U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-KSB

For the fiscal year ended September 30, 2004

Commission File Number 1-5103

BARNWELL INDUSTRIES, INC.

(Name of small business issuer in its charter)

(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 (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.

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.      o

Issuer’s revenues for the fiscal year ended September 30, 2004: $37,970,000

The aggregate market value of the voting stock held by non-affiliates (687,097 shares) of the Registrant on December 20, 2004, based on the closing price of $63.79 on that date on the American Stock Exchange, was $43,830,000.

As of December 20, 2004 there were 1,356,510 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 20, 2005 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, 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 in general and Hawaii’s tourism industry in particular.  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.

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 61% of Barnwell’s revenues for the fiscal year ended September 30, 2004 were attributable to its oil and natural gas activities.  Barnwell’s land investment segment revenues, including land segment revenues reported as “Gas processing and other” revenues in the Consolidated Statements of Operations, accounted for 27% of Barnwell’s revenues in fiscal 2004; contract drilling activities comprised 10% of fiscal 2004 revenues; and other revenues comprised 2% of fiscal 2004 revenues.  Approximately 90% of Barnwell’s capital expenditures for the fiscal year ended September 30, 2004 were attributable to oil and natural gas activities and 10% were 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 received 53% of its oil and natural gas revenues in fiscal 2004 from three individually significant customers, ProGas Limited, Coral Energy Canada Inc., and Plains Marketing Canada, L.P.

(ii)               Contract Drilling. Barnwell’s wholly-owned subsidiary, Water Resources International, Inc., drills wells and installs and repairs water pumping systems in Hawaii.  Water Resources owns and operates four rotary drill rigs, pump installation and service equipment, leases one rotary drill/workover rig to an oil company, 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 70%, 66% and 70% of its contract drilling revenues in fiscal 2004, 2003 and 2002, 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 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

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Historic Ka’upulehu and Hualalai Golf Club, which opened in 1996, a second golf course, and single 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.  Kaupulehu Developments later obtained the state and county zoning changes necessary to permit development of single 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.

Kaupulehu Developments currently owns development rights under option; rights to receive percentage and interim payments on Increment I of the approximately 870 leasehold acres; an interest in leasehold land zoned for resort/residential development within Increment II 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, 2004, 2003 and 2002 are summarized as follows (all revenues were from unaffiliated customers with no intersegment sales or transfers):

For further discussion see Note 12 (SEGMENT AND GEOGRAPHIC INFORMATION) and Note 14 (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, 2004, Barnwell employed 52 employees, 49 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.

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

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(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, 2004, 2003 and 2002 are set forth in Note 12 (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 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 2004, Barnwell participated in exploratory and developmental operations in the Canadian Provinces of Alberta and Saskatchewan, although Barnwell does not limit its consideration of exploratory and developmental operations to these areas.

Barnwell’s producing natural gas properties are located principally in Alberta.  A small number of producing properties are located in British Columbia and Saskatchewan.  The Province of Alberta determines its royalty share of natural gas by using a reference price that averages all natural gas sales in Alberta.  Royalty rates are calculated on a sliding scale basis, increasing as prices increase.  Additionally, Barnwell pays gross overriding royalties on a portion of its natural gas sales to other parties.

In fiscal 2004, 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 30%.  The weighted average rate of royalties paid on all of Barnwell’s natural gas was approximately 27% in fiscal 2004, versus approximately 28% in fiscal 2003.

In fiscal 2004, virtually all of Barnwell’s oil production was from properties located in Alberta.  The Province of Alberta determines its royalty share of oil by using a reference price that averages all oil sales in Alberta.  Royalty rates are calculated on a sliding scale basis, increasing as prices increase.  Additionally, Barnwell pays gross overriding royalties and leasehold royalties on a portion of its oil sales to parties other than the Province of Alberta.  In fiscal 2004 and 2003, the weighted average royalty rate paid on oil was approximately 22% and 24%, respectively.  The decrease in the weighted average royalty rate on oil was primarily due to lower royalty rates on new oil production.

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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 2004, Barnwell participated in the drilling of 128 gross development wells and 16 gross exploratory wells, of which management believes 134 should be capable of production.  Barnwell also participated in the recompletion of 33 gross wells (4.6 net wells).  The most significant drilling operations took place in the Dunvegan, Bonanza/Balsam, Doris, Wood River, Progress, and Armada 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, 2004, 2003, and 2002 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% interest, is Barnwell’s principal oil and natural gas property and is located in Alberta, Canada.  At September 30, 2004, the Dunvegan Unit had 148 natural gas wells producing from 148 well zones.  In fiscal 2004, Barnwell participated in the drilling of 27 gross (2.4 net) development gas wells, of which 24 gross (2.1 net) wells were successful, and recompletion of 11 gas wells (1.0 net wells) in the Dunvegan area.  These new wells added proved reserves and are expected to increase the rate of future production from the area.  Total capital expenditures at Dunvegan were $3,670,000 in fiscal 2004 as compared to $1,223,000 and $325,000 in fiscal 2003 and 2002, respectively.

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Capital expenditures totaled $1,740,000 in the Bonanza/Balsam area, where five gross wells (2.2 net wells) were drilled in fiscal 2004, as compared to $1,552,000 in fiscal 2003.  Two gross wells (0.7 net wells) were successful and tied in and producing at September 30, 2004, and three gross wells (1.5 net wells) were unsuccessful.

In the Doris area, where capital expenditures totaled $735,000 in fiscal 2004, Barnwell drilled three gross wells (1.5 net wells).  One of the wells (0.5 net well) was successful, one (0.5 net well) was unsuccessful, and one (0.5 net well) initially flowed commercial quantities of gas, but additional work is required on the well before it can be determined to be a successful well.

In the Wood River area, where capital expenditures totaled $615,000 in fiscal 2004, Barnwell drilled four gross wells (0.4 net wells).  Three gross wells (0.2 net well) are estimated to be successful, and one well  (0.2 net well) was tied in and producing at September 30, 2004.

In the Progress area, where capital expenditures totaled $550,000 in fiscal 2004, one unsuccessful well (0.5 net well) was drilled and one gross well (0.3 net well) was a successful oil well.

In the Armada area, where capital expenditures totaled $320,000 in fiscal 2004, eight successful gross wells (1.8 net wells) were drilled, seven of which were producing at September 30, 2004.

Barnwell’s average net interest in wells drilled in fiscal 2004 was approximately 10%, as compared to 23% in fiscal 2003 and 34% in fiscal 2002.  The decrease in fiscal 2004, as compared to fiscal 2003, was due principally to drilling programs at Dunvegan, 27 gross (2.4 net) wells, and Hilda, 81 gross (2.7 net) wells, for a total of 108 gross (5.1 net) wells or an average net well interest of 5% for these two drilling programs.  The average net interest in all other wells drilled in fiscal 2004 was 26%.  Of the wells drilled in fiscal 2004, 20 gross wells (7.9 net wells) were on prospects developed by Barnwell.

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 2004, 2003, and 2002 was derived primarily from the Province of Alberta.  All dollar amounts in this table are in U.S. dollars.

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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.

***                           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 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.

Barnwell’s major oil producing properties are the Red Earth, Chauvin and Bonanza areas in Canada.  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.

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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.

In fiscal 2003, approximately 71%, 20% and 9% of Barnwell’s oil and natural gas revenues were from the sale of natural gas, oil and natural gas liquids, respectively.

In fiscal 2003, Barnwell’s net production after royalties for natural gas averaged 8,700 MCF per day, a decrease of 3% from 8,980 MCF per day in fiscal 2002.  Gross natural gas production remained constant, while, on a net basis, natural gas production decreased due to an increase in royalty rates attributable to increased natural gas prices.  Dunvegan contributed approximately 43% of Barnwell’s net natural gas production in fiscal 2003.

In fiscal 2003, net production after royalties for oil averaged 390 barrels per day, a decrease of 3% from 400 barrels per day in fiscal 2002.  This decrease was due to natural declines in production from certain of Barnwell’s older oil properties, which was partially offset by new production at Wizard Lake, Bonanza and Boundary Lake.

In fiscal 2003, net production after royalties for natural gas liquids averaged 230 barrels per day, a decrease of 12% from 260 barrels per day in fiscal 2002.  This decrease was due primarily 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.  Barnwell did, however, receive a higher price for its natural gas than it would have if the liquids had been removed, thereby mitigating some of the impact of the liquids production decline.  The damage to the gas plant was repaired and the plant resumed operations in late December 2002.

The average production cost per MCFE was $0.93 for fiscal 2003, a 41% increase from $0.66 for fiscal 2002.  The increase is due partly to an oil and natural gas operating expense credit for overcharges of operating expenses for fiscal years 1998 through 2001 from the operator of the Dunvegan property totaling $470,000 which was received in fiscal 2002.  The increase was also attributable to higher well repair and maintenance, electricity, fuel, insurance, and general maintenance costs.

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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, 2004.

Productive Wells

*                                         Eleven gross natural gas wells have dual or multiple completions and six 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, 2004:

(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: 7% expire during fiscal 2005; 8% expire during fiscal 2006; 9% expire during fiscal 2007; 18% expire during fiscal 2008; 40% expire during fiscal 2009; and 3% expire during fiscal 2010.  Fifteen percent of Barnwell’s undeveloped acreage is not subject to expiration because they are

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related to heavy oil and other areas where leases are allowed to continue indefinitely without having a well on the acreage.  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 Thornbury (5,584 net acres), Swalwell (4,045 net acres), Boundary Lake (3,880 net acres), Mulligan (3,380 net acres), Bonanza/Balsam (3,240 net acres), Paddle River (3,200 net acres), Red Earth (2,339 net acres), Doris (2,304 net acres), Pouce Coupe South (1,920 net acres), and Gere (1,507 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, 2004, 2003, and 2002 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 since October 1, 2001.

Proved Producing Reserves

Total Proved Reserves

  (Includes Proved Producing Reserves)

As of September 30, 2004, 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 2004, Barnwell’s total net proved reserves, including proved producing reserves, of oil, condensate and natural gas liquids decreased by 97,000 barrels, and total net proved reserves of natural gas decreased by 814,000 MCF.

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The change in oil, condensate and natural gas liquids reserves was the net result of production during the year of 259,000 barrels, the addition of 115,000 barrels from the drilling of productive wells, the addition of 54,000 undeveloped barrels from the planned drilling of wells at Dunvegan in fiscal 2005, and the independent engineer’s 7,000 barrel downward revision of Barnwell’s oil reserves.

The change in natural gas reserves was the net result of production during the year of 3,383,000 MCF, the addition of 2,127,000 MCF from the drilling of productive natural gas wells, the addition of 1,571,000 undeveloped MCF from the planned drilling of wells at Dunvegan in fiscal 2005, and the independent engineer’s 1,129,000 MCF downward revision of Barnwell’s natural gas reserves.  543,000 MCF of the independent engineer’s downward revision was due to newly enacted regulations restricting the production of natural gas at Thornbury due to its possible negative impact on the future production of heavy oil in the area.

Barnwell’s working interest in the Dunvegan area accounted for approximately 60% and 58% of its total proved natural gas reserves at September 30, 2004 and 2003, respectively, and approximately 40% of total proved oil and natural gas liquids reserves at September 30, 2004 and 2003.

The following table sets forth Barnwell’s oil and natural gas reserves at September 30, 2004, 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, 2004

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 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 2004, 2003, and 2002, 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 2004, natural gas production from the Dunvegan Unit was responsible for approximately 42% of Barnwell’s natural gas revenues, as compared to 41% in fiscal 2003.  In fiscal 2004, Barnwell had three individually significant customers that accounted for 53% 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 2004, Barnwell continued its strategy to increase the volumes of natural gas sold into spot markets, reaching approximately 49% of natural gas volumes, to take advantage of new pipeline access to premium markets and higher 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 purposes of Canadian Federal income tax.  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 Alberta Royalty Tax Credit will generally not be eligible for 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 2004, Barnwell’s Alberta Royalty Tax Credit totaled approximately $377,000.  If the Alberta Royalty Tax Credit is not continued, 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. 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 leases an IDECO H-35 rotary drill/workover rig to an oil company.  Additionally, Water Resources leases a three-quarter of an acre maintenance facility in Honolulu 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, 2004, 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 government agencies, and identifies potential contracts through public notices, its officers’ involvement

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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 70%, 66%, and 70% of its contract drilling revenues in fiscal 2004, 2003, and 2002, respectively, pursuant to Federal, State of Hawaii and county contracts.  At September 30, 2004, Barnwell had accounts receivable from the State of Hawaii and county entities totaling approximately $1,705,000.  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 2004, Water Resources started five well drilling contracts and four pump installation contracts and completed one well drilling contracts and two pump installation contracts.  None of the completed well or pump contracts were started in the prior year.  Seventy-four percent (74%) of well drilling and pump installation jobs, representing 70% of total contract drilling revenues in fiscal 2004, have been pursuant to government contracts.

At September 30, 2004, Water Resources had a backlog of nine well drilling contracts and eight pump installation and repair contracts, five and two of which were in progress as of September 30, 2004.

The dollar amount of Barnwell’s backlog of firm well drilling and pump installation and repair contracts at November 30, 2004 and 2003 is as follows:

All of the contracts in backlog at November 30, 2004 are expected to be completed within or shortly after the end of fiscal year 2005.

Competition

Water Resources utilizes rotary drill rigs and competes with other drilling contractors in Hawaii which use cable tool rigs, which require less labor to operate but generally drill slower, rotary drill rigs similar to Water Resources’ drilling rigs, and 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 Barnwell’s major method of competition; reliability of service is also a significant factor.

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The number of available water well drilling jobs has increased from the prior year and Barnwell has been awarded more jobs in recent months.  Competitive pressures are expected to remain high, thus there is no assurance that the trend in available or awarded jobs 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 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.

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.

Kaupulehu Developments holds development rights for residentially zoned leasehold land within and adjacent to the Hualalai Golf Club and are under option to Kaupulehu Makai Venture.

Activity

Interests in Leasehold Land

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 the 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, 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”) 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

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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 Developments the amount by which the aggregate amount of all such payments is less than $5,000,000.  Additionally, WB 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.  As of November 30, 2004, Kaupulehu Developments has received a total of $450,000 of Interim Payments subsequent to February 2004.  There is no assurance that any future Interim Payments or any Percentage Payments will be received.

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.

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 late September 2004, WB began mass grading of the first phase of 38 lots for development.

For 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.

The sale of Kaupulehu Developments’ interest in Increment I was accounted for by use of the cost recovery method, under which no operating profit is recognized until cash received exceeds the cost and the estimated future costs related to the leasehold interest sold.  The revenue from the $11,550,000 Closing Payment plus $350,000 of post-closing Interim Payments received in March through September 2004, was reduced by $693,000 of fees related to the sale, approximately $402,000 in other costs related to the sale, and $3,475,000 of previously capitalized costs relating to Increment I.  The $7,330,000 of net revenue from the Closing Payment and Interim Payments for the year ended September 30, 2004 is recorded in the Consolidated Statements of Operations as “Sale of interest in leasehold land, net.”  Operating profit on the Increment I transaction, after minority interest, totaled approximately $5,470,000 for the year ended September 30, 2004.  There were no sales of interests in leasehold land in the years ended September 30, 2003 and 2002.  As no sales price or agreement with regards to the ownership and development of Increment II has yet been determined, no revenues or cost of sales have been recognized on Increment II.

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Development Rights

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, an unrelated entity that is an affiliate of Kajima Corporation of Japan.  On December 31, 2003, Kaupulehu Makai Venture exercised the portion of its development rights option due on those dates and paid Kaupulehu Developments $2,656,000 in fiscal 2004.  At September 30, 2004, approximately 100 acres remain under option.  Barnwell accounts for sales of development rights under option by use of 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 development rights sold.  In fiscal 2004, $2,656,000 of revenues attributable to the development rights sale were 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, on the transaction.  There were no other costs deducted from revenues from the sale of development rights in fiscal 2004 as all capitalized costs associated with the development rights were expensed in previous years under the cost recovery method.

The total amount of remaining future option receipts at September 30, 2004, if all options are fully exercised, is $18,593,750, comprised of seven payments of $2,656,250 due on each December 31 of years 2004 to 2010.  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.

Interests at September 30, 2004

The interests held by Kaupulehu Developments at September 30, 2004 include the development rights under option; the rights to receive Increment I percentage and interim 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 several years, Hawaii’s economy has experienced little or no growth.  However, 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 in recent years.  This trend continued through fiscal 2004 and is not expected to decline significantly in the near term, although there can be no assurance this trend will in fact continue.

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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 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

None.

PART II

Item 5.            Market For Common Equity and Related Stockholder Matters

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:

As of December 20, 2004, there were 1,356,010 shares of common stock, par value $0.50, outstanding.  There were approximately 400 holders of the common stock of the registrant as of December 20, 2004.

On December 3, 2004, Barnwell declared a cash dividend of $0.25 per share payable January 5, 2005, to stockholders of record on December 20, 2004.

Also on December 3, 2004, Barnwell declared a two-for-one stock split in the form of a stock dividend.  The new shares will be distributed on January 28, 2005 to all shareholders of record as of January 11, 2005.

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In August 2004, Barnwell declared a dividend of $0.15 per share payable September 15, 2004, to stockholders of record on August 27, 2004.

In February 2004, Barnwell declared a dividend of $0.50 per share payable March 12, 2004, to stockholders of record on February 27, 2004.

In December 2003, Barnwell declared a dividend of $0.20 per share payable January 6, 2004, to stockholders of record on December 22, 2003.

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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, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended September 30, 2004.  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 unsuccessful wells, are capitalized until such time as the aggregate of such costs, on a country-by-country basis, equals the discounted present value (at 10%) of Barnwell’s estimated future net cash flows from estimated production of proved oil and natural gas reserves, from such country, as determined by independent petroleum engineers, less related income tax effects.  Any capitalized costs, net of oil and gas related deferred income taxes, in excess of the discounted present value of proved properties and the lower of cost or estimated fair value of unproved properties are charged to expense.  Depletion of all such costs, except costs related to major development projects, is provided by the unit-of-production method based upon proved oil and natural gas reserves of all properties on a country-by-country basis.  Investments in major development projects are not amortized until either proved reserves are associated with the projects or impairment has been determined.  At September 30, 2004, Barnwell had no investments in major oil and natural gas development projects that were not being amortized.  General and administrative costs related to oil and natural gas operations are expensed as incurred.  Estimated future site restoration and abandonment costs are capitalized as part of the carrying amount of oil and natural gas properties and depleted over the life of the related reserves.  Proceeds from the disposition of minor producing oil and natural gas properties are credited to the cost of oil and natural gas properties.  Gains or losses are recognized on the disposition of significant oil and natural gas properties.

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Investment in land and revenue recognition

Barnwell’s investment in land is comprised of development rights under option; rights to receive Increment I percentage and interim 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 consequences attributable to 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, 2004 of $3,093,000 consists of $1,165,000 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 and $1,812,000 related to the excess of liabilities accrued for book purposes over liabilities accrued for tax purposes.  The deferred tax assets are estimated to be realized through the deduction of the cost basis of investment in land and expenses for tax purposes against future proceeds from sales of interests in leasehold land and land development rights.  Additionally, at September 30, 2004, Barnwell had a deferred tax asset of $116,000 for alternative minimum tax credit carryforwards which are available to reduce future U.S. federal regular income taxes, if any, over an indefinite period.  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 2004 and fiscal 2003, Barnwell assumed an expected long-term rate of return on plan assets of 8%.  The expected rate of future annual compensation increases utilized during and as of the end of fiscal 2004 and fiscal 2003 was 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, 2004, Barnwell determined this rate to be 5.75%.

At September 30, 2004, Barnwell’s accrued benefit cost was $418,000.  For the year ended September 30, 2004, Barnwell recognized a net periodic benefit cost of $168,000.

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:

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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; the future rental payment disclosures above assume the minimum lease payments for land in effect at December 31, 2005 remain unchanged through 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.  The price of oil 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.  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, 2004, have ranged from a low of $1.96 per thousand cubic feet to a high of $5.08 per thousand cubic feet, and tend to be higher in the winter season than in the summer due to increased demand.  Oil and natural gas 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 makes 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

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expenditures is required to replace depleting reserves.  Due to the nature of oil and natural gas exploration and development, 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.  The remaining options are comprised of seven payments of $2,656,250 due on each December 31 of years 2004 to 2010.  In February 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.  For the first increment, Kaupulehu Developments received an $11,550,000 cash closing payment 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 the first increment: 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, 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.  The area in 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 percentage or development rights payments will be received.

Barnwell also drills wells and installs and repairs water pumping systems in Hawaii.  Contract drilling results in fiscal 2003 and for the first quarter of fiscal 2004 reflected the impact of a decrease in activity due to cyclical changes in the timing of jobs put out for bid by governmental and private entities.  During the remainder of fiscal 2004, however, activity increased as the number and value of contracts awarded has increased in recent months.  While progress on these contracts will continue through a portion of fiscal 2005, there is no assurance that this trend will continue through all of fiscal 2005 and in future periods.

RESULTS OF OPERATIONS

Summary

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, 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.

The fiscal year average exchange rate of the Canadian dollar to the U.S. dollar increased 10% in fiscal 2004, as compared to fiscal 2003, and the exchange rate of the Canadian dollar to the U.S. dollar increased 7% at September 30, 2004, as compared to September 30, 2003.  This increase in the value of

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the Canadian dollar in U.S. dollars increased Barnwell’s reported assets and liabilities and revenues and expenses.

Barnwell generated net earnings of $2,320,000 in fiscal 2003, a $2,280,000 increase from net earnings of $40,000 in fiscal 2002.  The increase was largely attributable to significant increases in petroleum prices.  In addition, land segment operating profit increased in fiscal 2003, as compared to fiscal 2002, as revenues from the sale of development rights in fiscal 2003, accounted for under the cost recovery method, exceeded associated costs, whereas revenues from the sale of development rights in fiscal 2002 were fully offset by associated costs after consideration of minority interest in earnings.

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 2004 as compared to fiscal 2003, and fiscal 2003 as compared to fiscal 2002.  Production amounts reported are net of royalties and the Alberta Royalty Tax Credit.

Fiscal 2004 - Fiscal 2003