on production, restrictions on imports and exports, the maintenance of specified reserves, tax increases and retroactive tax claims, expropriation of property, cancellation of contract rights, environmental protection controls, environmental compliance requirements and laws pertaining to workers’ health and safety.  Costs of compliance with environmental laws are ingrained in Barnwell’s expenses and not distinguished from other costs and expenses.

Barnwell’s land investment business segment is affected by the condition of Hawaii’s real estate market.  The Hawaii real estate market is affected by Hawaii’s economy and Hawaii’s tourism industry, as well as the United States’ economy in general.  Any future cash flows from Barnwell’s land development activities are subject to, among other factors, the level of real estate activity and prices, the demand for new housing and second homes on the Island of Hawaii, the rate of increase in the cost of building materials and labor, the introduction of building code modifications, changes to zoning laws, and the level of confidence in Hawaii’s economy.

Barnwell’s contract drilling operations, which are located in Hawaii, are also indirectly affected by the factors discussed in the preceding paragraph.  Barnwell’s contract drilling operations are

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materially dependent upon levels of land development activity in Hawaii.  Such activity levels are affected by both short-term and long-term trends in Hawaii’s economy.  A decline in land development activity in Hawaii could have a material adverse effect on Barnwell’s contract drilling revenues and profitability.

All dollar amounts in this report are in U.S. dollars, unless otherwise noted.

Item 1.            Description of Business

                (a)       General Development of Business

Barnwell was incorporated in Delaware in 1956.  During its last three fiscal years, Barnwell was engaged in 1) oil and natural gas exploration, development, production and sales primarily in Canada (oil and natural gas segment), 2) investment in leasehold land in Hawaii (land investment segment), and 3) well drilling, contract labor servicing for geothermal well drilling and workovers, and water pumping system installation and repair in Hawaii (contract drilling segment).

Barnwell’s oil and natural gas activities comprise its largest business segment.  Approximately 74% of Barnwell’s revenues for the fiscal year ended September 30, 2005 was attributable to its oil and natural gas activities.  Barnwell’s contract drilling activities accounted for 17% of fiscal 2005 revenues; Barnwell’s land investment segment revenues accounted for 7% of fiscal 2005 revenues; and other revenues comprised 2% of fiscal 2005 revenues.  Approximately 97% of Barnwell’s capital expenditures for the fiscal year ended September 30, 2005 was attributable to oil and natural gas activities and 3% was applicable to other activities.

(i)            Oil and Natural Gas Activities.  Barnwell’s wholly-owned subsidiary, Barnwell of Canada, Limited, is involved in the acquisition, exploration and development of oil and natural gas properties, principally in Alberta, Canada.  Barnwell of Canada initiates and participates in exploratory and developmental operations for oil and natural gas on property in which it has an interest, and evaluates proposals by third parties with regard to participation in such exploratory and developmental operations elsewhere.  Barnwell’s oil and natural gas segment derived 62% of its oil and natural gas revenues in fiscal 2005 from four individually significant marketers, ProGas Limited (25%), Glencoe Resources Limited (15%), Coral Energy Canada Inc. (11%), and Plains Marketing Canada, L.P. (11%).

(ii)           Contract Drilling.  Barnwell’s wholly-owned subsidiary, Water Resources International, Inc. (“Water Resources”), drills wells and installs and repairs water pumping systems in Hawaii.  Water Resources owns and operates four rotary drill rigs, a rotary drill/workover rig, pump installation and service equipment, and maintains drilling materials and pump inventory in Hawaii.  Water Resources’ contracts are usually fixed price per lineal foot drilled or day rate contracts that are either negotiated with private entities or are obtained through competitive bidding with various private entities or local, state and federal agencies.  Barnwell’s contract drilling subsidiary derived 63%, 70%, and 66% of its contract drilling revenues in fiscal 2005, 2004, and 2003, respectively, pursuant to federal, State of Hawaii and county contracts.

(iii)          Land Investment.  Barnwell owns a 77.6% controlling interest in Kaupulehu Developments, a Hawaii general partnership which owns interests in leasehold land and development rights for property located approximately six miles north of the Kona International Airport in the North

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Kona District of the Island of Hawaii.  Between 1986 and 1989, Kaupulehu Developments obtained the state and county zoning changes necessary to permit development of the Four Seasons Resort Hualalai at Historic Ka’upulehu and Hualalai Golf Club, which opened in 1996, a second golf course, and single-family and multi-family residential units.  These projects were developed on leasehold land acquired from Kaupulehu Developments by Kaupulehu Makai Venture, an unrelated entity that is an affiliate of Kajima Corporation of Japan.  Kaupulehu Developments later obtained the state and county zoning changes necessary to permit development of single-family and multi-family residential units, a golf course and a limited commercial area on approximately 870 leasehold acres located adjacent to and north of the Four Seasons Resort Hualalai at Historic Ka’upulehu.  In 2004, Kaupulehu Developments’ leasehold interest in the first increment of these 870 acres was sold to WB KD Acquisition LLC, an independent third party.

Kaupulehu Developments currently owns development rights under option; rights to receive percentage payments on the first increment of the approximately 870 leasehold acres; an interest in leasehold land zoned for resort/residential development within the second increment of the approximately 870 leasehold acres, which is under a right of negotiation; and approximately 1,000 acres of vacant leasehold land zoned conservation.

                (b)       Financial Information about Industry Segments

Revenues of each industry segment for the fiscal years ended September 30, 2005, 2004, and 2003 are summarized as follows (all revenues were from unaffiliated customers with no intersegment sales or transfers):

For further discussion see Note 11 (SEGMENT AND GEOGRAPHIC INFORMATION) and Note 13 (CONCENTRATIONS OF CREDIT RISK) of “Notes to Consolidated Financial Statements” in Item 7.

                (c)       Narrative Description of Business

See the table above in Item 1(b) detailing revenue of each industry segment and description of each industry segment of Barnwell’s business under Item 2.

As of September 30, 2005, Barnwell employed 52 employees, 50 of which are on a full-time basis.  Twenty-five are employed in contract drilling activities, 16 are employed in oil and natural gas activities, and 11 are members of the corporate and administrative staff.

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For further discussion see the “Governmental Regulation” section and the “Competition” section in Item 2 hereof.

(d)                     Financial Information about Foreign and Domestic Operations and Export Sales

Revenues and long-lived assets by geographic area for the three years ended and as of September 30, 2005, 2004 and 2003 are set forth in Note 11 (SEGMENT AND GEOGRAPHIC INFORMATION) of “Notes to Consolidated Financial Statements” in Item 7.

Item 2.            Description of Property

OIL AND NATURAL GAS OPERATIONS

General

Barnwell’s investments in oil and natural gas properties consist of investments in Canada, principally in the Province of Alberta, with minor holdings in the Provinces of Saskatchewan and British Columbia.  These property interests are principally held under governmental leases or licenses.  Under the typical Canadian provincial governmental lease, Barnwell must perform exploratory operations and comply with certain other conditions.  Lease terms vary with each province, but, in general, the terms grant Barnwell the right to remove oil, natural gas and related substances subject to payment of specified royalties on production.

Barnwell initiates and participates in exploratory and developmental operations for oil and natural gas on property in which it has an interest.  Barnwell also evaluates proposals by third parties for participation in other exploratory and developmental opportunities.  All exploratory and developmental operations are overseen by Barnwell’s Calgary, Alberta staff along with independent consultants as necessary.  In fiscal 2005, Barnwell participated in exploratory and developmental operations in the Canadian Province of Alberta, although Barnwell does not limit its consideration of exploratory and developmental operations to this area.

Barnwell’s producing natural gas and oil properties are located principally in Alberta.  A small number of producing properties, representing less than 5% of production, are located in British Columbia and Saskatchewan.  The Province of Alberta determines its royalty share of natural gas and of oil by using reference prices that average all natural gas sales and oil sales, respectively, in Alberta.  Royalty rates are calculated on a sliding scale basis, increasing as prices increase up to a maximum royalty rate of 35%.  Additionally, Barnwell pays gross overriding royalties and leasehold royalties on a portion of its natural gas and oil sales to parties other than the Province of Alberta.

In fiscal 2005 and 2004, the weighted average rate of royalties paid on all of Barnwell’s natural gas was approximately 27%.  The weighted average rate of all royalties paid to governments and others on natural gas from the Dunvegan Unit, Barnwell’s principal oil and natural gas property, before the Alberta Royalty Tax Credit, was approximately 31% and 30% in fiscal 2005 and 2004, respectively.  New production coming on line at lower royalty rates essentially offset the increase in the weighted average royalty rate at Dunvegan.

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In fiscal 2005 and 2004, the weighted average royalty rate paid on oil was approximately 24% and 22%, respectively.  The increase in the weighted average royalty rate on oil was primarily due to higher oil prices and the expiry of certain royalty holidays on new oil properties.

Prices of natural gas are typically higher in the winter than at other times due to demand for heating.  Prices of oil are also subject to seasonal fluctuations, but to a lesser degree.  Unit sales of oil and natural gas are based on the quantity produced from the properties by the operator based on sound petroleum practices and applicable rules and regulations.  During periods of low demand for natural gas, the operator of the Dunvegan property may re-inject natural gas into underground storage facilities for delivery at a future date.

Well Drilling Activities

During fiscal 2005, Barnwell participated in the drilling of 70 gross development wells and 10 gross exploratory wells, of which management believes 69 should be capable of production and 11 are dry holes.  The most significant drilling operations took place in the Dunvegan, Bonanza, Doris and Progress areas.

The following table sets forth more detailed information with respect to the number of exploratory (“Exp.”) and development (“Dev.”) wells drilled for the fiscal years ended September 30, 2005, 2004, and 2003 in which Barnwell participated:

*                 The term “Gross” refers to the total number of wells in which Barnwell owns an interest, and “Net” refers to Barnwell’s aggregate interest therein.  For example, a 50% interest in a well represents 1 gross well, but 0.5 net well.  The gross figure includes interests owned of record by Barnwell and, in addition, the portion owned by others.

The Dunvegan Unit, in which Barnwell holds an 8.9% working interest, is Barnwell’s principal oil and natural gas property and is located in Alberta, Canada.  At September 30, 2005, the Dunvegan Unit had 188 producing natural gas wells.  In fiscal 2005, Barnwell participated in the drilling of 41 gross (3.7 net) development gas wells in the Dunvegan area, all of which were successful.  Total capital expenditures at Dunvegan were $4,299,000 in fiscal 2005 as compared to $3,670,000 and $1,223,000 in

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fiscal 2004 and 2003, respectively.  Barnwell expects that fiscal 2006 capital expenditures at Dunvegan will decline from fiscal 2005’s level.

                Capital expenditures totaled $2,023,000 in the Doris area in fiscal 2005 as compared to $735,000 in fiscal 2004.  Six gross wells (2.4 net wells) were drilled in fiscal 2005 of which four gross wells (1.7 net wells) were successful and two gross wells (0.7 net well) were unsuccessful.  In the Doris area Barnwell acquired oil and natural gas rights in 4,480 gross (3,200 net) acres of undeveloped land in fiscal 2005.  At September 30, 2005 Barnwell held a 44% average working interest in productive wells in the Doris area.

                Capital expenditures totaled $1,987,000 in the Bonanza area in fiscal 2005 as compared to $1,740,000 in fiscal 2004.  Five gross wells (1.6 net wells) were drilled in fiscal 2005 of which two gross wells (0.6 net wells) were successful and tied in and producing at September 30, 2005, and three gross wells (1.0 net wells) were unsuccessful.  In the Bonanza area Barnwell acquired oil and natural gas rights in 6,400 gross (3,348 net) acres of undeveloped land in fiscal 2005.  At September 30, 2005 Barnwell held a 32% average working interest in productive wells in the Bonanza area.

                Capital expenditures totaled $1,670,000 in the Progress area in fiscal 2005 as compared to $550,000 in fiscal 2004.  Three gross wells (0.9 net well) were drilled in fiscal 2005 of which two were successful and one is being evaluated.  In the Progress area Barnwell acquired oil and natural gas rights in 1,280 gross (720 net) acres of undeveloped land in fiscal 2005.  At September 30, 2005 Barnwell held a 32% average working interest in productive wells in the Progress area.

                Capital expenditures totaled $531,000 in the Wood River area in fiscal 2005 as compared to $615,000 in fiscal 2004.  Four gross wells (0.4 net wells) were successfully drilled in fiscal 2005.  At September 30, 2005 Barnwell held a 14% average working interest in productive wells in the Wood River area.

Barnwell’s average working interest in wells drilled in fiscal 2005 was approximately 17%, as compared to 10% in fiscal 2004 and 23% in fiscal 2003.  The increase in fiscal 2005, as compared to fiscal 2004, was principally due to an 81 gross (2.7 net) well drilling program in fiscal 2004 in the Hilda area, where Barnwell’s interest averaged 3.3%, which reduced Barnwell’s average net interest in fiscal 2004.  In fiscal 2005, Barnwell initiated 27 gross wells (8.8 net wells) as compared to 20 gross wells (7.9 net wells) in fiscal 2004.

Oil and Natural Gas Production

The following table summarizes (a) Barnwell’s net unit production for the last three fiscal years, based on sales of crude oil, natural gas, condensate and other natural gas liquids, from all wells in which Barnwell has or had an interest, and (b) the average sales prices and average production costs for such production during the same periods.  Production amounts reported are net of royalties and the Alberta Royalty Tax Credit.  Barnwell’s net production in fiscal 2005, 2004, and 2003 was derived primarily from the Province of Alberta.

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*                                         When used in this report, the term “BBL(S)” means stock tank barrel(s) of oil equivalent to 42 U.S. gallons and the term “MCF” means 1,000 cubic feet of natural gas at 14.65 pounds per square inch absolute and 60 degrees F.

**                                  Calculated on revenues before royalty expense and royalty tax credit divided by gross production.

***                           Calculated on revenues net of pipeline charges before royalty expense and royalty tax credit divided by gross production.

****                    Natural gas liquids, oil and natural gas units were combined by converting barrels of natural gas liquids and oil to an MCF equivalent (“MCFE”) on the basis of 1 BBL = 5.8 MCF.  Excludes natural gas pipeline charges.

*****             Natural gas liquids, oil and natural gas units were combined by converting barrels of natural gas liquids and oil to an MCF equivalent (“MCFE”) on the basis of 1 BBL = 5.8 MCF.

In fiscal 2005, approximately 68%, 21% and 11% of Barnwell’s oil and natural gas revenues were from the sale of natural gas, oil and natural gas liquids, respectively.

In fiscal 2005, Barnwell’s net production after royalties for natural gas averaged 9,920 MCF per day, an increase of 7% from 9,240 MCF per day in fiscal 2004.  Gross natural gas production also increased 7% in fiscal 2005, as compared to fiscal 2004.  Dunvegan contributed approximately 48% of Barnwell’s net natural gas production in fiscal 2005, an increase from 44% in fiscal 2004 due to the new well drilling at Dunvegan.

Barnwell’s major oil producing properties are the Red Earth, Chauvin and Bonanza areas in Canada.  In fiscal 2005, net production after royalties for oil averaged 380 barrels per day, a decrease of 10% from 420 barrels per day in fiscal 2004.  This decrease was principally due to natural production declines at Red Earth.

In fiscal 2005, net production after royalties for natural gas liquids averaged 310 barrels per day, an increase of 7% from 290 barrels per day in fiscal 2004.  This increase was due to higher Dunvegan

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production which increased 12% or 29 barrels per day.  Dunvegan contributed approximately 82% of Barnwell’s net natural gas liquids production in fiscal 2005.

The average production cost per MCFE was $1.20 for fiscal 2005, an 8% increase from $1.11 for fiscal 2004.  The increase was due to an 8% increase in the average exchange rate of the Canadian dollar to the U.S. dollar in fiscal 2005, as compared to fiscal 2004.

The average depletion cost per MCFE was $1.66 for fiscal 2005, a 27% increase from $1.31 for fiscal 2004.  The increase was due to a 17% increase in the depletion rate and an 8% increase in the average exchange rate of the Canadian dollar to the U.S. dollar.

The higher depletion rate is due to increases in Barnwell’s costs of finding and developing proven reserves, and costs that are incurred to decrease the rate of production declines or maintain or increase rates of production from reserves found in previous years.  Barnwell’s cost of finding and developing proven reserves has increased due to the cost of oil and natural gas exploration and development having increased along with product prices, the drilling of unsuccessful wells, and as a portion of recent oil and natural gas capital expenditures were for the development of existing reserves.

In fiscal 2004, approximately 67%, 22% and 11% of Barnwell’s oil and natural gas revenues were from the sale of natural gas, oil and natural gas liquids, respectively.

In fiscal 2004, Barnwell’s net production after royalties for natural gas averaged 9,240 MCF per day, an increase of 6% from 8,700 MCF per day in fiscal 2003.  Gross natural gas production also increased 6% in fiscal 2004, as compared to fiscal 2003.  Dunvegan contributed approximately 44% of Barnwell’s net natural gas production in fiscal 2004, an increase from 43% in fiscal 2003.

In fiscal 2004, net production after royalties for oil averaged 420 barrels per day, an increase of 8% from 390 barrels per day in fiscal 2003.  This increase was due to new production from the Bonanza and Wizard Lake areas, partially offset by decreases in production at certain older properties.

In fiscal 2004, net production after royalties for natural gas liquids averaged 290 barrels per day, an increase of 26% from 230 barrels per day in fiscal 2003.  This increase was due to increased production from the Dunvegan area and to a fire in early October 2002 at a Dunvegan gas plant that prevented stripping of natural gas liquids from the natural gas, resulting in an approximately 6,000 barrel decline in liquids net production in fiscal 2003.

The average production cost per MCFE was $1.11 for fiscal 2004, a 19% increase from $0.93 for fiscal 2003.  The increase was due to the addition of new properties, costs incurred to re-enter wells for repair, maintenance and cleaning, and inflationary pressures on oil field service costs.  Also contributing to the increase was a 10% increase in the average exchange rate of the Canadian dollar to the U.S. dollar which increased the average production cost per MCFE by $0.10 in fiscal 2004, as compared to fiscal 2003.

The average depletion cost per MCFE was $1.31 for fiscal 2004, a 46% increase from $0.90 for fiscal 2003.  The increase is the result of increased costs of finding and developing proven reserves, as compared to prior years, and a 10% increase in the average exchange rate of the Canadian dollar to the U.S. dollar which increased the average depletion cost per MCFE by $0.12 in fiscal 2004, as compared to fiscal 2003.

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The following table sets forth the gross and net number of productive wells Barnwell has an interest in as of September 30, 2005

Productive Wells

*                                         Twelve gross natural gas wells have dual or multiple completions and two gross oil wells have dual completions.

**                                  Please see note (2) on the following table.

Developed Acreage and Undeveloped Acreage

The following table sets forth certain information with respect to oil and natural gas properties of Barnwell as of September 30, 2005

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

(2)                “Gross” also refers to the total number of acres or wells in which Barnwell owns an interest, and “Net” refers to Barnwell’s aggregate interest therein.  For example, a 50% interest in a 320 acre lease represents 320 Gross Acres and 160 Net Acres.  The gross acreage and well figures include interests owned of record by Barnwell and, in addition, the portion owned by others.

Barnwell’s leasehold interests in its undeveloped acreage expire over the next fiscal years, if not developed, as follows: 6% expire during fiscal 2006; 6% expire during fiscal 2007; 18% expire during fiscal 2008; 32% expire during fiscal 2009; and 25% expire during fiscal 2010. Thirteen percent of Barnwell’s undeveloped acreage is not subject to expiration because they are related to heavy oil and other areas where leases are allowed to continue indefinitely without having a well on the acreage. 

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There can be no assurance that Barnwell will be successful in renewing its leasehold interests in the event of expiration.

Barnwell’s undeveloped acreage includes major concentrations in Alberta, at Bremner (8,640 net acres), Bonanza (6,352 net acres), Boundary Lake (6,326 net acres), Thornbury (6,261 net acres), Mulligan (4,708 net acres), Paddle River (5,760 net acres), Swalwell (4,000 net acres), Red Earth (3,271 net acres) and Doris (5,568 net acres).

Reserves

The amounts set forth in the table below, prepared by Paddock Lindstrom & Associates Ltd., Barnwell’s independent reservoir engineering consultants, summarize the estimated net quantities of proved producing reserves and proved reserves of crude oil (including condensate and natural gas liquids) and natural gas as of September 30, 2005, 2004, and 2003 on all properties in which Barnwell has an interest.  These reserves are before deductions for indebtedness secured by the properties and are based on constant dollars.  No estimates of total proved net oil or natural gas reserves have been filed with or included in reports to any federal authority or agency, other than the United States Securities and Exchange Commission, since October 1, 2003.

Proved Producing Reserves

Total Proved Reserves

  (Includes Proved Producing Reserves)

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As of September 30, 2005, essentially all of Barnwell’s proved producing and total proved reserves were located in the Province of Alberta, with minor volumes located in the Provinces of Saskatchewan and British Columbia.

During fiscal 2005, Barnwell’s total net proved reserves, including proved producing reserves, of oil, condensate and natural gas liquids increased by 2,000 barrels, and total net proved reserves of natural gas decreased by 1,591,000 MCF.

The change in oil, condensate and natural gas liquids reserves was the net result of production during the year of 253,000 barrels, the addition of 179,000 barrels from the drilling of productive wells, and the independent engineer’s 76,000 barrel upward revision of Barnwell’s oil reserves.

The change in natural gas reserves was the net result of production during the year of 3,621,000 MCF, the addition of 3,266,000 MCF from the drilling of productive natural gas wells and the independent engineer’s 1,236,000 MCF downward revision of Barnwell’s natural gas reserves.  The downward revision was caused by prior year wells not performing as anticipated.

Barnwell’s working interest in the Dunvegan area accounted for approximately 55% and 60% of its total proved natural gas reserves at September 30, 2005 and 2004, respectively, and approximately 37% and 40% of total proved oil and natural gas liquids reserves at September 30, 2005 and 2004, respectively.

The following table sets forth Barnwell’s oil and natural gas reserves at September 30, 2005, by property name, based on information prepared by Paddock Lindstrom & Associates Ltd.  Gross reserves are before the deduction of royalties; net reserves are after the deduction of royalties net of the Alberta Royalty Tax Credit.  This table is based on constant dollars where reserve estimates are based on sales prices, costs and statutory tax rates in existence at the date of the projection.  Oil, which includes natural gas liquids, is shown in thousands of barrels (“MBBLS”) and natural gas is shown in millions of cubic feet (“MMCF”).

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OIL AND NATURAL GAS RESERVES AT SEPTEMBER 30, 2005

Properties are located in Alberta, Canada unless otherwise noted.

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Estimated Future Net Revenues

The following table sets forth Barnwell’s “Estimated Future Net Revenues” from total proved oil, natural gas and condensate reserves and the present value of Barnwell’s “Estimated Future Net Revenues” (discounted at 10%).  Estimated future net revenues for total proved reserves are net of estimated development costs.  Net revenues have been calculated using current sales prices and costs, after deducting all royalties net of the Alberta Royalty Tax Credit, operating costs, future estimated capital expenditures, and income taxes.

Marketing of Oil and Natural Gas

Barnwell sells substantially all of its oil and condensate production under short-term contracts between itself and marketers of oil.  The price of oil and condensate is freely negotiated between the buyers and sellers.

Natural gas sold by Barnwell is generally sold under both long-term and short-term contracts with prices indexed to market prices.  The price of natural gas and natural gas liquids is freely negotiated between buyers and sellers.  In fiscal 2005, 2004, and 2003, Barnwell took virtually all of its oil and natural gas “in kind” where Barnwell markets the products instead of having the operator of a producing property market the products on Barnwell’s behalf.

In fiscal 2005, natural gas production from the Dunvegan Unit was responsible for approximately 46% of Barnwell’s natural gas revenues, as compared to 42% in fiscal 2004.  In fiscal 2005, Barnwell had four individually significant marketers that accounted for 62% of Barnwell’s oil and natural gas revenues.  A substantial portion of Barnwell’s Dunvegan natural gas production and natural gas production from other properties is sold to aggregators and marketers under various short-term and long-term contracts, with the price of natural gas determined by negotiations between the aggregators and the final purchasers.  In fiscal 2005, more than 50% of Barnwell’s oil and natural gas revenues were from products sold at spot prices.

Governmental Regulation

The jurisdictions in which the oil and natural gas properties of Barnwell are located have regulatory provisions relating to permits for the drilling of wells, the spacing of wells, the prevention of

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oil and natural gas waste, allowable rates of production and other matters.  The amount of oil and natural gas produced is subject to control by regulatory agencies in each province and state that periodically assign allowable rates of production.  The Province of Alberta and Government of Canada also monitor and regulate the volume of natural gas that may be removed from the province and the conditions of removal.

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

The right to explore for and develop oil and natural gas on lands in Alberta, Saskatchewan and British Columbia is controlled by the governments of each of those provinces.  Changes in royalties and other terms of provincial leases, permits and reservations may have a substantial effect on Barnwell’s operations.  In addition to the foregoing, in the future, Barnwell’s Canadian operations may be affected from time to time by political developments in Canada and by Canadian federal, provincial and local laws and regulations, such as restrictions on production and export, oil and natural gas allocation and rationing, price controls, tax increases, expropriation of property, modification or cancellation of contract rights, and environmental protection controls.  Furthermore, operations may also be affected by United States import fees and restrictions.

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

In 2002, Canadian taxpayers were not permitted to deduct royalties, taxes, rentals and similar levies paid to the federal or provincial governments in connection with oil and natural gas production in computing income for Canadian federal income tax purposes.  However, they were allowed to deduct a “Resource Allowance” which is 25% of the taxpayer’s “Resource Profits for the Year” (essentially, net income from the production of oil, natural gas or minerals) in computing their taxable income.

In November 2003, Royal Assent was received on a bill passed by the Parliament of Canada, which was then enacted into law, to reduce Canada’s corporate tax rate on “resource” income (income derived from oil and natural gas operations) over a four-year period beginning January 1, 2003 from 29% to 21% with the 21% tax rate commencing on January 1, 2007.  Additionally, the bill phases in over the same four-year period tax deductions for royalties, which previously were not tax deductible, and phases out the Resource Allowance deduction along with other changes.  Accordingly, during fiscal 2004, Barnwell’s Canadian deferred income tax liabilities were reduced by approximately $1,440,000 due to the reduction in Canada’s federal corporate tax rate.

In Alberta, a producer of oil or natural gas is entitled to a credit against the royalties payable to the Crown by virtue of the Alberta Royalty Tax Credit program.  The Alberta Royalty Tax Credit rate is based on a price-sensitive formula and varies between 75% at prices below a specified royalty tax credit reference price and 25% at prices above a specified royalty tax credit reference price.  The Alberta Royalty Tax Credit will be applied to a maximum annual amount of $2,000,000 Canadian dollars of

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Alberta Crown royalties payable for each producer or associated group of producers.  Crown royalties on production from producing properties acquired from corporations claiming maximum entitlements to the Alberta Royalty Tax Credit will generally not be eligible for the Alberta Royalty Tax Credit.  The rate is established quarterly based on the average royalty tax credit reference price, as determined by the Alberta Department of Energy.  The royalty tax credit reference price is based on a weighted average oil and gas price.

The Province of Alberta has stated that changes in the Alberta Royalty Tax Credit will be announced three years in advance.  The government of Alberta has considered limiting the Alberta Royalty Tax Credit on some basis, as yet undetermined, to entities that invest in oil and natural gas in Alberta.  Barnwell currently does such investing.  The Alberta Royalty Tax Credit program has been in effect in various forms since 1974 and Barnwell anticipates that it will be continued in some form for the foreseeable future.  In fiscal 2005, Barnwell’s Alberta Royalty Tax Credit totaled approximately $409,000.  If the Alberta Royalty Tax Credit is discontinued, it will have an adverse effect on Barnwell.

Competition

The majority of Barnwell’s natural gas sales take place in Alberta, Canada.  Natural gas prices in Alberta are generally competitive with other major North American areas due to increased pipeline capacity into the United States.  Barnwell’s oil and natural gas liquids are sold in Alberta with prices determined by the world price for oil.

Barnwell competes in the sale of oil and natural gas on the basis of price, and on the ability to deliver products.  The oil and natural gas industry is intensely competitive in all phases, including the exploration for new production and reserves and the acquisition of equipment and labor necessary to conduct drilling activities.  The competition comes from numerous major oil companies as well as numerous other independent operators.  There is also competition between the oil and natural gas industry and other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers.  Barnwell is a minor participant in the industry and competes in its oil and natural gas activities with many other companies having far greater financial, technical and other resources.

CONTRACT DRILLING OPERATIONS

Barnwell owns 100% of Water Resources International, Inc. (“Water Resources”) which drills water and exploratory wells and installs and repairs water pumping systems in Hawaii.  Water Resources owns and operates four Spencer-Harris portable rotary drill rigs ranging in drilling capacity from 3,500 feet to 7,000 feet, and an IDECO H-35 rotary drill/workover rig which it had leased to an oil company during the latter part of fiscal 2003 through the end of fiscal 2005.  Additionally, Water Resources leases a three-quarter of an acre maintenance facility in Honolulu, Hawaii and a one acre maintenance and storage facility with 2,800 square feet of interior space in Kawaihae, Hawaii, and maintains an inventory of drilling and pump supplies.  As of September 30, 2005, Water Resources employed 25 drilling, pump and administrative employees, none of whom are union members.

Water Resources drills water, water monitoring and geothermal wells of varying depths in Hawaii and also installs and repairs water pumps and is the state of Hawaii’s distributor for Floway pumps and equipment.  The demand for Water Resources’ services is primarily dependent upon land development activities in Hawaii.  Water Resources markets its services to land developers and

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government agencies, and identifies potential contracts through public notices, its officers’ involvement in community activities and referrals.  Contracts are usually fixed price per lineal foot or day rate contracts and are negotiated with private entities or obtained through competitive bidding with private entities or with local, state and federal agencies.  Contract revenues are not dependent upon the discovery of water, geothermal production zones or other similar targets, and contracts are not subject to renegotiation of profits or termination at the election of the governmental entities involved.  Contracts provide for arbitration in the event of disputes.

Barnwell’s contract drilling subsidiary derived 63%, 70%, and 66% of its contract drilling revenues in fiscal 2005, 2004, and 2003, respectively, pursuant to federal, State of Hawaii and county contracts.  At September 30, 2005, Barnwell had accounts receivable from the State of Hawaii and county entities totaling approximately $621,000.  Barnwell has lien rights on wells drilled and pumps installed for federal, State of Hawaii, county and private entities.

Barnwell’s contract drilling segment currently operates in Hawaii and is not subject to seasonal fluctuations.

Activity

In fiscal 2005, Water Resources started seven well drilling contracts and seven pump installation contracts and completed five well drilling contracts and five pump installation contracts.  Five of the completed well drilling contracts and one of the completed pump contracts were started in the prior year.  Seventy-two percent (72%) of well drilling and pump installation jobs, representing 63% of total contract drilling revenues in fiscal 2005, have been pursuant to government contracts.

At September 30, 2005, Water Resources had a backlog of nine well drilling contracts and ten pump installation and repair contracts, seven and four of which were in progress as of September 30, 2005.

The dollar amount of Water Resources’ backlog of firm well drilling and pump installation and repair contracts at November 30, 2005 and 2004 was as follows:

All of the contracts in backlog at November 30, 2005 are expected to be completed within fiscal year 2006.

Competition

Water Resources utilizes rotary drill rigs and competes with other drilling contractors in Hawaii which use drill rigs similar to Water Resources’ drilling rigs, and newer or top head rotary drilling rigs that drill as quickly as Water Resources’ equipment but require less labor.  These competitors are also capable of installing and repairing vertical turbine and submersible water pumping systems in Hawaii.  These contractors compete actively with Water Resources for government and private contracts.  Pricing is Water Resources’ major method of competition; reliability of service is also a significant factor.

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Competitive pressures are expected to remain high, thus there is no assurance that the increase in available or awarded jobs which occurred in fiscal 2005 will continue.

LAND INVESTMENT OPERATIONS

Barnwell owns a 77.6% controlling interest in Kaupulehu Developments, a Hawaii general partnership that owns interests in leasehold land and development rights for property located approximately six miles north of the Kona International Airport in the North Kona District of the Island of Hawaii.  Between 1986 and 1989, Kaupulehu Developments obtained the state and county zoning changes necessary to permit development of the Four Seasons Resort Hualalai at Historic Ka’upulehu and Hualalai Golf Club, which opened in 1996, a second golf course, and single-family and multiple-family residential units.  These projects were developed on leasehold land acquired from Kaupulehu Developments by Kaupulehu Makai Venture, an unrelated entity that is an affiliate of Kajima Corporation of Japan.  The development rights held by Kaupulehu Developments are for residentially-zoned leasehold land within and adjacent to the Hualalai Golf Club and are under option to Kaupulehu Makai Venture.

In 1993, Kaupulehu Developments submitted a rezoning petition to the State Land Use Commission and in 1998, filed an Application for a Project District zoning ordinance and a Special Management Area Use Permit Petition with the County of Hawaii to reclassify conservation-zoned land to zoning which allows resort/residential development.  In October 2001, Kaupulehu Developments received final approval for the reclassification.

On February 13, 2004, Kaupulehu Developments entered into a Purchase and Sale Agreement with WB KD Acquisition LLC (“WB”) by which Kaupulehu Developments transferred its leasehold interest in approximately 870 acres zoned for resort/residential development, in two increments, to WB.  There is no affiliation between Kaupulehu Developments and WB.  WB is an affiliate of Westbrook Partners LLC, an affiliate of the developers of the Kuki’o Resort.  The first increment (“Increment I”) is an area planned for approximately 80 single-family lots and a beach club on the portion of the property bordering the Pacific Ocean.  The purchasers of the 80 single-family lots will have the right to apply for membership in the Kuki’o Resort Golf and Beach Club, which is located adjacent to and south of the Four Seasons Resort Hualalai at Historic Ka’upulehu.  The second increment (“Increment II”) is the remaining portion of the approximately 870-acre property and is zoned for single-family and multi-family residential units and a golf course and clubhouse.

With respect to Increment I, Kaupulehu Developments received a non-refundable $11,550,000 payment (“Closing Payment”) in February 2004 and is entitled to receive payment of the following percentages of the gross proceeds generated from the sale by WB of single-family lots in Increment I (“Percentage Payments”): 9% of the gross proceeds from single-family lot sales up to aggregate gross proceeds of $100,000,000; 10% of such aggregate gross proceeds greater than $100,000,000 but less than $300,000,000; and 14% of such aggregate gross proceeds in excess of $300,000,000.  If prior to December 31, 2005,  Kaupulehu Developments has not received Percentage Payments equal to or greater than $2,500,000 in the aggregate, WB will pay Kaupulehu Developments the amount by which the aggregate amount of all prior Percentage Payments made by WB to Kaupulehu Developments is less than $2,500,000.  If prior to December 31, 2006, Kaupulehu Developments has not received Percentage Payments (including payments in lieu of Percentage Payments as described in the immediately preceding sentence) equal to or greater than $5,000,000 in the aggregate, then WB will pay Kaupulehu

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Developments the amount by which the aggregate amount of all such payments is less than $5,000,000.  Until the formal granting of access and utility easements by third parties to WB have been completed, WB is entitled, but not required, to withhold payment of Percentage Payments and the minimum payments described above to Kaupulehu Developments until WB’s aggregate gross proceeds generated by the sale of single-family lots in Increment I exceeds $75,000,000.  As of the date of this filing, Kaupulehu Developments has received no Percentage Payments and it is Barnwell’s understanding that the conditions regarding the formal granting of easements are in progress but have not yet been completed.  There is no assurance that any of these future payments will be received.

WB also agreed to pay Kaupulehu Developments non-refundable interim payments of $50,000 per month (“Interim Payments”), until the first to occur of the closing of the sale of the 40th single-family lot sold in Increment I or WB’s payment to Kaupulehu Developments of a total of $900,000 in Interim Payments subsequent to February 2004.  Kaupulehu Developments received Interim Payments totaling $350,000 through fiscal 2004.

Kaupulehu Developments, WB and The Trustees of The Estate of Bernice Pauahi Bishop (“KS”) also entered into an agreement (the “Step-In Rights Agreement”) whereby if WB elects not to proceed with development of Increment I within the time frame set forth in the Step-In Rights Agreement, which may be extended by KS, or defaults under the terms of its lease with KS, Kaupulehu Developments would have the right to succeed to WB’s development rights and develop the property without any payment to WB.

With respect to Increment II, Kaupulehu Developments and WB agreed to use diligent efforts to negotiate, and attempt to document and enter into, prior to the date which is three (3) years following the closing of the sale of the first single-family lot in Increment I, an agreement with regards to the ownership and development of Increment II.  WB, however, may terminate such negotiations at any time without any further obligation.  Under the terms of the Step-In Rights Agreement, if at the end of three years following the closing of the sale of the first single-family lot in Increment I the parties have not entered into a definitive agreement with respect to Increment II, the leasehold rights with respect to Increment II will revert to Kaupulehu Developments.  In 2005, Kaupulehu Developments and WB held several meetings to discuss possible development scenarios for Increment II.  No agreement has been reached with WB for the development of Increment II although the discussions between the parties are ongoing.

Activity

During the year ended September 30, 2005, Kaupulehu Developments received $550,000 of Interim Payments, before minority interest, and has received in full the aforementioned $900,000 of Interim Payments as of August 2005.

In March 2004, WB commenced engineering of infrastructure, preparation of covenants, conditions and restrictions for a community association, and preparation of legal documents to enable real estate sales, and broke ground and graded several miles of access roads.  In 2004, WB received final subdivision approval from the County of Hawaii for the first phase of 38 lots.  In 2005, WB received federal and State of Hawaii approvals to begin marketing the first phase of 38 lots of Increment I.  Additionally, during 2004 and 2005, WB excavated, processed and placed material on the single-family lots bringing a majority of the first phase of 38 lots to finished grade.

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On December 31, 2004, Kaupulehu Makai Venture exercised the portion of its development rights option due on that date and paid Kaupulehu Developments $2,656,000.  Barnwell accounts for sales of development rights under option by use of the cost recovery method, whereby no operating profit is recognized until cash received exceeds the cost and the estimated future costs related to development rights sold.  Accordingly, the $2,656,000 of revenues attributable to the development rights sale in December 2004 was reduced by $159,000 of fees related to the sale, resulting in net revenues of $2,497,000 and a $1,950,000 operating profit, after minority interest.  There were no other costs deducted from revenues from the sale of development rights in fiscal 2005 as all capitalized costs associated with the development rights were expensed in previous years under the cost recovery method.  At September 30, 2005, approximately 81 acres remain under option.

The total amount of remaining future development rights option receipts at September 30, 2005, if all options are fully exercised, was $15,937,500, comprised of six payments of $2,656,250 due on each December 31 of years 2005 to 2010.  In November 2005, Kaupulehu Makai Venture paid Kaupulehu Developments $2,875,000 upon exercising the portion of its development rights option due on December 31, 2005 of $2,656,000 and a portion, $219,000, of its development rights option due on December 31, 2006, bringing the total remaining future development rights option receipts to $13,063,000.  If any annual option payment is not made, the then remaining development right options will expire.  There is no assurance that any portion of the remaining options will be exercised.

The interests held by Kaupulehu Developments at September 30, 2005 include the development rights under option; the rights to receive Increment I Percentage Payments; the leasehold land zoned for resort/residential development within Increment II, which is under a right of negotiation with WB; and approximately 1,000 acres of vacant leasehold land zoned conservation.

Competition

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

For the past couple of years, Hawaii’s economy has experienced some growth and the South Kohala/North Kona area of the island of Hawaii, the area in which Kaupulehu Developments’ property is located, has experienced strong demand for residential real estate.  This trend continued through fiscal 2005 and is not expected to decline significantly in the near term, although there can be no assurance this trend will in fact continue.

CORPORATE OFFICE

In December 2003, Barnwell purchased the space it was leasing for its corporate offices located at 1100 Alakea Street, Suite 2900, Honolulu, Hawaii 96813 for $1,057,000, of which $883,000 was financed by a note payable to a Hawaii bank and the remainder was paid in cash.  The seller was A&B Alakea LLC, an independent third party.  The note was payable in monthly principal payments of

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approximately $3,000, plus interest, and was due in full in December 2006.  Barnwell repaid the note in full in fiscal 2004.  The space purchased has 4,662 useable square feet in an office building in downtown Honolulu, Hawaii.

Item 3.            Legal Proceedings

                Barnwell is occasionally involved in routine litigation and is subject to governmental and regulatory controls that are incidental to the business.  Barnwell’s management believes that routine claims and litigation involving Barnwell are not likely to have a material adverse effect on its financial position, results of operations or liquidity.

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

                The Board of Directors and the stockholders of Barnwell, on May 11, 2005 and October 7, 2005, respectively, approved an amendment (the “Amendment”) to Barnwell’s Certificate of Incorporation to increase the authorized number of shares of Barnwell’s common stock, par value $0.50, from 4,000,000 shares to 20,000,000 shares.  The Amendment became effective on October 12, 2005 upon the filing of the Amendment with the Secretary of State of the State of Delaware.

PART II

Item 5.            Market For Common Equity and Related Stockholder Matters

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

On October 17, 2005, Barnwell declared a three-for-one stock split in the form of a stock dividend.  The new shares were distributed on November 14, 2005 to all shareholders of record as of October 28, 2005.  All information in this Form 10-KSB has been adjusted to reflect the stock splits for all periods presented.

The principal market on which Barnwell’s common stock is being traded is the American Stock Exchange.  The following tables present the quarterly high and low sales prices, on the American Stock Exchange, for Barnwell’s common stock during the periods indicated (split-adjusted):

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As of December 14, 2005, there were 8,169,060 (split-adjusted) shares of common stock, par value $0.50, outstanding.  There were approximately 1,500 holders of the common stock of the registrant as of December 14, 2005.

On December 9, 2005, Barnwell declared a cash dividend of $0.025 per share payable January 4, 2006, to stockholders of record on December 20, 2005.

In August 2005, Barnwell declared a cash dividend of $0.02 per share (split-adjusted), payable September 15, 2005, to stockholders of record on September 1, 2005.

In May 2005, Barnwell declared a cash dividend of $0.02 per share (split-adjusted), payable June 15, 2005, to stockholders of record on June 1, 2005.

In February 2005, Barnwell declared a cash dividend of $0.02 per share (split-adjusted), payable March 15, 2005, to stockholders of record on March 1, 2005.

In December 2004, Barnwell declared a cash dividend of $0.04 per share (split-adjusted), payable January 5, 2005, to stockholders of record on December 20, 2004.

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Item 6.    MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion is intended to assist in the understanding of the consolidated balance sheets of Barnwell Industries, Inc. and subsidiaries (collectively referred to herein as “Barnwell”) as of September 30, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended September 30, 2005.  This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes to Consolidated Financial Statements included in this report.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities.  Actual results could differ significantly from those estimates.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In response to U.S. Securities and Exchange Commission Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” Barnwell has identified certain of its policies as being of particular importance to the understanding of its financial position and results of operations and which require the application of significant judgment by management.

Oil and natural gas properties

Barnwell uses the full cost method of accounting under which all costs incurred in the acquisition, exploration and development of oil and natural gas reserves, including costs related to unsuccessful wells and estimated future site restoration and abandonment, are capitalized until such time as the aggregate of such costs net of accumulated depletion and oil and gas related deferred income taxes, on a country-by-country basis, equals the sum of 1) the discounted present value (at 10%), using prices as of the end of the fiscal year on a constant basis, of Barnwell’s estimated future net cash flows from estimated production of proved oil and natural gas reserves as determined by independent petroleum engineers, less estimated future expenditures to be incurred in developing and producing the proved reserves but excluding future cash outflows associated with settling asset retirement obligations accrued on the balance sheet; plus 2) the cost of major development projects and unproven properties not subject to depletion, if any; plus 3) the lower of cost or estimated fair value of unproven properties included in costs subject to depletion; less 4) related income tax effects.  If net capitalized costs exceed this limit, the excess is expensed.  Depletion is computed using the units-of-production method whereby capitalized costs, net of salvage values, plus estimated future costs to develop proved reserves and satisfy asset retirement obligations, are amortized over the total estimated proved reserves on a country-by-country basis.  Investments in major development projects are not depleted until either proved reserves are associated with the projects or impairment has been determined.  At September 30, 2005 and 2004, Barnwell had no investments in major oil and natural gas development projects that were not being depleted.  General and administrative costs related to oil and natural gas operations are expensed as incurred.  Proceeds from the disposition of minor producing oil and natural gas properties are credited

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to the cost of oil and natural gas properties.  Gains or losses are recognized on the disposition of significant oil and natural gas properties.

Investment in land and revenue recognition

Barnwell’s investment in land is comprised of development rights under option; rights to receive percentage payments; leasehold land interests in land zoned resort/residential which are under right of negotiation; and land zoned conservation which is not under option or right of negotiation.  Investment in land is reported at the lower of the asset carrying value or fair value, less costs to sell, and is evaluated for impairment whenever events or changes in circumstances indicate that the recorded investment balance may not be fully recoverable.

Costs incurred for the acquisition and improvement of leasehold land interests, including capitalized interest, are included in the consolidated balance sheets under the caption “Investment in Land.”

Sales of development rights under option and revenues from the sale of Increment I of leasehold land interests are accounted for under the cost recovery method.  Under the cost recovery method, no operating profit is recognized until cash received exceeds the cost and the estimated future costs related to the development rights sold.

Contract drilling

Revenues, costs and profits applicable to contract drilling contracts are included in the consolidated statements of operations using the percentage of completion method, principally measured by the percentage of labor dollars incurred to date for each contract to total estimated labor dollars for each contract.  Contract losses are recognized in full in the period the losses are identified.  The performance of drilling contracts may extend over more than one year and, in the interim periods, estimates of total contract costs and profits are used to determine revenues and profits earned for reporting the results of contract drilling operations.  Revisions in the estimates required by subsequent performance and final contract settlements are included as adjustments to the results of operations in the period such revisions and settlements occur.  Contracts are normally less than one year in duration.

Income taxes

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

A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax asset will not be realized.  Barnwell has established a valuation allowance primarily for the U.S. tax effect of deferred Canadian taxes, foreign tax credits, accrued expenses and state of Hawaii net operating loss carryforwards which may not be realizable in future years as there can be no assurance of any specific level of earnings or that the timing of U.S. earnings will coincide with the payment of Canadian taxes to enable Canadian taxes to be fully deducted (or recoverable) for U.S. tax purposes.

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Net deferred tax assets at September 30, 2005 of $4,800,000 consists of $3,322,000 related to expenses accrued for book purposes but not for tax purposes and $972,000 related to the excess of the cost basis of investment in land for tax purposes over the cost basis of investment in land for book purposes.  Canadian deferred tax assets related to expenses accrued for book purposes but not for tax purposes are estimated to be realized through future Canadian income tax deductions against future Canadian oil and natural gas earnings.  U.S. deferred tax assets related to expenses accrued for book purposes but not for tax purposes and the excess of the cost basis of investment in land for tax purposes over the cost basis of investment in land for book purposes are estimated to be realized from deductions against future U.S. earnings from sales of interests in leasehold land and land development rights.  Additionally, at September 30, 2005, Barnwell had a deferred tax asset of $461,000 for alternative minimum tax credit carryforwards which are available to reduce future U.S. federal regular income taxes over an indefinite period, and a net deferred tax asset of $45,000 for a state net operating loss carryforward which is available to reduce future state income taxes arising from future sales of interests in leasehold land and land development rights and expires if not utilized on or before September 30, 2025.  The amount of deferred income tax assets considered realizable may be reduced if estimates of future taxable income are reduced.

Pension Plan

Barnwell sponsors a noncontributory defined benefit pension plan covering substantially all of its U.S. employees, with benefits based on years of service and the employee’s highest consecutive five-year average earnings.  Barnwell accounts for its defined benefit pension plan in accordance with Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions,” which requires that amounts recognized in financial statements be determined on an actuarial basis.  Statement of Financial Accounting Standards No. 87 requires that the effects of the performance of the pension plan’s assets and changes in pension liability discount rates on Barnwell’s computation of pension income (expense) be amortized over future periods.  Any variances in the future between the assumed rates utilized for actuarial purposes and the actual rates experienced by the plan may materially affect Barnwell’s results of operations or financial condition.

During and as of the end of fiscal 2005 and fiscal 2004, Barnwell assumed an expected long-term rate of return on plan assets of 8% and an expected rate of future annual compensation increases of 5%.

At the end of each year, Barnwell determines the discount rate to be used to calculate the present value of plan liabilities.  The discount rate is an estimate of the current interest rate at which the pension liabilities could be effectively settled at the end of the year.  In estimating this rate, Barnwell looks to rates of return on high-quality, fixed-income investments.  At September 30, 2005, Barnwell determined this rate to be 5.25% as compared to a discount rate of 5.75% used at September 30, 2004.

At September 30, 2005, Barnwell’s accrued benefit cost was $517,000.  For the year ended September 30, 2005, Barnwell recognized a net periodic benefit cost of $249,000 and recorded an additional minimum liability of $132,000.

Asset Retirement Obligation

On October 1, 2002, Barnwell adopted Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” which requires that the fair value of a liability

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for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.  The asset retirement obligation reflects Barnwell’s obligation to plug and abandon natural gas and oil wells, dismantle and remove related equipment and plants, and restore the properties to a suitable condition at the end of oil and gas operations based on Barnwell’s net ownership interest in the properties.  The asset retirement obligation is recorded at fair value in the period in which it is incurred along with a corresponding increase in the carrying amount of the related asset.  Barnwell has estimated fair value by discounting the estimated future cash outflows required to settle abandonment and restoration liabilities.  The present value calculation includes numerous estimates, assumptions and judgments regarding the existence of liabilities, the amount and timing of cash outflows required to settle the liability, what constitutes adequate restoration, inflation factors, credit adjusted discount rates, and consideration of changes in legal, regulatory, environmental and political environments.  Asset retirement costs included in the carrying amount of the related asset are depleted over the estimated life of the associated reserves, and the discounted present value of the asset retirement obligation is accreted and included in oil and natural gas operating expenses.  Abandonment and restoration cost estimates are determined in conjunction with Barnwell’s reserve engineers based on historical information regarding costs incurred to abandon and restore similar well sites, information regarding current market conditions and costs, and knowledge of subject well sites and properties.

CONTRACTUAL OBLIGATIONS

                The following table lists the scheduled maturities of long-term debt, estimating that Barnwell’s credit facility with the Royal Bank of Canada will be renewed on each annual renewal date, currently April 30, and scheduled minimum rental payments of non-cancelable operating leases for office space and leasehold land:

There is no assurance that the bank will in fact extend the term of the facility on each renewal date or that the facility will be renewed at its current amount.  The following table lists the scheduled maturities of long-term debt assuming that the facility will not be renewed on the next renewal date and that Barnwell then elects to convert the revolving facility to term status, and scheduled minimum rental payments of non-cancelable operating leases for office space and leasehold land:

The lease payments for land are subject to renegotiation after December 31, 2005.  Per the lease agreement, the lease payments will remain unchanged pending an appraisal, after which the lease rent

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will be adjusted to fair market value.  Barnwell currently does not know the amount of the new lease payments which could be effective January 1, 2006; they may remain unchanged or increase.  The future rental payment disclosures above assume the minimum lease payments for land in effect at December 31, 2005 remain unchanged through December 2025, the end of the lease term.

OVERVIEW

Barnwell is engaged in the following lines of business: 1) oil and natural gas exploration, development, production and sales essentially all in Canada (oil and natural gas segment), 2) investment in leasehold land in Hawaii (land investment segment), and 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling segment).

Barnwell sells substantially all of its oil and condensate production under short-term contracts with marketers of oil.  Natural gas sold by Barnwell is generally sold under both long-term and short-term contracts with prices indexed to market prices.  The price of natural gas, oil and natural gas liquids is freely negotiated between the buyers and sellers.  Market prices for petroleum products are dependent upon factors such as, but not limited to, changes in weather, storage levels, and output.  Petroleum and natural gas prices are very difficult to predict and fluctuate significantly.  For example, natural gas prices for Barnwell, based on quarterly averages during the three years ended September 30, 2005, have ranged from a low of $3.26 per thousand cubic feet to a high of $7.25 per thousand cubic feet, and tend to be higher in the winter than in the summer due to increased demand.  Oil and natural gas exploration, development and operating costs generally follow trends in product market prices, thus in times of higher product prices the cost of exploration, development and operation of oil and natural gas properties will tend to escalate as well.  Barnwell’s oil and natural gas operations make capital expenditures in the exploration, development, and production of oil and natural gas.  Cash outlays for capital expenditures are largely discretionary, however, a minimum level of capital expenditures is required to replace depleting reserves.  Due to the nature of oil and natural gas exploration and development, significant uncertainty exists as to the ultimate success of any drilling effort.

Barnwell owns a 77.6% controlling interest in Kaupulehu Developments, a Hawaii general partnership which owns interests in leasehold land and development rights for property located approximately six miles north of the Kona International Airport in the North Kona District of the Island of Hawaii, adjacent to and north of the Four Seasons Resort Hualalai at Historic Ka’upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean.   Kaupulehu Developments’ development rights are under option to a developer and revenues are recognized when options are exercised.  In February 2004, Kaupulehu Developments entered into an agreement with an independent buyer whereby Kaupulehu Developments transferred its leasehold interest in approximately 870 acres zoned for resort/residential development, in two increments, to the buyer.  For the first increment (“Increment I”), Kaupulehu Developments received an $11,550,000 cash closing payment in February 2004 and is also entitled to receive future payments from the buyer based on the following percentages of gross receipts from the developer’s sales of single-family residential lots in Increment I: 9% of the gross proceeds from single-family lot sales up to aggregate gross proceeds of $100,000,000; 10% of such aggregate gross proceeds greater than $100,000,000 but less than $300,000,000; and 14% of such aggregate gross proceeds in excess of $300,000,000.  For the second increment (“Increment II”), Kaupulehu Developments agreed to use diligent efforts to negotiate, and attempt to document and enter into, prior to the date which is three (3) years following the closing of the sale of the first single-family lot in Increment I, an agreement with regards to the ownership and development of Increment II.  The area in

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which Kaupulehu Developments’ interests are located has experienced strong demand for premium residential real estate in recent years, however there is no assurance that any future development rights or percentage payments will be received.

Barnwell also drills wells and installs and repairs water pumping systems in Hawaii.  Contract drilling results are highly dependent upon the quantity, dollar value and timing of contracts awarded by governmental and private entities and can fluctuate significantly.  Water well drilling and pump installation operating profits during fiscal 2005 reflected the impact of increased activity in the number and value of contracts awarded by the various governmental and private entities.  Contract drilling operating profits have, however, started to decrease in recent months, and management expects a lower level of activity and operating profit in fiscal 2006, as compared to fiscal 2005.

RESULTS OF OPERATIONS

Summary

Barnwell generated net earnings of $6,027,000 in fiscal 2005, a $2,683,000 decrease from net earnings of $8,710,000 in fiscal 2004.  The decrease was the result of fiscal 2004 net earnings including the receipt of a closing payment from the sale of an interest in leasehold land in February 2004 which generated an operating profit, after minority interest and before taxes, of approximately $5,200,000, and deferred income tax benefits of $1,740,000 resulting from the enactment of reductions in Canadian federal and Alberta income tax rates; there were no such items in fiscal 2005.  Additionally, earnings decreased due to an increase in stock appreciation rights expense, after income taxes, of $1,608,000 in fiscal 2005 resulting from an increase in the market price of Barnwell’s stock and the issuance of additional stock options that have stock appreciation rights.  These decreases in net earnings were partially offset by increases in operating profits generated by Barnwell’s oil and natural gas and contract drilling segments.

The fiscal year average exchange rate of the Canadian dollar to the U.S. dollar increased 8% in fiscal 2005, as compared to fiscal 2004, and the exchange rate of the Canadian dollar to the U.S. dollar increased 9% at September 30, 2005, as compared to September 30, 2004.  This increase in the value of the Canadian dollar in U.S. dollars increased Barnwell’s reported assets and liabilities and revenues and expenses.

Barnwell generated net earnings of $8,710,000 in fiscal 2004, a $6,390,000 increase from net earnings of $2,320,000 in fiscal 2003.  The increase was the result of an increase in land investment operating profit due to the sale of an interest in leasehold land referred to above, higher operating profit from the sale of development rights, and deferred income tax benefits of $1,740,000 resulting from a reduction in Canadian income tax rates.

Oil and Natural Gas Revenues

Selected Operating Statistics

                The following tables set forth Barnwell’s annual net production and annual average price per unit of production for fiscal 2005 as compared to fiscal 2004, and fiscal 2004 as compared to fiscal 2003.  Production amounts reported are net of royalties and the Alberta Royalty Tax Credit.

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Fiscal 2005 - Fiscal 2004