UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

___X______ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
           ACT OF 1934

_________  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT


                         FOR QUARTER ENDED JUNE 30, 2006

                        Commission file number: 000-30651
                                                ---------

                            INDUSTRIAL MINERALS, INC.
                      -----------------------------------
             (Exact name of Registrant as Specified in its Charter)


       Delaware                                          11-3763974
-----------------------                      ----------------------------------
(State of Incorporation)                    (I.R.S. Employer Identification No.)


          2500 One Dundas Street West, Toronto, Ontario, Canada M5G 1Z3
                   -----------------------------------------
               (Address of principal executive offices) (Zip Code)

                                 (416) 979-4621
                   -----------------------------------------
               Registrant's telephone number, including area code

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  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      X                No _______
                                        --------------

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

                                    Yes                       No ___X____
                                        -------------

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock as of the latest practicable date:

         As  of  June  30,  2006  the  number  of  shares   outstanding  of  the
registrant's only class of common stock was 118,043,776.


         Transitional Small Business Disclosure Format (Check one):

                                    Yes                       No ___X____
                                        -------------


<PAGE>
<TABLE>
<CAPTION>

                                TABLE OF CONTENTS

                                                                                                                 PAGE
PART I - FINANCIAL INFORMATION
<S>                                                                                                               <C>
Item 1.  Financial Statements                                                                                      1

         Consolidated Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005 (audited)..........     2

         Consolidated Statements of Operations (unaudited) for the three and six month periods ended
          June 30, 2006 and 2005 and for the period November 6, 1996 (date of inception),
          to June 30, 2006....................................................................................     3

         Consolidated  Statements  of Cash Flows  (unaudited)  for the six month period ended June 30, 2006
         and 2005 and for the period November 6, 1996 (date of inception) to June 30, 2006 ...................     4

         Consolidated Statement of Stockholders' Equity (unaudited) as of June 30, 2006.......................     6

         Notes to Consolidated Financial Statements (unaudited)...............................................     8

Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations................................................................................     9

Item 3.  Controls and Procedures..............................................................................     13

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings ...................................................................................     13

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds..........................................     13

Item 3.  Defaults upon Senior Securities......................................................................     14

Item 4.  Submission of Matters to a Vote of Security Holders..................................................     14

Item 5.  Other Information....................................................................................     14

Item 6.  Exhibits and Reports on Form 8-K.....................................................................     14

Signatures....................................................................................................     15
</TABLE>



<PAGE>


PART I.    FINANCIAL INFORMATION

Item 1.   FINANCIAL STATEMENTS

For financial  information,  please see the financial  statements  and the notes
thereto, attached hereto and incorporated by this reference.

The financial  statements have been adjusted with all adjustments  which, in the
opinion of management,  are necessary in order to make the financial  statements
not misleading.

The financial statements have been prepared by Industrial Minerals, Inc. without
audit  pursuant to the rules and  regulations  of the  Securities  and  Exchange
Commission.  Certain information and footnotes  disclosures normally included in
financial  statements  prepared in accordance with generally accepted accounting
principles  have  been  condensed  or  omitted  as  allowed  by such  rules  and
regulations,  and management  believes that the disclosures are adequate to make
the information presented not misleading. These financial statements include all
the adjustments  which,  in the opinion of management,  are necessary for a fair
presentation  of  financial  position  and  results  of  operations.   All  such
adjustments are of a normal and recurring  nature.  These  financial  statements
should be read in conjunction with the audited financial  statements at December
31, 2005, included in the Company's Form 10-KSB.


















                                       1

<PAGE>
                            INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)
                           Consolidated Balance Sheets
                       June 30, 2006 and December 31, 2005

<TABLE>
<CAPTION>
                                                                                        June 30,         December 31,
                                                                                         2006                2005
                                                                                      (Unaudited)         (Audited)
                                                                                    -------------      ------------
ASSETS

Current assets:
<S>                                                                                 <C>                <C>
     Cash and Cash Equivalents                                                      $      33,518      $     83,300
     Receivables                                                                           13,113            35,158
     Prepaid expenses                                                                       4,036            16,895
     Deposits                                                                              26,049            22,621
                                                                                    -------------      ------------

                           Total current assets                                            76,716           157,974

Long-term deposits                                                                        258,662           230,000
Building and equipment, at cost, less accumulated
     depreciation of $557,975 in 2006 and $504,227 in 2005                              1,622,665         1,770,177
                                                                                    -------------      ------------

                           Total assets                                             $   1,958,043      $  2,158,151
                                                                                    =============      ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                               $     116,794      $     92,044
     Accrued interest payable                                                              27,368            19,637
     Loans payable                                                                        402,339            90,796
     Due to related parties                                                               127,483            51,589
     Current installments of mortgage payables                                              3,422             2,946
                                                                                    -------------      ------------
                           Total current liabilities                                      677,406           257,012

     Accrued interest payable                                                                   -            71,892
     Loans Payable                                                                              -         1,745,216
     Mortgage payable, excluding current installments                                       9,535             9,823
                                                                                    -------------      ------------

                           Total liabilities                                              686,941         2,083,943
                                                                                    -------------      ------------

Stockholders' equity:
     Common Stock, par value $.0001; 200,000,000 shares authorized;
     118,043,776 shares issued and outstanding                                             11,801            11,155
     Additional paid-in capital                                                         6,142,881         4,197,125
     Deficit accumulated during exploration stage                                      (4,883,580)       (4,134,072)
                                                                                    -------------      ------------

                           Total stockholders' equity                                   1,271,102            74,208
                                                                                    -------------      ------------

                           Total liabilities and stockholders' equity               $   1,958,043      $  2,158,151
                                                                                    =============      ============
</TABLE>



See accompanying notes to consolidated financial statements.

                                       2
<PAGE>

                            INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)

                      Consolidated Statements of Operations
                  (Unaudited) Three and six month periods ended
                       June 30, 2006 and 2005 and for the
        period from November 6, 1996 (Date of Inception) to June 30, 2006

<TABLE>
<CAPTION>
                                            Three month period  ended      Six month period ended    November 6, 1996
                                                     June 30,                     June 30,           (inception) to
                                                 2006           2005          2006         2005       June 30,2006
                                             -----------     ----------    ----------   ------------   -----------
<S>                                          <C>             <C>           <C>          <C>            <C>
Revenue:                                     $     3,040              -         3,040              -        19,337

Expenses:
     Cost of revenues                             10,700              -        10,700              -        86,901
     Professional fees                            70,772         28,687       116,327         44,022     1,428,458
     Royalty fees                                  5,956          5,238        11,694         10,638        86,009
     Depreciation and amortization                63,159         55,330        97,311        110,425       610,247
     Impairment of long-lived assets                   -              -             -              -       582,176
     Loss on disposal of assets                   54,251              -        54,251              -        54,251
     Management fees and salaries                 90,406        124,785       202,897        214,910       863,556
     Other general and administrative             80,969        245,867       259,612        416,370     3,939,701
                                             -----------     ----------    ----------   ------------   -----------
                         Total expenses          376,213        459,907       752,792        796,365     7,651,299
                                             -----------     ----------    ----------   ------------   -----------
                   Loss from operations         (373,173)      (459,907)     (749,752)      (796,365)   (7,631,962)
                                             -----------     ----------    ----------   ------------   -----------
Other income:
    Interest income                                  241              3           244              7         3,172
    Gain from extinguishment of debt                   -              -             -              -     1,047,634
    Other income                                       -              -             -              -           594
                                             -----------     ----------    ----------   ------------   -----------
                     Total other income              241              3           244              7     1,051,400
                                             -----------     ----------    ----------   ------------   -----------
                               Net loss      $  (372,932)      (459,904)     (749,508)      (796,358)   (6,580,562)
                                             ===========     ==========    ==========   ============   ===========
       Net loss per common share issued      $     (0.00)         (0.01)        (0.01)         (0.01)
                                             ===========     ==========    ==========   ============
Weighted average common shares               117,835,249    111,587,966   114,728,274    111,587,966
outstanding                                  ===========     ==========    ==========   ============
</TABLE>




See accompanying notes to consolidated financial statements.

                                       3
<PAGE>
                            INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)

                Consolidated Statements of Cash Flows (Unaudited)
                Six month period ended June 30, 2006 and 2005 and
           for the period from November 6, 1996 (Date of Inception) to
                                  June 30, 2006
<TABLE>
<CAPTION>

                                                                                Six month
                                                                              period ended
                                                                                 June 30,              November 6, 1996
                                                                                 --------               (inception) to
                                                                         2006             2005           June 30, 2006
                                                                     ------------      -----------      -------------
Cash flows from operating activities:
<S>                                                                  <C>                 <C>             <C>
     Net loss                                                        $  (749,508)        (796,358)       (6,580,562)
     Adjustments to reconcile net loss to
            net cash used in operating activities:
         Depreciation and amortization                                    97,311          110,425           601,955
         Provision for bad debts                                               -                -            49,676
         Stock issued for services                                             -                -           414,606
         Impairment of long-lived assets                                       -                -           297,882
         Loss on disposal of assets                                       54,251                -            54,251
         Gain on extinguishment of debt                                        -                -        (1,047,634)
         Changes in:
              Receivables                                                 22,045           79,289           (17,282)
              Inventory                                                        -                -            (5,527)
              Prepaid expenses                                            12,859             (162)           (4,576)
              Deposits                                                    (3,428)          (5,632)          (26,049)
              Accounts payable and accrued expenses                       24,938          149,548           (41,446)
              Accrued Interest Payable                                    50,864           15,899           410,675
              Due to related parties                                      75,894           12,213           522,483
                                                                     ------------      -----------      -------------

                           Net cash used in operating
                             activities                                 (414,774)        (434,778)       (5,371,548)
                                                                     ------------      -----------      -------------

Cash flows from investing activities:
     Purchase of building and equipment                                   (4,049)        (217,498)       (2,078,030)
     Investment in Multiplex                                                   -                -           (75,000)
     Acquisition of goodwill                                                   -                -          (149,057)
     Loan to related party                                                     -                -           (50,000)
     Loan repayments                                                           -                -             4,493
     Long-term deposits                                                  (28,662)               -          (188,262)
                                                                     ------------      -----------      -------------

                           Net cash used in
                             investing activities                        (32,711)        (217,498)       (2,535,856)
                                                                     ------------      -----------      -------------

                                                                                                                    (Continued)
</TABLE>

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>


                            INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)

          Consolidated Statements of Cash Flows (Unaudited), Continued

<TABLE>
<CAPTION>

                                                                                Six month
                                                                              period ended
                                                                                 June 30,              November 6, 1996
                                                                                 --------               (inception) to
                                                                         2006             2005           June 30, 2006
                                                                     ------------      -----------      -------------

Cash flows from financing activities:
 <S>                                                                <C>                 <C>             <C>
     Net proceeds from sale of common stock                          $    69,660                -           814,519
     Net proceeds from loans payable                                     328,043          642,967         7,113,494
     Proceeds from mortgage                                                    -                -            17,000
     Principal payments on mortgage                                            -           (1,571)           (4,231)
     Cash acquired in acquisition of Peanut
         Butter & Jelly, Inc.                                                  -                -               140
                                                                     ------------      -----------      -------------

                           Net cash provided by
                               financing activities                      397,703          641,396         7,940,922
                                                                     ------------      -----------      -------------

Net increase (decrease) in cash                                          (49,782)         (10,880)           33,518

Cash and Cash Equivalents, beginning of period                            83,300           27,726                 -
                                                                     ------------      -----------      -------------

Cash and Cash Equivalents, end of period                             $    33,518           16,846            33,518
                                                                     ============      ===========      =============

Supplemental cash flow disclosures:
     Cash paid for interest                                          $         -                -               113
                                                                     ============      ===========      =============

     Cash paid for income taxes                                      $         -                -                 -
                                                                     ============      ===========      =============

Non cash investing and financing activities:
     Shares issued for debt                                          $ 1,761,716                -         7,326,607
                                                                     ============      ===========      =============
     Shares issued for services                                      $         -                -           414,606
                                                                     ============      ===========      =============
     Shares issued for investment                                    $         -                -                30
                                                                     ============      ===========      =============
     Shares issued for accrued interest                              $   115,026                -           383,307
                                                                     ============      ===========      =============
     Long term deposits financed by accounts payable                 $         -                -            70,400
                                                                     ============      ===========      =============


     Property costs financed by issuance
         of common stock                                             $         -                -            30,000
                                                                     ============      ===========      =============

     Equipment financed by:
         Accounts payable                                                      -                -           200,000
         Issuance of common stock                                              -                -             5,000
                                                                    ------------      -----------      ------------

                                                                     $         -                -           205,000
                                                                     ============      ===========      =============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

                            INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)

           Consolidated Statement of Stockholders' Equity (Unaudited)
                                  June 30, 2006

<TABLE>
<CAPTION>
                                                                                           Deficit
                                                                                         Accumulated
                                                                          Additional     During the
                                                  Common Stock             Paid-In       Exploration
                                          ---------------------------       Capital         Stage           Totals
                                           # of Shares          Amount
                                          ------------       ----------  -------------    -----------    ------------

<S>                                       <C>               <C>            <C>           <C>              <C>
Inception - November 6, 1996                        -       $       -              -              -              -

Balance at December 31, 1998                  252,500              25        505,143       (750,830)      (245,662)
Issuance of stock for cash                     30,000               3        146,618              -        146,621
Issuance of stock for services                 55,000               6        274,994              -        275,000
Net loss                                            -               -              -       (259,404)      (259,404)
                                          ------------       ----------  -------------    -----------    ------------

Balance at December 31, 1999                  337,500              34        926,755     (1,010,234)       (83,445)

Issuance of stock for cash                     84,900               8        413,062              -        413,070
Issuance of stock for services                 70,000               7        349,993              -        350,000
Issuance of stock for Multiplex
     stock                                      3,000               1             29              -             30
Issuance of stock for acquisition             475,463              47          4,699              -          4,746
Net loss                                            -               -              -       (694,758)      (694,758)
                                          ------------       ----------  -------------    -----------    ------------

Balance at December 31, 2000                  970,863              97      1,694,538     (1,704,992)       (10,357)

Issuance of stock for
     compensation                              30,000               3         59,997              -         60,000
Net loss                                            -               -              -        (67,251)       (67,251)
                                          ------------       ----------  -------------    -----------    ------------

Balance at December 31, 2001                1,000,863             100      1,754,535     (1,772,243)       (17,608)

Issuance of stock in connection
     with acquisition of Industrial
     Minerals Incorporated                 35,000,000           3,500     (1,740,393)     1,696,982         (39,911)
Minimum 50 shares
     post-split allocation                     30,758               -              -              -               -
Net loss                                            -               -              -       (520,242)       (520,242)
                                          ------------       ----------  -------------    -----------    ------------

Balance at December 31, 2002               36,031,621           3,600         14,142       (595,503)       (577,761)

Minimum 50 shares
     post-split allocation                        327               -              -              -               -
2-for-1 split                              36,031,948           3,603         (3,603)             -               -

Net loss                                            -               -              -     (1,133,197)     (1,133,197)
                                          ------------       ----------  -------------    -----------    ------------

Balance at December 31, 2003               72,063,896           7,203         10,539     (1,728,700)     (1,710,958)

                                                                                                   (continued)
</TABLE>

See accompanying notes to consolidated financial statements.

                                       6
<PAGE>



                            INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)

           Consolidated Statement of Stockholders' Equity (Unaudited)
                                  June 30, 2006


                                   (continued)

<TABLE>
<CAPTION>
                                                                                           Deficit
                                                                                         Accumulated
                                                                          Additional     During the
                                                  Common Stock             Paid-In       Exploration
                                          ---------------------------       Capital         Stage           Totals
                                           # of Shares          Amount
                                          ------------       ----------  -------------    -----------    ------------

<S>                                       <C>               <C>            <C>           <C>              <C>

3-for-2 split                              36,031,948           3,603         (3,603)             -               -

Allocation on round-up
              of shares                             7               -              -              -               -
Issuance of stock in settlement of debt     3,492,115             349      4,190,189              -       4,190,538
Net loss                                            -               -              -       (561,153)       (561,153)
                                          ------------       ----------  -------------    -----------    ------------


Balance at December 31, 2004              111,587,966       $  11,155      4,197,125     (2,289,853)      1,918,427

Net loss                                            -               -              -     (1,844,219)     (1,844,219)
                                          ------------       ----------  -------------    -----------    ------------



Balance at December 31, 2005              111,587,966       $  11,155      4,197,125     (4,134,072)         74,208
                                          ------------       ----------  -------------    -----------    ------------

Issuance of stock for cash                    200,000              20         69,640              -          69,660


Issuance of stock in settlement of debt     6,255,810             626      1,876,116              -       1,876,742

Net loss                                            -               -              -       (749,508)       (749,508)
                                          ------------       ----------  -------------    -----------    ------------

Balance at June 30, 2006                  118,043,776       $  11,801      6,142,881     (4,883,580)      1,271,102
                                          ============       ==========  =============   ============    ============
</TABLE>











See accompanying notes to consolidated financial statements.

                                       7
<PAGE>
                            INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)
                   Notes to Consolidated Financial Statements
                 Three month period ended June 30, 2006 and 2005


ORGANIZATION

The  Company  was  incorporated  on  November  6,  1996,  as  Winchester  Mining
Corporation  in the State of Delaware.  On May 13, 2000, in connection  with its
merger with Hi-Plains  Energy Corp. the Company changed its name from Winchester
Mining  Corporation  to PNW  Capital,  Inc.  On January  31,  2002,  the Company
acquired 91% of the outstanding  shares of Industrial  Minerals,  Inc. On May 2,
2002, the Company merged the remaining 9% of Industrial Minerals,  Inc. into PNW
Capital, Inc. and changed its name to Industrial Minerals, Inc.

PRESENTATION OF INTERIM INFORMATION

The accompanying  interim financial  statements have been prepared in accordance
with accounting  principles  generally  accepted in the United States of America
and, in the opinion of  management,  include all normal  adjustments  considered
necessary to present  fairly the financial  position as of June 30, 2006 and the
results of  operations  and cash flows for the three and six month periods ended
June 30, 2006 and 2005.  Interim  results  are not  necessarily  indicative  for
results for a full year.

The  financial  statements  and notes are presented as permitted by Form 10-QSB,
and do not  contain  certain  information  included  in  the  Company's  audited
financial statements and notes for the year ended December 31, 2005.

RECLASSIFICATION

Certain amounts in the prior year financial statements have been reclassified to
conform with the current year presentation.

FINANCING

During the  six-month  period  ending June 30, 2006 the Company has been able to
secure  debt   financing   in  the  amount  of  $328,043   from   non-affiliated
shareholders.

                                       8

<PAGE>


Item 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THREE-MONTHS ENDING JUNE 30, 2006 AND JUNE 30, 2005

During the  three-month  period ending June 30, 2006 the Company had revenues of
$3,040.  The Company had no revenue  during the same  three-month  period ending
June 30,  2005.  The Company  incurred  $10,700 for cost of revenues  during the
three-month  period  ending June 30,  2006.  This  increase of $10,700 is due to
drilling  and  blasting  costs to obtain more  graphite  from the Bissett  Creek
Graphite property to provide sample products to our potential  customers.  There
was no cost of revenue for the same three-month  period ended June 30, 2005. The
Company incurred  expenses for professional fees in the amount of $70,772 during
the  three-month  period  ending  June 30, 2006  compared to $28,687  during the
three-month  period ending June 30, 2005.  This is an increase of $42,085 due to
additional  costs for  engineering  consultants.  The Company  incurred  royalty
expenses in the amount of $5,956 during the  three-month  period ending June 30,
2006 compared to $5,238 for the  three-month  period  ending June 30, 2005.  The
increase  of  $718  is due to a  change  in the  currency  exchange  rate of the
Canadian dollar to the US dollar.

Depreciation and amortization expense for the three-month period ending June 30,
2006 totaled $63,159 compared to $55,330 for the three-month  period ending June
30, 2005. This represents an increase of $7,829.  This increase is the result of
additional  asset  purchases  involving  the Company's  Bissett  Creek  Graphite
property.

The Company  recognized  a loss on disposal of  equipment  at the Bissett  Creek
Graphite  property in the amount of $54,251 for the  three-month  period  ending
June 30, 2006.  There were no asset disposals for the three-month  period ending
June 30, 2005. Management fees and salaries during the three-month period ending
June 30, 2006  totaled  $90,406  compared to $124,785  for the same  three-month
period ending June 30, 2005. The management fee for the CEO is $10,000  monthly.
The  balance of $60,406  was paid to  employees  of the  company  working at the
Bissett  Creek  property.  Other  general and  administrative  expenses  for the
three-month period ending June 30, 2006 totaled $80,969 compared to $245,867 for
the same three-month  period ending June 30, 2005. This represents a decrease in
the  three-month  period  ending June 30, 2006 of $164,898  over the same period
ending June 30, 2005.  This  decrease is due to a decrease in  equipment  rental
costs,  fuel costs, mine closure plan costs and marketing costs. The Company had
a net loss of  $372,932  for the  three-month  period  ending  June 30,  2006 as
compared to a net loss of $459,904 for the  three-month  period  ending June 30,
2005. This  represents a decrease of $86,972 for the  three-month  period ending
June 30, 2006 compared to the same three-month  period ending June 30, 2005. The
loss per share for the quarter in 2006 was nominal compared to (.01) in the same
period in 2005.

SIX-MONTHS ENDING JUNE 30, 2006 AND JUNE 30, 2005

During the  six-month  period  ending June 30, 2006 the Company had  revenues of
$3,040.  The Company had no revenue during the same six-month period ending June
30, 2005.

The Company  incurred  $10,700 for cost of revenues during the six-month  period
ending June 30, 2006.  This  increase of $10,700 is due to drilling and blasting
costs to obtain  more  graphite  from the  Bissett  Creek  Graphite  property to
provide sample products to our potential customers. There was no cost of revenue

                                       9
<PAGE>

for the same six-month period ended June 30, 2005. The Company incurred expenses
for  professional  fees in the amount of $116,327  during the  six-month  period
ending June 30, 2006 compared to $44,022 during the six-month period ending June
30, 2005.  This is an increase of $72,305 due to increased  costs of engineering
consultants.

The  Company  incurred  royalty  expenses  in the amount of  $11,694  during the
six-month  period ending June 30, 2006. The Company is required to pay a minimum
yearly royalty of $24,219 ($27,000 CDN dollars) whether the Company is producing
graphite or not. The Company  incurred royalty expenses in the amount of $10,638
during the six-month  period ending June 30, 2005. This is an increase of $1,056
in royalty expense during the six-month  period ending June 30, 2006 compared to
the six-month period ending June 30, 2005. This increase is due to change in the
currency exchange rate of the Canadian dollar to the US dollar.

Depreciation and  amortization  expense for the six-month period ending June 30,
2006 totaled $97,311  compared to $110,425 for the six-month  period ending June
30, 2005. This represents a decrease of $13,114.  This decrease is the result of
the disposal of assets  purchased for our Bissett Creek Graphite  property and a
change in the currency  exchange  rate of the Canadian  dollar to the US dollar.
The Company recognized a loss on the disposal of assets in the amount of $54,251
for the six-month period ending June 30, 2006. There were no asset disposals for
the six-month period ending June 30, 2005.

Management  fees and salaries  during the six-month  period ending June 30, 2006
totaled $202,897  compared to $214,910 for the same six-month period ending June
30,  2005.  The  management  fee for the CEO is $10,000  monthly and the Company
still  owes  $60,000  to the CEO.  The  monies  due to the CEO in the  amount of
$60,000  are  reflected  in the  balance  sheet as a  liability  due to  related
parties. The balance of $142,897 was paid to employees of the Company working at
the Bissett Creek property.  Other general and  administrative  expenses for the
six-month period ending June 30, 2006 totaled $259,612  compared to $416,370 for
the same six-month  period ending June 30, 2005.  This  represents a decrease in
the  six-month  period  ending June 30,  2006 of  $156,758  over the same period
ending June 30, 2005.  This  decrease is due to a decrease in  equipment  rental
costs, fuel costs, mine closure plan costs and marketing costs.

The Company shipped graphite samples during the quarter ending June 30, 2006 and
is continuing to seek a market for graphite.  Several  companies  have expressed
interest in the graphite from the Company's Bissett Creek Graphite property. The
Company  has  filled an order  totaling  five tons of  graphite  from one of its
customers.  The Company  considers  this order as a pre contract  order based on
customer quality  evaluations.  This order generated an insignificant  amount of
revenue for the Company. This order did result in a Letter of Intent from one of
our  potential  customers  who has the  potential to purchase up to 2,500 metric
tons per year of the Company's plus fifty mesh flake  graphite.  This is pending
the ability of the Company to produce  material  that adheres to the  customer's
specifications  and  meets a price  per  metric  ton that is  acceptable  to the
customer's business unit production requirements and market demands. The Company
is pleased  with this  response but  cautions  investors  that there are no firm
orders for the  Company's  graphite  at this time.  The  Company  also  cautions
investors that there is no assurance that a commercially  viable mineral deposit
exists on the property,  and that further  exploration will be required before a
final evaluation as to any economic and legal feasibility is determined.

As discussed in earlier Management  Discussion and Analysis,  during exploration
it became  apparent to management that a number of changes to the mill had to be
made.  The large flake  graphite (mesh size -12 to +35) is the most valuable and
it was discovered  during initial  exploration that a portion of the large flake
size graphite was being  destroyed at certain stages of the graphite  operation.
An analysis was performed at every stage of the graphite operation from the size
of the initial rock to the handling of the head grade ore throughout the primary
crushing, initial screening,  secondary crushing, to the intermediary screening,
to separating  the graphite,  to the  increasing of the carbon  content from the
initial  separating  process to the final  screening and bagging of graphite for
delivery  to  customers.  The  analysis  that has  been  conducted  resulted  in

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<PAGE>

management  deciding to make some  changes to the  process  which  involves  the
relocating of some equipment that is currently installed to a different position
in the line and the need to purchase additional equipment. At this writing these
steps  are  at a work  in  progress  stage  and  management  estimates  that  an
additional  $2,145,000  in  capital  expenditures  will  be  required.  This  is
discussed in the section of this report under Liquidity and Capital Resources.

The Company had a net loss of $749,508 for the six-month  period ending June 30,
2006 as compared to a net loss of $796,358 for the six-month  period ending June
30, 2005. This represents a decrease of $46,850 for the six-month  period ending
June 30, 2006 compared to the same  six-month  period ending June 30, 2005.  The
loss per share was ($.01) for the six month periods in 2006 and 2005.

LIQUIDITY AND CAPITAL RESOURCES

The Company has cash on hand at June 30,  2006 of $33,518  and a  receivable  of
$13,113 as a result of tax input  credits owed to the Company by the  Government
of Canada and the sale of a sample shipment of graphite.

The Company has prepaid  expenses of $4,036.  This  represents a prepaid royalty
expense.  The  Company is required  to pay a minimum  yearly  royalty of $24,219
($27,000 CDN dollars)  whether the Company is producing  graphite or not.  There
was a royalty payment made in the amount of $13,500 during the six-month  period
ending June 30, 2006.

The Company has total deposits in the amount of $26,049 as of June 30, 2006. The
Company has on deposit with its landlord $1,521 which represents  one-month rent
and common costs  associated with its premises located at 2500 One Dundas Street
West, Suite 2500, Toronto, Ontario, Canada M5G 1Z3. The Company will continue to
rent office space on a month- to-month basis.  The Company also has a deposit on
equipment in the amount of $19,734 and an advance against  expenses to employees
in the amount of $4,794.

The Company has a long-term deposit of $258,662 with the Ministry of Finance for
the  Province  of  Ontario.  During the year  ending  December  31,  2004 a Mine
Development  and Closure  Plan was filed with,  and accepted by, the Ministry of
Northern  Development and Mines, in accordance with the Mining Act, R.S.O. 1990,
Ontario Regulation 240/00, including the standards,  procedures and requirements
of the Mining Code of Ontario.  The Company's  deposit in the amount of $258,662
is a non-refundable financial guarantee to the Province of Ontario ensuring that
there are enough funds on hand to effect a proper  closure of the Bissett  Creek
Graphite  property.  This deposit  will  increase  once the Company  begins full
production.

The Company  has total  accounts  payable of  $116,794.  The  Company  also owes
$27,368 in accrued interest payable. This accrued interest is due and payable on
July 31,  2006.  The Company  owes $4,485 to an officer in  management  fees and
salaries that were due and payable in the quarter ending September 30, 2005. The
Company owes $77,940 to officers in management fees that were due and payable as
of June 30, 2006. The Company owes $10,523 in business-related travel and repair
expenses and $34,535 in loans to officers.  In total,  the Company owes $127,483
to its officers, reported as due to related parties at June 30, 2006.

The Company secured a first mortgage in the amount of $17,000 during fiscal year
2002 which requires a payment of $359  (Canadian $400 monthly)  monthly for five
years and the  balance is then due and  payable at the end of five  years.  This
mortgage  carries an interest  rate of 7% annually.  The Company has the cash on
hand to pay these payments in an orderly fashion.

During the  six-month  period  ending June 30, 2006 the Company has been able to
secure  debt   financing   in  the  amount  of  $328,043   from   non-affiliated
shareholders. Total loans payable now amount to $402,339 as of the period ending
June 30,  2006.  The  interest  rate  associated  with the $311,543 of borrowing

                                       11
<PAGE>

during the quarter ending June 30, 2006 is 10% annually and the principal  along
with accrued  interest is due and payable on or before  December  31, 2006.  The
interest rate  associated with $90,796 of the total loans payable is 7% annually
and the  principal  in the amount of  $90,796  along with  accrued  interest  is
payable on or before July 31, 2006.

On April 4, 2006,  in order to provide for the  conversion  of certain long term
debt to  equity,  the  Board  has  determined  that it is  appropriate  to issue
6,255,810  shares of restricted  common stock, for total debt to be converted to
$1,876,742. The following settlement of debt was in payment of a loan payable to
SEGO  Holdings,  a  non-affiliated  shareholder,  consisting of principal in the
amount of $1,761,716 and interest accrued in the amount of $115,026.

As of the date of this  filing,  changes  to the mill are at  various  stages of
completion and an insignificant amount of graphite has been produced.  Investors
should be aware that during the commissioning  process management has discovered
the need to upgrade certain screens and crushing of the ore as this will enhance
production  capabilities  as  the  Company  expands  graphite  production.   The
engineers have done a thorough  review and revised the production plan resulting
in the need to purchase new equipment, upgrade existing equipment and buildings,
and improve the classification process.

In order to complete  these  upgrades at the mill site, the Company has budgeted
for the following cash requirements:

1        Purchase of Crushers/Head Cone/Roughers & Installation       $1,050,000
2        Upgrading of Screens                                            125,000
3        Modify Air Classifiers                                          300,000
4        Upgrading of Buildings/Rebuild Mill                             215,000
5        Improving Classification Process                                305,000
4        Installation of Mag Rollers                                     150,000
                                                                      ----------

Total Upgrade Requirement                                             $2,145,000
                                                                      ==========



1        Professional fees                                            $   85,000
2        Royalty Payments                                                 13,500
3        Management fees and salaries                                    200,000
4        General & Administrative Expenses                               540,000
5        Environmental monitoring and testing                            120,000
                                                                      ----------

Total Operating Budget                                                $  958,500
                                                                      ==========


Investors  should be aware that the above are estimates only and could change as
the project develops.

The Company requires  $2,145,000 to complete the upgrades discussed above on its
Bissett Creek Property.  The Company has an operational budget for the six-month
period beginning July 1, 2006 in the amount of $958,500 or a monthly operational
cost of $159,750  for each of the months of July  through  December  2006.  Thus
total funds in the amount of  $3,103,500  are  required to fund the  anticipated
operations at the Company's  Bissett Creek Graphite Mine.  Since the Company has
cash of $33,518 and has a receivable of $13,113 on hand as of June 30, 2006, the
Company  requires  additional  financing  in the  amount  of  $3,056,869.  While
management  believes the Company will be  successful  in obtaining  satisfactory
financing to complete  construction of the mine and begin operations,  investors
should be cautioned  that the Company  currently has no  commitments of any type

                                       12
<PAGE>

made by any  person or entity to  provide  financing.  Investors  and  potential
investors  should be aware that the  Company  might not be able to  continue  to
operate  throughout  its current  fiscal year ending  December  31, 2006 without
sales of its graphite or additional financing.

Investors and potential investors should be aware that the Company does not have
the funds to complete  construction  of the mine. In addition,  the Company does
not have the  necessary  funds to  operate  throughout  its fiscal  year  ending
December 31, 2006.  Even if the Company is successful in obtaining the necessary
financing there is no guarantee that the Company will be successful in marketing
graphite.  The Company  intends to continue to seek debt financing to ensure its
ability to operate throughout 2006 from  non-affiliates,  and possibly officers,
directors and  shareholders.  No  commitments  of any type have been made by any
person or entity to provide  financing.  Management  has no plan to overcome the
uncertainties  surrounding the Company's  ability to continue as a going concern
for a reasonable  period of time extending  beyond  December 31, 2006 unless the
Company  obtains  additional  financing or begins  production  and  successfully
obtains a contract for its  graphite.  Management  will deal with issues as they
arise but as a "start up" company in a graphite mining attempt,  the Company can
neither predict nor solve, in anticipation, the uncertainties of mining, capital
raising,  marketing or operations.  All risks and uncertainties  inherent in any
start up company  exist in the chosen area of the Company.  The Company does not
have any other plan in place to provide capital or financing for its operations.

Should the Company  complete the mine and begin  production  investors should be
further  cautioned that there might not be a market for the Company's  graphite.
The Company is currently  seeking  customers for its graphite.  Discussions  are
ongoing  with  potential  customers  for  graphite  but there  are no  contracts
concluded  at this time.  There can be no  guarantee  that the  company  will be
successful in obtaining a contract for its graphite.

Investors and potential  investors should be further cautioned that the ultimate
success of the Company relies on the Company's  ability to successfully mine and
market its graphitic resource at a profit.


Item 3.  CONTROLS AND PROCEDURES

The  management of the Company has evaluated the  effectiveness  of the issuer's
disclosure  controls  and  procedures  as of the end of the period of the report
(evaluation  date) and have  concluded  that the  disclosure  controls  internal
controls and procedures are adequate and effective  based upon their  evaluation
as of the evaluation date.

There were no changes in the small  business  issuer's  internal  controls  over
financial  reporting  identified  in  connection  with  the  Company  evaluation
required by  paragraph  (3) of Rule 13a-15 or Rule 15d-15 under the Exchange Act
that occurred during the small business  issuer's fourth fiscal quarter that has
materially  affected  or is  reasonably  likely to  materially  affect the small
business issuer's internal control over financial reporting.

PART II.  - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings, nor does management believe
that any such proceedings are contemplated.


Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

                                       13
<PAGE>

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.


Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


Item 5. OTHER INFORMATION

None.


Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

         EXHIBIT NO.                DESCRIPTION
         -----------                -----------
            #31               CERTIFICATION PURSUANT TO SECTION
                              302 OF THE SARBANES-OXLEY ACT

            #32               CERTIFICATION OF DISCLOSURE PURSUANT TO
                              18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
                              SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(b) The following is a list of Current  Reports on Form 8-K filed by the Company
during and subsequent to the quarter for which this report is filed.

         Form 8-K Report filed on April 5, 2006
         Form 8-K Report filed on May 12, 2006
         Form 8-K Report filed on May 17, 2006








                                       14
<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August 14, 2006              INDUSTRIAL MINERALS, INC.

                                    By:/s/Larry Van Tol
                                    ___________________________________
                                    Larry Van Tol, Chief Executive Officer,
                                    President and Director


         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

Dated: August 14, 2006              INDUSTRIAL MINERALS, INC.

                                    By:/s/Larry Van Tol
                                    ______________________________________
                                    Larry Van Tol, Acting Chief Financial
                                    Officer, Secretary/Treasurer and Director






























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