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



                                   FORM 10-K/A
                                Amendment No. 2


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

                   For the fiscal year ended December 31, 2004


                            Industrial Minerals, Inc.
                           ---------------------------
                    (Name of business issuer in its charter)

<TABLE>
<CAPTION>
<S>                                      <C>                                   <C>
======================================== ===================================== =====================================
               Delaware                               000-30651                             06-1474412
                                                      ---------                             ----------
---------------------------------------- ------------------------------------- -------------------------------------
    (State or other jurisdiction of            (Commission File Number)         (IRS Employer Identification No.)
            incorporation)
======================================== ===================================== =====================================
</TABLE>


         One Dundas Street West, Suite 2500, Toronto, ON, Canada M5G 1Z3
               -------------------------------------------------
                    (Address of principal executive offices)

Issuer's telephone number:       (416) 979-4621
                                 --------------

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

Securities  registered under Section 12(g) of the Exchange Act: Common Stock, no
par value (Title of class)

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 issuer was  required  to file such  reports),  and (2) has been
subject to such filing requirements for the past 90 days.

         Yes      [X]      No [_]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of issuer's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]



<PAGE>


Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act). [ X ] Yes [ ] No

State issuer's revenues for its most recent fiscal year: $ 0

As of December 31, 2004, 85,424,936 shares of the Company's Common Stock, no par
value per share, were held by  non-affiliates,  which, based upon market closing
price on December 31, 2004, of $1.20 had a value of $102,509,923.20.

The  number  of  shares  of Common  Stock of the  Registrant  outstanding  as of
December 31, 2004 were 111,587,966.

                       DOCUMENT INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K  (e.g.,  Part I, Part II,  etc.)  into  which the  document  is
incorporated:  (1) Any  annual  report  to  security  holders;  (2) Any proxy or
information  statement;  and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the  Securities Act of 1933.  The listed  documents  should be clearly
described for identification  purposes (e.g.,  annual report to security holders
for fiscal year ended December 24, 1980).

Website Access to Company's Reports

Industrial     Minerals,      Inc.'s     internet     website     address     is
www.industrialmineralsinc.com.  Our  annual  reports  on  Form  10-K,  quarterly
reports  on Form 10-Q,  current  reports on Form 8-K,  and  amendments  to those
reports  filed or furnished  pursuant to section  13(a) or 15(d) of the Exchange
Act  are  not yet  available  free of  charge  through  our  website.  It is the
intention of  management  to publish  these reports on the Company's web site as
soon as  reasonably  practicable  after they are  electronically  filed with, or
furnished  to, the  Securities  and Exchange  Commission.  Until the reports are
available  on the  company's  web site  anyone can  request  the report from the
Company at the above  address  and the Company  will  furnish the report free of
charge.


                                       2
<PAGE>


                                TABLE OF CONTENTS

PART I                                                                     PAGE

   Item 1.  Description of Business                                         4
   Item 2.  Description of Property                                         7
   Item 3.  Legal Proceedings                                               8
   Item 4.  Submission of Matters to a Vote of Security Holders             8


PART II

   Item 5.  Market for Registrant's Common Equity, Related Stockholder
             Matters and Issuer Purchases of Equity Securities              9
   Item 6.  Selected Financial Data                                        10
   Item 7.  Management's Discussion and Analysis of Financial Condition
             and Results of Operation                                      11
   Item 7A Quantitative and Qualitative Disclosures About Market Risk      17
   Item 8.  Financial Statements and Supplementary Data                    17
   Item 9.  Changes in and Disagreements With Accountants on Accounting
                  and Financial Disclosure                                 17
   Item 9A. Controls and Procedures                                        17
   Item 9B. Other Information                                              18

PART III

   Item 10.  Directors and Executive Officers of the Registrant            18
   Item 11. Executive Compensation                                         21
   Item 12. Security Ownership of Certain Beneficial Owners and Management 23
   Item 13. Certain Relationships and Related Transactions                 24
   Item 14.  Principal Accounting Fees and Services                        24

PART IV

   Item 15. Exhibits, Financial Statement Schedules                        25

SIGNATURES                                                                 26


                                       3
<PAGE>

                                     PART I

ITEM 1 - DESCRIPTION OF BUSINESS

Background

         The  Company was formed  November 6, 1996.  The name of the Company was
changed to PNW Capital, Inc. on May 16, 2000.

         The Company is a successor  registrant  pursuant to Section  12(g) 3 of
the  Securities  Exchange  Act of 1934,  by virtue of a statutory  merger of the
Parent,  Winchester Mining Corp., a Delaware  corporation,  and its wholly owned
subsidiary,  Hi-Plains  Energy Corp.,  a Wyoming  corporation,  with  Winchester
Mining  Corporation  being the  survivor.  There was no change to the issued and
outstanding shares of Winchester Mining Corporation, and all shares of Hi-Plains
Energy Corp. were retired by virtue of the merger.

         On May 15, 2000,  Winchester  Mining Corp.  completed a Share  Purchase
Agreement with shareholders of Hi-Plains Energy Corp. in which Winchester Mining
Corp., a Delaware  corporation,  acquired all 780,000 shares  outstanding of the
Registrant for the purposes of  accomplishing a Merger of Hi-Plains Energy Corp.
and Winchester Mining Corp. The Merger was completed on May 15, 2000.

         In 1996 the Company was listed on the OTCBB with the symbol  WNCR.  The
prior   management   raised  funds  for  a  mining  property  in  the  Northwest
Territories.  The budget was spent and the Company remained inactive until March
of 1999.  In March of 1999,  the  Company  raised  $150,000  to invest in online
gambling  pursuant to Rule 504,  Regulation D for US  Investors  and Pursuant to
Regulation S for foreign  investors.  The Company has since  divested  itself of
these  acquisitions  due to the  questionable  nature  of  the  online  gambling
industry.  In September of 1999,  Wayne Miller  became  president of  Winchester
Mining, Corp. The Company  commissioned  Digicorp of Vancouver British Columbia,
Canada   to   develop   websites   for  the   Company:   Hollywoodmall.net   and
Pacificnorthwestmall.net.  They have been  under  development  since  October of
1999.  Radiant  Communication  of Vancouver was  developing  and managing  these
websites until work was terminated in late 2000.

         Bullseye  Communication Group was hired to develop an overall marketing
plan for the  Company  and the two  "mall"  websites.  All  website  and  "mall"
development  work was terminated in the fall of 2000, due to lack of capital and
difficulty  of  attracting  business.  According  to Company  records,  Bullseye
Communication Group was paid a total of $5000 for development of the website.

         In fall of 2000 the Company acquired 100% of the issued and outstanding
stock of PB&J  Inc.,  a newly  formed  Colorado  Corporation  upon  issuance  of
47,460,000  shares of common  stock to the  principals  of PB&J,  who became the
management and Directors of PNWC.

                                       4
<PAGE>

         The PB&J  transaction  was  brought to the  Company by Messrs.  Silva &
McFarlane who were not officers and Directors or affiliates of the Company.  The
transaction was completed as a share exchange.

         The  Board  of  Directors  determined  that the  consideration  for the
business  concept of PB&J was adequate based upon the facts that: a) the company
had no active business. b) the business plan appeared to have potential,  c) the
market  price of the stock was very low. d) no other more  promising  businesses
were  willing to be acquired,  when the company had no capital to invest.  There
was an arms  length  negotiation  between  the then Board of  Directors  and the
principals  of  PB&J.  Two  owners  of PB&J  Messrs.  Silva &  McFarlane  became
officers, directors, and affiliates of the company after the PB&J transaction.

         PB&J had developed  magnetized  package  dispensing  system for plastic
bags and dryer  sheets for  location on kitchen  refrigerators.  The product was
designed to offer enhanced  convenience which management believed  represented a
marketable product.

         PB&J, the now wholly owned subsidiary had no prior business  operations
in the prior two years, although the management did develop the concept and test
market the product on a limited  local basis.  The product has never been placed
in production nor significant marketing effort made due to lack of capital. PB&J
held a trademark  license on the name Peanut Butter + Jelly,  Inc. by assignment
from Joseph L. McFarlane the magnetic packaging and dispensing system.

         On December 14, 2001, the  shareholders  adopted a reverse split of the
then  issued  and  outstanding  shares on a 100 for one  basis,  except  that no
shareholder  shall be reduced to less than 50 shares.  The effective date of the
reverse split was January 7, 2002.

         On January  31,  2002,  PNW  Capital,  Inc.  ("PNW" or the  "Company"),
entered into a definitive  acquisition  agreement to acquire Industrial Minerals
Incorporated  ("IMI"),  a private Nevada  corporation,  owner of certain mineral
leases  located  in the  Townships  of Head,  Clara and  Maria in the  County of
Renfrew and the Province of Ontario,  Canada.  The Agreement for Share  Exchange
was executed  January 31, 2002 and approved by the Board of Directors on January
31, 2002. The negotiation was at arms length.

         Under the terms of the acquisition agreement,  PNW exchanged a total of
31,511,700  shares of its common  stock for 91% of the  issued  and  outstanding
shares of IMI. By February 20, 2002 the Company received executed documents from
the  participating  shareholders of IMI  representing  31,511,750  common shares
(91%) for the  exchange  of shares of IMI for common  shares of PNW on a one for
one basis.

         In the  transaction  IMI became a wholly owned  subsidiary  of PNW. The
Company nor its subsidiary currently have any revenue producing operations.  The
stockholders of IMI became stockholders of PNW, and their rights as stockholders
are governed by the PNW articles of  incorporation  and bylaws,  as currently in
effect, and the laws of the State of Delaware. Following the acquisition, PNW is
continuing  on IMI's  operations  under the changed  company name to  Industrial

                                       5
<PAGE>

Minerals Inc. PNW's then current board of directors  resigned and a new board of
directors was appointed  after Notice  pursuant to Section 14f of the Securities
and Exchange Act of 1934 was mailed to  shareholders.  Shareholders did not vote
on this appointment of directors.

         The IMI  transaction  was introduced to the company by a shareholder of
the company who was not an officer or director or affiliate. The transaction was
approved by the Board,  because the company had been unable to raise capital for
the PB&J project. The purchase consideration was negotiated based upon a summary
of report prepared by Ben Ainsworth of  Ainsworth-Jenkins.  This report prepared
by Mr. Ainsworth  summarized  previous reports by Kilborn  Engineering Ltd., KHD
Canada  Ltd.,  Pincock,  Alan &  Holt,  Cominco  Engineering  Services  Ltd  and
Environmental Applications Group Ltd.

         The Board of Directors  approved the  acquisition of IMI on January 31,
2002 and  authorized  the issuance of the shares on February 20, 2002.  The vote
was unanimous to approve the agreement.

         The PNW board of directors  negotiated the  acquisition  agreement with
IMI and authorized the issuance of the exchange shares totaling  31,511,750 in a
transaction  exempt from registration  under Section 4(2), 4(6) and Regulation S
as applicable because the board of directors believes that this acquisition will
be to the benefit of shareholders.

         The class of persons to whom the common  shares of issuer  were  issued
was the holders of 91% of the common stock of Industrial Minerals, Incorporated,
a Nevada  Corporation.  The consideration for the issuance of issuers shares was
to acquire (by exchange) 91% of the shares of Industrial Minerals, Incorporated,
a Nevada  Corporation.  Subsequently,  in May 2002,  the  subsidiary  Industrial
Minerals,  Inc. was merged into issuer in a statutory  merger of a subsidiary in
to a parent pursuant to Section 253 of Delaware General Corporation Law.

         On June 13, 2003, the officers and directors of the Company  approved a
resolution to forward split the common shares of the Company on a two shares for
one basis,  and a majority of the  shareholders  have  indicated  their  written
consent to such action.

            On July 24, 2003,  Industrial Minerals Canada,  Inc., a wholly owned
subsidiary  of  Industrial  Minerals,  Inc.,  and  Mohawk  Investment  Group and
Community of Southend Reserve No. 200 and 209 and Southend Reindeer  Development
Corporation  signed a memorandum  of  understanding.  The parties have agreed to
form a limited  partnership  for the purpose of conducting a business  involving
the mining,  milling,  transportation,  and the sale of graphite  located on the
reserve.  The  community of Southend  would have 50%  interest  while the Mohawk
Investment Group and Industrial Minerals Canada, Inc. would each have 25% of the
partnership.

         As  of  March  14,  2004,   negotiations   have  ended   regarding  the
Saskatchewan  property.  The parties to the memorandum of  understanding  signed
July 24,  2003  have not  been  able to  successfully  negotiate  the  necessary
contracts.

                                       6
<PAGE>

         As of March 15, 2004,  the Ministry of  Environment  of the Province of
Ontario has  requested  a storm  water  management  plan from the  Company.  The
Company has retained  Knight  Piesold to author this plan and it is  anticipated
that this plan will be submitted to the Ministry of Environment by May 15, 2005.

         In August  2004,  the  Company  through  its wholly  owned  subsidiary,
Industrial Minerals Canada,  Inc., received notice from the Ministry of Northern
Development  and  Mines for the  Province  of  Ontario  that the  Bissett  Creek
Graphite  Project  Certified  Closure Plan as per Subsection  141. (3)(a) of the
Mining Act for the Province of Ontario is now considered filed.

         Industrial   Minerals,   Inc.   through  its  wholly  owned  subsidiary
Industrial  Minerals  Canada,  Inc. may now begin  production of graphite on its
Bissett Creek Graphite Property.  During production the Company must comply with
the Bissett Creek Graphite Closure Plan as filed.


         Certain Risks

         The Company's  business is subject to numerous risk factors,  including
the following:

         The Company is in the process of  developing  its mineral  property for
graphite at its Bissett Creek  property.  The company has built it's  processing
building and installed  equipment in  preparation  for  attempted  production of
graphite.

         There has been minimal graphite production to date by the Company which
has  occurred  during the  commissioning  of the  process.  The  Company  has no
purchase orders for graphite to be produced by the Company. The Company hopes to
be in production for graphite  before the end of its current fiscal year,  which
is  December  31,  2005,  at its Bissett  Creek  mineral  property.  (Please see
"management discussion and analysis" as contained in Item 7 hereof.)


ITEM 2 - DESCRIPTION OF PROPERTY

         After December 31, 2001 the Company has acquired and merged  Industrial
Minerals,  Incorporation  a Nevada  corporation  into  itself.  The Company owns
mineral  interests  through  its wholly  owned  subsidiary  Industrial  Minerals
Canada, Inc. in a graphite mineral property in Canada as follows:

         The Company is the "lessee" of lease number  364704  consisting  of the
following:  All those  parcels  or tracts  of land and land  under  water in the
Township  of Head,  Clara and Maria,  in the County of Renfrew  and  Province of
Ontario, containing by admeasurement 564.569 hectares, be the same more or less,
composed of those parts of lots 21, 22, 23, 24 and 25, Concessions IV and V, and
part of the bed of Mag Lake and the bed of the unnamed lake, and lots 23, 24 and
25 and the north half of lots 21 and 22,  Concession III as shown on the plan of
the  geographic  Township of Maria,  designated as parts 1, 2, 3 and 5 on a plan
and a field  notes  deposited  in the Land  Registry  Office at Pembroke as Plan
49R_11203,  comprising mining claims EO 608306, EO 608346, EO 608347, EO 608374,

                                       7
<PAGE>

EO 608348, EO 608373, EO 608349, EO 608372, EO 608369, SO 998760, SO 1084577, EO
800884,  EO 800880,  EO 800881,  EO 608350,  EO 608371, EO 608367, EO 608370, EO
608376, EO 608368, EO 608302, SO 1117797,  SO 998754, SO 1117798,  SO 998755, SO
1117799, SO 998756 and SO 998757.

         On June  20,  2002,  the  Company  acquired  the  following  unpatented
graphite mining claims. SO 1249711 (11 units) SO 1249723 (3 units) SO 1234705 (2
units) They cover a total area of approximately 625 acres or 248 hectares.  They
are located in Maria  township  in Ontario,  Canada.  The Company  acquired  the
graphite  mining claims from Messrs.  P. McLean and F.  Tagliamonte and from the
estate of P. Lacombe. The Company paid $50,000 (Canadian) for the property.  The
transaction  to acquire the claims were at "arms length" with  Sellers.  Sellers
are not and  were not  affiliates  of IMI at the  time of the  transaction.  The
Company is  responsible  for a royalty in the amount of $20 (Canadian) per tonne
of  graphite  produced.  The  Company  must pay an  advance  royalty  of $27,000
Canadian  yearly which will be  recaptured  once the  property is producing  and
there are sales.

         The Company's  mailing  address is One Dundas Street West,  Suite 2500,
Toronto, ON M5G 1Z3.

ITEM 3 - LEGAL PROCEEDINGS

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


ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         At the  annual  meeting of  shareholders  held in Toronto on August 25,
2004, the  shareholders  elected John Melnyk,  Stephen W. Weathers and Thomas S.
Bamford and Larry Van Tol directors of the Corporation.

         The  shareholders  also approved the  appointment of Toski,  Schaefer &
Co., P.C. as auditors for the fiscal year ending December 31, 2004.

         The officers and directors of the Company were  authorized to amend the
Company's  Articles of  Incorporation  to increase  the number of Common  Shares
authorized  from  one  hundred  million  (100,000,000)  to two  hundred  million
(200,000,000).

         Effective as of September 27, 2004, for all  shareholders  of record on
September  27, 2004,  the common  stock of the Company was forward  split on the
basis of three shares for two shares issued and  outstanding  in the name of the
shareholder,  i.e.  for  each two  shares  owned,  the  shareholder  will,  upon
surrender  to  the  transfer  agent  of  the  old  certificate,  receive  a  new
certificate  which reflects the ratio of the forward split on two old shares for
three new shares basis.  Surrender of old  certificates is required.  Fractional

                                       8
<PAGE>

shares will be rounded up to the next whole share. The officers and directors of
the Company authorized the appropriate Articles of Amendment.

         There were 887,350 shares  represented in person and 36,597,777  shares
represented by proxy.  Each of the directors  elected received 100% of the votes
of the shares present. There were no votes recorded against any of the directors
elected at the meeting.

         The  shareholders  voted to  appoint  Toski,  Schaefer & Co.,  P.C.  as
auditors, 37,478,127 for, 7,000 abstain and no votes against were recorded.

         The shareholders  voted to authorize increase in capital to 200,000,000
shares  from  100,000,000  there were  37,479,927  for,  200  against  and 5,000
abstain.

         The  shareholders  voted to authorize a forward split on the basis of 3
shares for every 2 shares held there were 37,484,927 for and 200 against.

                                     PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

        (a) The  Registrant's  common  stock is traded  in the  over-the-counter
market under the symbol IDSM (OTC Bulletin Board  Symbol).  The table below sets
forth  the high and low bid  prices  of the  Registrant's  common  stock for the
periods  indicated.  Such  prices  are  inter-dealer  prices,  without  mark-up,
mark-down or commissions and do not necessarily  represent actual sales.  (NOTE:
Price adjusted for 3 for 2 forward split.)


         2003                               High                         Low
         ----                               ----                         ---
     1st quarter                            0.67                         0.55
     2nd quarter                            1.02                         0.42
     3rd quarter                            2.02                         0.93
     4th quarter                            2.22                         1.38


         2004                               High                         Low
         ----                               ----                         ---
     1st quarter                            2.14                         1.65
     2nd quarter                            1.83                         1.70
     3rd quarter                            2.03                         1.60
     4th quarter                            2.10                         1.02


         (b) As of December 31, 2004,  there were 313  shareholders of record of
the Registrant's common stock.

                                       9
<PAGE>

         (c) The Registrant has neither  declared nor paid any cash dividends on
its common  stock,  and it is not  anticipated  that any such  dividend  will be
declared or paid in the foreseeable future.

         Effective August 11, 1993, the Securities and Exchange  Commission (the
"Commission")  adopted Rule 15g-9,  which established the definition of a "penny
stock," for purposes relevant to the Company,  as any equity security that has a
market price of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions.  For any transaction involving a
penny  stock,  unless  exempt,  the rules  require:  (i) that a broker or dealer
approve a person's account for  transactions in penny stocks;  and (ii) that the
broker  or  dealer  receive  from  the  investor  a  written  agreement  to  the
transaction,  setting  forth the  identity and quantity of the penny stock to be
purchased.  In order to approve a person's  account  for  transactions  in penny
stocks,  the  broker  or  dealer  must  (i)  obtain  financial  information  and
investment  experience and objectives of the person;  and (ii) make a reasonable
determination that the transactions in penny stocks are suitable for that person
and that person has sufficient  knowledge and experience in financial matters to
be capable of evaluating the risks of transactions  in penny stocks.  The broker
or dealer  must also  deliver,  prior to any  transaction  in a penny  stock,  a
disclosure  schedule  prepared  by the  Commission  relating  to the penny stock
market,  which,  in highlight form, (i) sets forth the basis on which the broker
or dealer made the suitability determination; and (ii) states that the broker or
dealer  received a signed,  written  agreement  from the  investor  prior to the
transaction.  Disclosure  also has to be made  about the risks of  investing  in
penny  stock in both  public  offerings  and in  secondary  trading,  and  about
commissions payable to both the broker-dealer and the registered representative,
current  quotations for the securities and the rights and remedies  available to
an  investor  in cases of fraud in penny stock  transactions.  Finally,  monthly
statements  have to be sent  disclosing  recent price  information for the penny
stock held in the account and information on the limited market in penny stocks.

Dividends

         The Company has not paid any dividends to date,  and has no plans to do
so in the immediate future.


ITEM 6 - SELECTED FINANCIAL DATA

         That in order to provide for the  conversion  of certain long term debt
to equity,  the Board has determined  that it is appropriate to issue  3,492,115
shares  of  Restricted   Common  Stock,  for  total  debt  to  be  converted  of
$5,238,172.40  USD,  consisting of principal in the amount of $4,969,891.16  USD
and interest accrued in the amount of $268,281.24 USD.

         That by issuing  shares of Restricted  Common Stock to the creditors in
the amount of  $5,238,172.40,  the Board has determined that, in the exercise of
their best business  judgment,  the Company is receiving full, fair and adequate
consideration for the issuance of the shares.

                                       10
<PAGE>


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

CONSOLIDATED RESULTS

          Twelve month periods ending December 31, 2004, 2003 and 2002

         The Company had no revenue for 2004, 2003 and 2002.

         Total expenses for professional fees were $86,932,  $91,858 and $86,275
for 2004, 2003 and 2002 respectively.

         Total royalty expenses were $16,660, $18,775 and $17,550 for 2004, 2003
and 2002  respectively.  These  expenses  are the  result of the  Bissett  Creek
Graphite  property.  The Company is required to pay a minimum  yearly royalty of
$21,600   whether   graphite  is  produced  or  not.   These  payments  are  due
semi-annually  on March 6 and September 6 of each year. The Company has recorded
a prepaid expense in the amount of $3,330  representing the January and February
2005 portion of the royalty  payment  paid on  September  6, 2004.  There was no
prepaid  expense  recorded  for the  years  ending  December  31,  2003 and 2002
respectively.  The fluctuations  reported by the Company  regarding this expense
are due to the recent  strength of the Canadian  dollar versus the United States
dollar.  The Company is required to pay the royalty due in Canadian  dollars and
that minimum royalty is $27,000 Canadian annually.

         Total  depreciation  expenses  were  $131,674,  $68,717 and $56,193 for
2004, 2003 and 2002 respectively.

         Total management fees and salaries were $124,400, $56,127 and $ NIL for
2004, 2003 and 2002 respectively.  During 2004 a former CEO was paid a salary of
$50,002 and $48,127 for 2003.  During 2004 the current CEO was paid a management
fee of $10,000.  The CFO was paid  $24,000 in 2004 and a  management  fee in the
amount of $8,000 in 2003. The Company hired employees to begin commissioning the
plant located on the Bissett Creek  Graphite  Property in October of 2004 paying
these employees a total of $40,398 during 2004.

         Other general and administrative expenses totaled $1,249,218,  $897,804
and $360,227 for 2004, 2003 and 2002 respectively.

         The Company has had a net loss of $561,153, $1,133,197 and $520,242 for
2004,  2003 and 2002  respectively.  During fiscal year ending December 31, 2004
the  Company  had a gain  from  the  extinguishment  of  debt in the  amount  of
$1,047,634.  This gain along with  interest  income in the amount of $97 reduced
the Company's net loss from  operations by $1,047,731  from  $1,608,884 to a net
loss of $561,153. Investors should be cautioned that this is a one time gain and
for  discussions  concerning  operating  results in this report  management will
discuss  financial  results from operations  essentially  ignoring this one time
gain in the amount of $1,047,634.


                                       11
<PAGE>


                         Liquidity and Capital Resources

         The Company has cash on hand of $27,726 and a receivable as at December
31,  2004 of  $105,925.  The  receivable  of  $105,925  is a result of tax input
credits owed to the company by the Government of Canada.

         The Company has prepaid expenses of $15,540. This represents the unused
portion of an insurance policy in the amount of $12,210 that the company carries
for its building  and  equipment.  This policy  expires  September 6, 2005.  The
Company also has $3,330 in a prepaid royalty expense.

         The Company has total  deposits in the amount of $11,789 as of December
31, 2004 compared to $65,242 for the  twelve-month  period  ending  December 31,
2003. This represents a decrease of $53,453. 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 has entered into a lease, which expires on
April 30, 2005 at which time 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 $10,000 and an advance against expenses to an employee in the amount of $268.

         The Company has a long-term  deposit of $230,000  with the  Ministry of
Finance for the Province of Ontario.  During the year ending December 31, 2004 a
Mine  Development  and Closure  Plan has been 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 $230,000 is a 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.  A balance of $70,400 is still owed on this  deposit  and is
reflected on the current balance sheet under accounts payable.

         The  Company  had no revenue  during  the  twelve-month  period  ending
December 31, 2004 and expects to have no revenue during the first quarter ending
March 31, 2005. The Company  anticipates  some revenue during the second quarter
of 2005  ending  June  30  however  as a  start  up  company  management  has no
historical  data to  reasonably  project  the amount of revenue.  Investors  and
potential  investors  should be aware  that the  Company  is  currently  seeking
customers for its graphite.  Discussions  are on going 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.

         The Company  has total  current  liabilities  in the amount of $238,383
which is made up of accounts payable,  $120,326,  $11,787 due to related parties
and $2,763 for the current portion of a mortgage payable.  The Company also owes
$90,796 and $12,711 in notes payable and accrued interest payable  respectively.
Investors and potential investors should be aware that the Company does not have
the funds on hand to pay these current  liabilities in an orderly  fashion.  The
Company intends to continue to seek debt financing to complete this project from
non-affiliates,   and  possibly   officers,   directors  and  shareholders.   No

                                       12
<PAGE>

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. 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.

         During the fiscal year ending  December 31, 2002 the company  secured a
first  mortgage  which has a balance  outstanding  of $15,395 as of December 31,
2004  included in this  balance is the current  principal  payments  required in
fiscal 2005 of $2,763.  A payment monthly payment of $320 is required  including
principal  and interest for the next 32 months.  The balance of $7,566 on August
29, 2007 is then due and payable.  This mortgage  carries an interest rate of 7%
compounded semi-annually not in advance.

         The  Company had current  loans  payable of $90,796 as of December  31,
2004. The Company was granted an extension  regarding this debt to July 31, 2005
during the  twelve-month  period ending December 31, 2003.  Investors  should be
cautioned  that virtually 100% of this debt is due and payable on July 31, 2005.
The Company has not begun any  discussions to negotiate  terms more favorable to
the Company  concerning this debt. Should the Company not be able to retire this
debt on July 31, 2005  investors  should be cautioned that the Company might not
be able to continue to operate.

         During the twelve-month period ending December 31, 2004 the Company has
been able to secure additional debt financing in the amount of $2,001,980 from a
non-affiliated  shareholder.  On December 30, 2004 the Company issued  3,492,115
common  shares in exchange for paying  $4,969,891  and $268,281 in principal and
accrued  interest owed.  After this transaction the company had loans payable in
the amount of $90,796  and accrued  interest in the amount of $12,711.  Interest
will continue to accrue at the rate of 7% per annum until July 31, 2005 when the
total  principal of $90,796 along with any accrued  interest will become due and
payable.  The  interest  rate  associated  with  this  debt  will be 7%  yearly.
Investors and potential investors should be aware that the Company does not have
the funds on hand to pay these current liabilities in an orderly fashion.

         2004 highlights include:

1.       Acceptance of Mine Closure Plan by Ministry of Northern Development and
         Mines for the province of Ontario.
2.       Completion of  construction  of process  building and  installation  of
         processing equipment.
3.       Beginning of the  commissioning  phase of the  equipment at the Bissett
         Creek Graphite Property.

                                       13
<PAGE>

         While the Company  has  completed  the above work on its Bissett  Creek
Property the Company has  established a budget as follows for fiscal year ending
December 31, 2005:

         1. Installation of dryer                             $     60,000
         2. Commissioning of plant                                  80,000
         3. General & Administrative                               900,000
         4. Professional fees                                       87,000
         5. Management Fees & Salaries                             360,000
                                                              ------------
Total funds required                                          $  1,487,000

         Investors  should be aware that the above are estimates  only and could
change as the project  continues  through the  commissioning  and start up phase
leading to  production.  It should be noted that costs of mining for fiscal 2005
are included in general and administrative costs detailed in point 3 above.

         Through  December  31,  2004,  the company has been able to obtain debt
financing and was able to convert debt to equity.

         As part of the  financing  discussed  in the  preceding  paragraph  the
Company  secured  a first  mortgage  in the  amount  of  $17,000  on a house and
separate  building  during the fiscal year ending December 31, 2002. The balance
of this mortgage was $15,395 at December 31, 2004. The payments on this mortgage
are $320 monthly at an interest rate of 7% per annum,  calculated  semi-annually
not in advance. This mortgage matures August 29, 2007.

         In addition to the  Company's  cash on hand of $27,726,  receivable  of
$105,925  at December  31, 2004 and  subsequent  to December  31, 2004  securing
$202,500 in new loans from a  non-affiliated  shareholder,  the Company requires
additional  financing in the amount of $1,150,849 to operate  throughout  fiscal
year ending December 31, 2005.  Investors should note this additional  financing
required  assumes no revenue in fiscal  2005,  as the Company has no  historical
figures to  accurately  project  revenue.  Management  believes the Company will
begin selling  graphite,  creating  revenue  beginning in the second  quarter of
fiscal  2005.  Any revenue  received by the  Company  will reduce the  financing
required.

         Investors and potential  investors should be aware that even though the
Company has been able to raise funds to December 31,  2004,  the Company may not
be successful in obtaining  satisfactory  additional  financing in the amount of
$1,150,849.  There  are no  financing  commitments  currently  in place  for the
required funds in the amount of $1,150,849.  The Company  intends to continue to
seek debt financing to complete this project 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.  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

                                       14
<PAGE>

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.

         Once production begins 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. Several Companies have expressed interest in
the  graphite and some have  requested  production  samples  from the  Company's
Bissett  Creek  Graphite  Property.  Discussions  are on  going  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.


Contractual Obligations and Other Long-Term Liabilities

         Industrial  Minerals,  Inc. has the following minimum commitments under
contractual obligations,  including purchase obligations, as defined by the U.S.
Securities  and Exchange  Commission.  A "purchase  obligation" is defined as an
agreement to purchase goods or services that is enforceable  and legally binding
on  Industrial  Minerals,   Inc.  and  that  specifies  all  significant  terms,
including:  fixed or  minimum  quantities  to be  purchased;  fixed,  minimum or
variable price provisions; and the approximate timing of the transaction.  Other
long-term liabilities are defined as long-term liabilities that are reflected on
Industrial Minerals,  Inc.'s balance sheet under GAAP. Based on this definition,
the tables below  include only those  contracts,  which include fixed or minimum
obligations.  It does  not  include  normal  purchases,  which  are  made in the
ordinary course of business.

         The following table provides  aggregated  information  about Industrial
Minerals,   Inc.'s  outstanding  contractual  obligations  and  other  long-term
liabilities as of December 31, 2004.

                                                     2005       2006      2007
                                                     ----       ----      ----

         Mortgage Payable & Interest               $    3,840   $3,840   $12,689
         Office Lease (1)                          $    2,964        -         -
         Loan Payable & Interest                   $  107,744        -         -
         Contracts
                  Technical support                $   37,500        -         -
                  Environmental Assessments        $  120,000        -         -
                  Financial Assurance (2)          $   70,400        -         -
                  Equipment Purchase               $    9,600        -         -
                                                   ----------   ------   -------
         Total Contractual Commitments             $  352,048   $3,840   $12,689

                                       15
<PAGE>

(1)      As of May 1 2005 the Company will retain the office on a month to month
         basis.
(2)      Outstanding  balance of  financial  assurance  due on or before May 31,
         2005.

CRITICAL ACCOUNTING ESTIMATES

         Accounting  policies  are  integral  to  understanding  this MD&A.  The
consolidated  financial statements of Industrial Minerals,  Inc. are prepared in
conformity  with GAAP,  which  requires  the use of  estimates,  judgments,  and
assumptions  that affect the reported  amounts of assets and  liabilities at the
date of the  financial  statements  and the  reported  amounts of  revenues  and
expenses during the periods presented.  Industrial  Minerals,  Inc.'s accounting
policies  are  described  in Note 1 to the  Consolidated  Financial  Statements.
Critical  accounting  estimates  are  described in this  section.  An accounting
estimate is  considered  critical if: the estimate  requires  management to make
assumptions  about  matters that were highly  uncertain at the time the estimate
was made;  different estimates reasonably could have been used; or if changes in
the estimate that would have a material  impact on the  Corporation's  financial
condition or results of operations are reasonably likely to occur from period to
period.   Management  believes  that  the  accounting   estimates  employed  are
appropriate and resulting balances are reasonable; however, actual results could
differ from the original estimates,  requiring  adjustments to these balances in
future periods.  The Corporation  has discussed the  development,  selection and
disclosures of these critical  accounting  estimates with the Audit Committee of
Industrial  Minerals,  Inc.'s Board of  Directors,  and the Audit  Committee has
reviewed the Corporation's disclosures relating to these estimates.

Going Concern

         The critical  assumption  made by management of the Company is that the
Company will continue to operate as a going concern.  The following is contained
in the  notes  to the  financial  statements  and the  company's  auditors  have
expressed  a concern  that the  Company  may not be able to  continue as a going
concern.

         "The Company's financial statement has been presented on the basis that
it is a going  concern.  The  Company  is in the  exploration  stage and has not
earned any revenues from operations.  The Company's current  liabilities  exceed
current  assets by $77,403  and the  Company  recorded a net loss  amounting  to
$561,153  during the year ended  December 31,  2004.  The  Company's  ability to
continue, as a going concern is dependent upon its ability to develop additional
sources of capital  to operate  it's  Bissett  Creek  Property  and  ultimately,
achieve profitable operations.  Management plans to obtain sufficient additional
debt or equity financing to finance operations,  capital  improvements and other
necessary activities to ensure the business becomes profitable. The accompanying
financial  statements do not include any adjustments  that might result from the
outcome of these uncertainties."

         If the  Company can not  continue  as a going  concern the value of the
Company's  assets  may  approach  a level  close to zero.  Investors  should  be
cautioned  that  should the  Company  cease to operate the Company may recover a
small  fraction of the original  costs of its assets should a liquidation of the
Company's assets occur. Management estimates a recovery of approximately 5 cents

                                       16
<PAGE>

on the  dollar  in the event of a  wholesale  liquidation.  Should  this type of
liquidation  occurred  in 2004 an  increase  in loss of  $1,946,868  would  have
occurred with a corresponding decrease in stockholders equity from $1,918,427 to
a deficit position of $28,441.

Impairment of Long-Lived Assets

         Industrial  Minerals,  Inc.  periodically reviews the carrying value of
its long-lived  assets held and used, other than goodwill and intangible  assets
with  indefinite   lives,   and  assets  to  be  disposed  of  when  events  and
circumstances warrant such a review. This review is performed using estimates of
future cash flows.  If the carrying  value of a long-lived  asset is  considered
impaired,  an impairment charge is recorded for the amount by which the carrying
value of the long-lived asset exceeds its fair value.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We do not have any market risk sensitive instruments.  Since operations
in Canada are in Canadian  dollar  denominated  accounts,  we do believe that we
have foreign  currency  risk in that as the Canadian  dollar  increases in value
against the United States dollar our operating  costs  increase when reported in
United States dollars.

         Our product is quoted for sale in United States dollars.


ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The response to this item is  submitted  as a separate  section of this
report beginning on page F-1.

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

         None.

ITEM 9A - CONTROLS AND PROCEDURES

    Disclosure Controls and Procedures

         Our Chief Executive Officer and Chief Financial Officer, have evaluated
the  effectiveness  of our  disclosure  controls and procedures (as such term is
defined in Rules  13a-15(e) and 15d-15(e)  under the Securities  Exchange Act of
1934, as amended (the  "Exchange  Act")) as of the end of the period  covered by
this report.  The  evaluation  included  certain  control areas in which we have
made, and are continuing to make, changes to improve and enhance controls. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded  that,  as of the end of such  period,  our  disclosure  controls  and
procedures were not effective because of a material weakness discussed below.

     Internal Control Over Financial Reporting

         A material  weakness is a condition in which the design or operation of
one or more of the internal  control  components does not reduce to a relatively
low level the risk that  misstatements  caused by error or fraud in amounts that
would be  material in relation to the  financial  statements  being  audited may
occur and not be  detected  within a timely  period by  employees  in the normal
course of performing their assigned functions.

                                       17
<PAGE>

          The   Securities   and  Exchange   Commission   rule  making  for  the
Sarbanes-Oxley  Act of 2002  Section  404  requires  that a  company's  internal
controls over financial  reporting be based upon a recognized  internal  control
framework.  While the Company has an internal  control and procedures  manual in
place and  management  believes the controls and  procedures  are  effective the
manual is not based upon a recognized  internal  control  framework,  because we
have not  found  one that  fits the  limited  scope of  operations  of our small
Company.

          During the first half of the Company's fiscal year ending December 31,
2005 management will be revising the Company's  internal and controls  procedure
document basing this revision upon a model framework created by the Committee of
Sponsoring   Organizations  of  the  Treadway   Commission  (or  "COSO")  as  is
appropriate   to  our   operations.   This   framework   is  entitled   Internal
Control-Integrated  Framework. The COSO Framework, which is the common shortened
title,  was published in 1992 and we believe,  will satisfy the  Securities  and
Exchange  Commission  requirements of Section 404 of the  Sarbanes-Oxley  Act of
2002.

          To address  these  material  weaknesses  management  is  committed  to
re-writing it's internal  controls and procedures manual based upon the Treadway
Commission  report as is appropriate to our operations  during the first half of
fiscal year ending December 31, 2005.

          Except as noted above, there have not been any changes in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f)  under the Exchange  Act) during our fourth  fiscal  quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

ITEM 9B - OTHER INFORMATION

         Not applicable.

                                    PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 The current Executive officers of Registrant at December 31, 2004 are:

         NAME                       POSITION HELD             TENURE
         ----                       -------------             ------
         Larry Van Tol              President and CEO         Annual
         John Melnyk                CFO, Secretary/Treasurer  Annual

The persons who are directors of the Registrant at December 31, 2004 are:

         NAME                               AGE
         ----                               ---
         Larry Van Tol                      61
         John Melnyk                        55
         Stephen W. Weathers                44
         Thomas S. Bamford                  55

Business Experience

         The following is a brief account of the business  experience  during at
least the past five years of the  persons  designated  to be new  directors  and
officers of the Registrant,  indicating the principal  occupation and employment
during  that  period  by  each,  and the  name  and  principal  business  of the
organizations by which they were employed.

                                       18
<PAGE>

         LARRY VAN TOL, age 61,  graduated  with a Bachelor of Science degree in
Business  Administration and Economics from the University of Minnesota in 1967.
From 1976 to present Mr. Van Tol has been the owner operator of Hilltop  Florist
and  Greenhouse  in  Mankato,  Minnesota.  Mr.  Van Tol has been a  director  of
Security State Bank in Mankato.  He has held this  directorship  since 1999. Mr.
Van Tol is a member of the audit, company policy,  compensation,  investment and
loan  approval  committees  of  Security  State  Bank.  Security  State  bank is
privately  held and the 3rd largest of Mankato's 28 Banks.  Security  State bank
has one location  and $100 million in assets.  Mr. Van Tol is also a director of
Bancommunity Service Corp. Bancommunity is the privately held holding company of
First National Bank of St. Peter, MN and Security State Bank of Mankato. Mr. Van
Tol has held this  position  since  1999.  Mr. Van Tol was elected a Director of
Industrial Minerals, Inc. on October 24, 2003 and appointed President and CEO on
November 12, 2004.

         JOHN MELNYK,  age 55, studied Business  Administration  and Commerce at
the  University  of  Alberta  from 1970 to 1974.  From 1974 to 1978 he managed a
sales  territory for McQueen Sales Company,  Ltd., a distributor of photographic
products.  From  1978  to  1982  he  was a  self-employed  sales  agent  in  the
photographic industry. In 1982 he purchased an interest in a photo finishing lab
which he sold in 1994. From 1994 to present he has been a self-employed business
consultant.  Mr.  Melnyk also served as the President and a director of Murphy's
Investment Corp. a privately held Corporation which invests in various ventures.
He  resigned  his  position in March 2002.  Mr.  Melnyk  works full time for the
Company.

         STEPHEN W.  WEATHERS,  age 44,  earned his B. S. in Geology  from Boise
State University. He has worked as an environmental geologist both in the mining
industry and oil and gas industry. His duties included permitting, environmental
compliance,   environmental   remediation/reclamation   and  natural  gas  asset
acquisitions  both in the United  States and  Canada.  Mr.  Weathers  worked for
Maxxim  Environmental/Terracon from 1997 through 1999 and presently works in the
environmental  remediation  division for a Duke Energy Field Services which is a
natural  gas  processing  company  (1999-2002).  Mr.  Weathers  also serves as a
director of Sun River Mining, Inc. which is seeking a business acquisition.

         THOMAS S. BAMFORD, age 55, obtained a Bachelor of Science in Geological
Engineering  from the  University  of  Saskatchewan  in 1971,  Master of Science
(Geology/Geophysics)  from the University of Saskatchewan in 1973, and a Masters
of Business Administration from the University of Saskatchewan in 1978.

         Mr. Bamford is a member of the  Association of  Professional  Engineers
and  Geoscientists of Saskatchewan  (APEGS).  He became affiliated with APEGS in
1975. In 1995 Mr. Bamford  established and operated a  Calgary-based  management
consulting  and  database/software  development  practice  with  emphasis on the
process of analyzing  operational  and economic  performance for the oil and gas
industry.  Current focus of this  consulting  practice is to design and organize
private  financing and structuring for tax-effective and traditional oil and gas
investment vehicles in western Canada.

                                       19
<PAGE>

         Mr.  Bamford held the  positions of President and CEO  (1998-1999)  and
Chief Financial Officer  (1997-1998) of Westlinks Resources Ltd. Mr. Bamford was
a director of Westlinks  Resources Ltd. from 1997 to 2000.  Westlinks  Resources
Ltd. was an Alberta Stock Exchange traded junior oil and Gas Company, which grew
through acquisition, merger and amalgamation.

         Mr.  Bamford  began his  career in 1975 with  Saskatchewan  Oil and Gas
Corporation  (Saskoil)  and remained  with  Saskoil  (now  Wascana  Energy Inc.)
through 1995. He participated  in various  aspects of the technical,  operating,
administration  and  financial  growth  of  a  start-up,  private,  oil  company
(Saskoil) through its transition to a publicly traded senior production  company
(Wascana Energy).  Career  development  during this period focused on the design
and development of new business opportunities, processes, methods and systems as
well as providing special project leadership to these initiatives.

         He held the  following  positions  at Wascana  Energy,  Inc.  (formerly
askoil), Reserves and Evaluations Engineer (04/1975-09/1977),  Educational Leave
(09/1977_04/1978),  Reservoir Engineer (04/1978-12/1979),  Director Planning and
Special   Projects    (01/1980-04/1983),    Acting    Vice-President,    Finance
(11/1981-04/1982),  Manager,  Exploration  Geology  (04/1983-11/1985),  Manager,
Business   Development    (11/1985-06/1987),    Manager,    Corporate   Planning
(06/1987-08/1989),   Manager,  Research   (05/1992-04/1994),   Manager,  Special
Projects (05/1992-04/1994) and Manager, Budgets and Reserves, (05/1994-12/1995).

         Mr.  Bamford was appointed a Director of Industrial  Minerals,  Inc. on
October 24, 2003.

         No appointee for a director position has been found guilty of any civil
regulatory  or  criminal  offense  or is  currently  the  subject  of any  civil
regulatory proceeding or any criminal proceeding.

Compliance with Section 16(a) of the Exchange Act

         Section  16(a) of the  Securities  Exchange Act of 1934 (the  "Exchange
Act") requires that the Company's  officers and  directors,  and persons who own
more than ten percent of a registered class of the Company's equity  securities,
file  reports of  ownership  and changes in ownership  with the  Securities  and
Exchange   Commission.   Officers,   directors  and  greater  than  ten  percent
stockholders  are required by regulation to furnish to the Company copies of all
Section 16(s) forms they file.

         The following persons failed to file forms on a timely basis during the
past two fiscal years as required under Section 16(a) as follows:

         None.

Conflicts of Interest

         Members of the Company's  management  are  associated  with other firms
involved in a range of business  activities.  Consequently,  there are potential

                                       20
<PAGE>

inherent  conflicts of interest in their acting as officers and directors of the
Company.  Insofar as the officers and  directors  are engaged in other  business
activities, management anticipates it will devote only a minor amount of time to
the Company's affairs.

         The Company's  Board of Directors has adopted a policy that the Company
will not seek a merger with, or acquisition  of, any entity in which any officer
or director  serves as an officer or  director or in which they or their  family
members own or hold a  controlling  ownership  interest.  Although  the Board of
Directors  could  elect to change this  policy,  the Board of  Directors  has no
present intention to do so.

         There can be no assurance that management will resolve all conflicts of
interest in favor of the Company.

                         ITEM 11- EXECUTIVE COMPENSATION

                             EXECUTIVE COMPENSATION

Cash Compensation.

         Compensation paid for all services provided up to December 31, 2004 (1)
to each of our executive officers and (2) to all officers as a group.
<TABLE>
<CAPTION>
<S>                      <C>       <C>        <C>      <C>            <C>         <C>              <C>
------------------------ --------- ---------- -------- -------------- ----------- ---------------- -------------------------
Name and Principal       Year      Salary     Bonus    Consulting     Number of   Securities       Long Term Compensation/
Position                                               Fees/Other     Shares      Underlying       Option
                                                       Fees ($)                   Options/
                                                                                  SARS (#)
------------------------ --------- ---------- -------- -------------- ----------- ---------------- -------------------------
Robert A. Stoutley       2002              0        0              0           0                0                         0
(Terminated as
President 2004)
                         2003        $48,127        0              0           0                0                         0
                         2004        $50,002        0              0           0                0                         0
------------------------ --------- ---------- -------- -------------- ----------- ---------------- -------------------------
Larry Van Tol,           2002              0        0              0           0                0                         0
President & CEO
                         2003              0        0              0           0                0                         0
                         2004              0        0        $10,000           0                0                         0
------------------------ --------- ---------- -------- -------------- ----------- ---------------- -------------------------
John Melnyk, CFO         2002              0        0              0           0                0                         0
Secretary/Treasurer
                         2003              0        0         $8,000           0                0                         0
                         2004        $24,000        0              0           0                0                         0
------------------------ --------- ---------- -------- -------------- ----------- ---------------- -------------------------
Officers as a Group      2002              0        0              0           0                0                         0
                         2003        $48,127        0         $8,000           0                0                         0
                         2004        $74,002        0        $10,000           0                0                         0
------------------------ --------- ---------- -------- -------------- ----------- ---------------- -------------------------
</TABLE>


                                       21
<PAGE>
<TABLE>
<CAPTION>


                     SUMMARY COMPENSATION TABLE OF DIRECTORS
                             (to December 31, 2004)

<S>                     <C>          <C>            <C>           <C>             <C>                  <C>
----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Name                    Year         Annual         Meeting       Consulting      Number of Option     Securities Underlying
                                     Retainer       Fees ($)      Fees/Other      Shares Exercised     Options/SARS (#)
                                     Fees ($)                     Fees ($)
----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Larry Van Tol,          2002                     0             0               0                    0                           0
Director
                        2003                     0             0               0                    0                           0
                        2004                     0             0               0                    0                           0
----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
John Melnyk, Director   2002                     0             0               0                    0                           0
                        2003                     0             0               0                    0                           0
                        2004                     0             0               0                    0                           0
----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Stephen W. Weathers,    2002                     0             0               0                    0                           0
Director
                        2003                     0             0               0                    0                           0
                        2004                     0             0               0                    0                           0
----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Thomas S. Bamford,      2002                     0             0               0                    0                           0
Director
                        2003                     0             0               0                    0                           0
                        2004                     0             0               0                    0                           0
----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Robert A. Stoutley      2002                     0             0               0                    0                           0
(Former Director)
                        2003                     0             0               0                    0                           0
                        2004                     0             0               0                    0                           0
----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Richard H. Woodhead     2002                     0             0               0                    0                           0
(Former Director)
                        2003                     0             0               0                    0                           0
                        2004                     0             0               0                    0                           0
----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Directors as a Group    2002                     0             0               0                    0                           0
                        2003                     0             0               0                    0                           0
                        2004                     0             0               0                    0                           0
----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
</TABLE>


         The  following  committees  have been  formed as of March 18,  2004 and
membership as of December 31, 2004 is as follows:

         1)  Nominating  Committee  -  Members  are Larry  Van Tol,  Stephen  W.
Weathers and Thomas S.  Bamford.  Thomas S. Bamford and Stephen W.  Weathers are
independent  Directors as defined by the  Sarbanes-Oxley  Act of 2002. Larry Van
Tol ceased to be an independent  director as of his  appointment to the position
of CEO on November 12, 2004.

         2) Audit  Committee - Members are Larry Van Tol and Thomas S.  Bamford.
Thomas S. Bamford is an  independent  Director as defined by the  Sarbanes-Oxley
Act of 2002.  Larry  Van Tol  ceased  to be an  independent  director  as of his
appointment to the position of CEO on November 12, 2004.

         3) Compensation  Committee - Members are Stephen W. Weathers and Thomas
S. Bamford.  All Committee  Members are independent  Directors as defined by the
Sarbanes-Oxley  Act  of  2002.  As the  compensation  committee  was  discussing
compensation  surrounding the appointment of Mr. Van Tol to the position of CEO,
Mr. Van Tol resigned from this committee on October 20, 2004.

                                       22
<PAGE>

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>

         The following  table shows the share  ownership of officers,  directors
and 5% or greater shareholders as of December 31, 2004.
<S>                                                        <C>                           <C>
---------------------------------------------------------- ----------------------------- -----------------------------
        Name and Address of Beneficial Ownership               Amount and Nature of            Percent of Class
                                                               Beneficial Ownership
---------------------------------------------------------- ----------------------------- -----------------------------
Larry Van Tol, President, CEO & Director                                        647,250                 Less than .1%
One Dundas Street West Suite 2500
Toronto, Ontario, Canada M5G 1Z3
---------------------------------------------------------- ----------------------------- -----------------------------
John Melnyk, CFO Secretary/Treasurer                                      5,701,200 (1)                          5.1%
One Dundas Street West Suite 2500
Toronto, Ontario, Canada M5G 1Z3
---------------------------------------------------------- ----------------------------- -----------------------------
Stephen W. Weathers, Director                                                    26,575                 Less than .1%
One Dundas Street West Suite 2500
Toronto, Ontario, Canada M5G 1Z3
---------------------------------------------------------- ----------------------------- -----------------------------
Thomas S. Bamford, Director                                                 450,000 (2)                 Less than .1%
One Dundas Street West Suite 2500
Toronto, Ontario, Canada M5G 1Z3
---------------------------------------------------------- ----------------------------- -----------------------------
Richard H. Woodhead, (resigned Director)                                              0                 Less than .1%
One Dundas Street West Suite 2500
Toronto, Ontario, Canada M5G 1Z3
---------------------------------------------------------- ----------------------------- -----------------------------
Robert A. Stoutley,                                                                   0                            0%
(Former President and CEO)
One Dundas Street West Suite 2500
Toronto, Ontario, Canada M5G 1Z3
---------------------------------------------------------- ----------------------------- -----------------------------
Krystar International                                                        19,494,000                          17.5
P.O. Box N-8198
East Bay Street
Management International Building
Nassau, Bahamas BWI
========================================================== ============================= =============================
Directors as a Group                                                          6,825,025                          5.2%
========================================================== ============================= =============================
</TABLE>

(1)      Includes  Murphy's   Investment  Corp.  and  Olympic  View  Investments
         (beneficially John Melnyk's wife)
(2)      Includes 150,000 shares through the Bamford Family Trust


                                       23

<PAGE>


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On January  31,  2002,  PNW  Capital,  Inc.  ("PNW" or the  "Company"),
entered into a definitive  acquisition  agreement to acquire Industrial Minerals
Incorporated  ("IMI"),  a private Nevada  corporation,  owner of certain mineral
leases  located  in the  Townships  of Head,  Clara and  Maria in the  County of
Renfrew and the Province of Ontario,  Canada.  The Agreement for Share  Exchange
was executed  January 31, 2002 and approved by the Board of Directors on January
31, 2002. The negotiation was at arms length.

         Under the terms of the acquisition agreement,  PNW exchanged a total of
31,511,700  shares of its common  stock for 91% of the  issued  and  outstanding
shares of IMI. By February 20, 2002 the Company received executed documents from
the  participating  shareholders of IMI  representing  31,511,750  common shares
(91%) for the  exchange  of shares of IMI for common  shares of PNW on a one for
one basis.

         In the  transaction  IMI became a wholly owned  subsidiary  of PNW. The
Company nor its subsidiary currently have any revenue producing operations.  The
stockholders of IMI became stockholders of PNW, and their rights as stockholders
are governed by the PNW articles of  incorporation  and bylaws,  as currently in
effect, and the laws of the State of Delaware. Following the acquisition, PNW is
continuing  on IMI's  operations  under  the  changed  company  name  Industrial
Minerals, Inc. PNW's then current board of directors resigned and a new board of
directors was appointed  after Notice  pursuant to Section 14f of the Securities
and Exchange Act of 1934 was mailed to  shareholders.  Shareholders did not vote
on this appointment of directors.

         The class of persons to whom the common  shares of issuer  were  issued
was the  holders of 91% of the common  stock of  Industrial  Minerals,  Inc.,  a
Nevada Corporation.  The consideration for the issuance of issuers shares was to
acquire (by exchange) 91% of the shares of Industrial  Minerals,  Inc., a Nevada
Corporation. Subsequently, in May 2002 the subsidiary, Industrial Minerals, Inc.
was merged  into  issuer in a statutory  merger of a  subsidiary  in to a parent
pursuant to Section 253 of Delaware General Corporation Law.

         The officers  and  directors  of the Company  approved a resolution  to
forward  split the  common  shares of the  Company on a two shares for one basis
effective June 13, 2003 based upon a majority of the  shareholders  giving their
written consent to such action.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

         General.  Toski,  Schaefer,  &  Co.,  P.C.  ("TSC")  is  the  Company's
principal auditing firm. The Company's Board of Directors has considered whether
the  provisions  of  audit  services  is  compatible  with   maintaining   TSC's
independence.

                                       24
<PAGE>

         Audit Fees. The following  table sets out fees billed to the Company by
TSC.

                                            2004            2003           2002

Audit Fees                                $12,000          $9,000         $4,000

Audit Related Fees                         $5,000          $4,800         $4,800


         The Company had no audit  committee for 2002 and 2003 thus the Board of
Directors  acted as the audit  committee for the years 2002 and 2003.  The Board
had no  "pre-approval  policies  and  procedures"  in effect  for the  auditors'
engagement for the audit year 2002 and 2003.

         The audit  committee  for the year 2004  recommended  TSC for the audit
year 2004 and the  shareholders  at an annual meeting held in Toronto,  Ontario,
Canada appointed TSC the company's auditors for the 2004 audit year.

         The auditors' full time employees performed all audit work.


                                     PART IV

ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)      (1)      See attached Financial Statements.
         (2)      Not applicable.
         (3)      See (b) below.

 (b)     Exhibits filed with this annual report.

Exhibit No.               Description
 -----------               -----------
3.1                        Bylaws (1)
14.1                       Code of Ethics (2)
31.1                       Section 302 Certification (CEO)
31.2                       Section 302 Certification (CFO)
32.1                       Section 906 Certification (CEO)
32.2                       Section 906 Certification (CFO)

         (1)Incorporated  by  reference  from  the  exhibits  included  with the
Company's  prior  Report  on Form 8K filed  with  the  Securities  and  Exchange
Commission, dated March 16, 2004.

         (2)Incorporated  by  reference  from  the  exhibits  included  with the
Company's  prior  Report  on Form 8K filed  with  the  Securities  and  Exchange
Commission, dated January 6, 2004.

         (c) Not applicable.

                                       25
<PAGE>




                                   Signatures

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

                                                   Industrial Minerals, Inc.

         Date: May 2, 2005                      By:/s/Larry Van Tol
                                                   -----------------------------
                                                   Larry Van Tol, President

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

         Date: May 2, 2005              By:/s/Larry Van Tol
                                           -----------------------------
                                           Larry Van Tol, President and CEO

         Date: May 2, 2005              By:/s/John Melnyk
                                           -----------------------------
                                           John Melnyk, Secretary/Treasurer, CFO

                                   DIRECTORS:

         Date: May 2, 2005              By:/s/Larry Van Tol
                                           -----------------------------
                                           Larry Van Tol

         Date: May 2, 2005              By:/s/John Melnyk
                                           -----------------------------
                                           John Melnyk

         Date: May 2, 2005              By:/s/Stephen W. Weathers
                                           -----------------------------
                                           Stephen W. Weathers




                                       26

<PAGE>
                            INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)
                     FINANCIAL STATEMENTS TABLE OF CONTENTS
                                December 31, 2004







                                                                          PAGE
                                                                          ----

Reports of Independent Registered Public Accounting Firm..............     F-1

Consolidated Balance Sheets...........................................     F-4

Consolidated Statements of Operations.................................     F-5

Consolidated Statements of Cash Flows.................................     F-6

Consolidated Statement of Stockholders' Equity........................     F-8

Notes to Consolidated Financial Statements ............................    F-9




                                       27
<PAGE>

                          TOSKI, SCHAEFER & CO., P.C.
                          CERTIFIED PUBLIC ACCOUNTANTS
                            555 International Drive
                         Williamsville, New York 14221
                                     ------
                            Telephone (716) 634-0700
                               Fax (716) 634-0764

                        REPORT OF INDEPENDENT REGISTERED
                             PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Industrial Minerals, Inc. and Subsidiary
(An Exploration Stage Company):

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Industrial  Minerals,  Inc. and  Subsidiary  (formerly  PNW  Capital,  Inc.) (An
Exploration  Stage  Company) as of December  31, 2004 and 2003,  and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
each of the years in the  three-year  period  ended  December  31,  2004.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial  statements  based on our  audits.  The  financial  statements  of PNW
Capital,  Inc. as of December 31, 2001,  including the amounts presented for the
period from inception  (November 6, 1996) to December 31, 2001,  were audited by
other auditors whose report dated February 13, 2002 on those statements included
an explanatory  paragraph that described the Company's  ability to continue as a
going concern as discussed in note 8 to the financial statements.

         We conducted our audits in accordance  with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis of our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material  respects,  the financial position of Industrial
Minerals,  Inc. and Subsidiary as of December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the years in the three-year
period  ended  December 31,  2004,  in  conformity  with  accounting  principles
generally accepted in the United States of America.

         The accompanying  financial statements have been prepared assuming that
the Company  will  continue as a going  concern.  As  discussed in note 8 to the
financial statements, the Company is in the exploration stage and has not earned
revenues from operations.  Those conditions  raise  substantial  doubt about its
ability to continue  as a going  concern.  Management's  plans  regarding  those
matters are also  described in note 8. The  financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.

                                        /s/Toski, Schaefer & Co., P.C.
Williamsville, New York
March 4, 2005
(except for note 12, as to which
   date is March 15, 2005)
                                      F-1

<PAGE>

                          TOSKI, SCHAEFER & CO., P.C.
                          CERTIFIED PUBLIC ACCOUNTANTS
                            555 International Drive
                         Williamsville, New York 14221
                                     ------
                            Telephone (716) 634-0700
                               Fax (716) 634-0764

                        REPORT OF INDEPENDENT REGISTERED
                             PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
 Industrial Minerals, Inc. and Subsidiary
 (An Exploration Stage Company):

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's Report on Internal Control over Financial Reporting that Industrial
Minerals,  Inc. and Subsidiary did not maintain  effective internal control over
financial reporting as of December 31, 2004, as the Company has not assessed its
internal control based upon a recognized internal control framework.  Industrial
Minerals,  Inc. and  Subsidiary's  management  is  responsible  for  maintaining
effective  internal  control over financial  reporting and for its assessment of
the   effectiveness   of  internal   control  over  financial   reporting.   Our
responsibility  is to  express  an opinion  on  management's  assessment  and an
opinion on the  effectiveness  of the company's  internal control over financial
reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

                                       F-2

<PAGE>

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the  policies  or  procedures  may  deteriorate.

A  material  weakness  is  a  control  deficiency,  or  combination  of  control
deficiencies,  that  results  in more than a remote  likelihood  that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's  assessment.  As of December  31,  2004,  management  identified  a
deficiency in the Company's  internal control over financial  reporting that its
internal control and procedures  manual is not based upon a recognized  internal
control  framework.  This material  weakness was considered in  determining  the
nature,  timing,  and  extent of audit  tests  applied  in our audit of the 2004
consolidated  financial  statements,  and this report does not affect our report
dated March 4, 2005 on those financial statements.

In our opinion,  management's  assessment  that  Industrial  Minerals,  Inc. and
Subsidiary did not maintain effective internal control over financial  reporting
as of December 31, 2004 is fairly stated,  in all material  respects,  as it has
not assessed it's  internal  control  based upon a recognized  internal  control
framework.  Also, in our opinion, because of the effect of the material weakness
described  above  on  the  lack  of a  recognized  internal  control  framework,
Industrial  Minerals,  Inc and Subsidiary has not maintained  effective internal
control over financial reporting as of December 31, 2004.

We do not  express an opinion or any other  form of  assurance  on  management's
statements  included  in the third and  fourth  paragraphs  of the  accompanying
Management's Report on Internal Control Over Financial  Reporting.

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting   Oversight  Board  (United  States),   the  consolidated   financial
statements of Industrial Minerals,  Inc. and Subsidiary at December 31, 2004 and
2003 and for each of the three years in the period  ended  December 31, 2004 and
in our report dated March 4, 2005 we expressed an unqualified opinion thereon.


                                        /s/Toski, Schaefer & Co., P.C.

Williamsville, New York
March 4, 2005

                                       F-3

<PAGE>

                            INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)
                           Consolidated Balance Sheets
                     December 31, 2004 and December 31, 2003

<TABLE>
<CAPTION>
                                                                                       December 31     December 31
                                                                                           2004            2003
                                                                                        (Audited)       (Audited)
                                                                                    -------------      ------------
Assets:

Current assets:
<S>                                                                                 <C>                <C>
     Cash                                                                           $      27,726      $    585,934
     Receivables                                                                          105,925            40,267
     Prepaid expenses                                                                      15,540            10,462
     Deposits                                                                              11,789            65,242
                                                                                    -------------      ------------

                           Total current assets                                           160,980           701,905

Long-term deposits                                                                        230,000                 -
Building and equipment, at cost, less accumulated
     depreciation of $256,167 in 2004 and $124,493 in 2003                              1,778,462           911,652
                                                                                    -------------      ------------

                           Total assets                                             $   2,169,442      $  1,613,557
                                                                                    =============      ============

Liabilities and Stockholders' Equity

Current liabilities:
     Accounts payable                                                               $     120,326      $    165,753
     Accrued interest payable                                                              12,711                 -
     Loans payable                                                                         90,796                 -
     Due to related parties                                                                11,787                 -
     Current installments of mortgages payables                                             2,763             2,144
                                                                                    -------------      ------------
                        Total current liabilities                                         238,383           167,897

     Accrued interest payable                                                                   -            83,579
     Loans payable                                                                              -         3,058,707
     Mortgage payable, excluding current installments                                      12,632            14,332
                                                                                    -------------      ------------

                           Total liabilities                                        $     251,015      $  3,324,515
                                                                                    =============      ============

Stockholders' equity:
     Common  Stock,  par  value  $.0001;   200,000,000   shares  authorized;
     111,587,966 shares issued and outstanding for 2004 and
     72,063,896 shares issued and outstanding for 2003                                      3,949             3,600
     Additional paid-in capital                                                         4,204,331            14,142
     Deficit accumulated during exploration stage                                      (2,289,853)       (1,728,700)
                                                                                    -------------      ------------

                           Total stockholders' equity (deficit)                         1,918,427        (1,710,958)
                                                                                    -------------      ------------

                           Total liabilities and stockholders' equity               $   2,169,442      $  1,613,557
                                                                                    =============      ============
</TABLE>


          See accompanying notes to consolidated financial statements.
                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                            INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)
                 Consolidated Statements of Operations (Audited)
              Twelve months ended December 31, 2004, 2003 and 2002
        and for the period from November 6, 1996 (Date of Inception) to
                               December 31, 2004

                                                                                                                       Nov. 6, 1996
                                                                                                                      (inception) to
                                                                   2004                    2003             2002       Dec. 31, 2004
                                                             --------------           -------------      -----------   -------------


<S>                                                          <C>                      <C>                  <C>          <C>
Revenue                                                      $           -            $          -       $        -     $    15,537
                                                             --------------           -------------      -----------     -----------

Expenses:
                  Cost of revenues                                       -                       -                -          76,201
                  Professional fees                                 86,932                  91,858           86,275       1,198,594
                  Royalty fees                                      16,660                  18,775           17,550          52,985
                  Depreciation and amortization                    131,674                  68,717           56,193         264,876
                  Impairment of long-lived assets                        -                       -                -         582,176
                  Management fees and salaries                     124,400                  56,127                -         180,527
                  Other general and administrative               1,249,218                 897,804          360,227       2,698,149
                                                             --------------           -------------      -----------     -----------
                      Total expenses                             1,608,884               1,133,281          520,245       5,053,508
                                                             --------------           -------------      -----------     -----------
                      Loss from operations                      (1,608,884)             (1,133,281)        (520,245)     (5,037,971)
                                                             --------------           -------------      -----------     -----------

Other income:

                  Interest income                                       97                      84                3           2,908
                  Gain from extinguishment of debt               1,047,634                       -                -       1,047,634
                  Other income                                           -                       -                -             594
                                                             --------------           -------------      -----------     -----------
                      Total other income                         1,047,731                      84                3       1,051,136
                                                             --------------           -------------      -----------     -----------
                      Net loss                               $    (561,153)           $ (1,133,197)      $ (520,242)    $(3,986,835)
                                                             ==============           =============      ===========     ===========
                  Net loss per common share issued           $       (0.01)           $      (0.02)      $    (0.02)
                                                             --------------           -------------      -----------     -----------

Weighted average common shares outstanding                      81,649,078              55,549,253       31,810,566
                                                             ==============           =============      ===========

</TABLE>


          See accompanying notes to consolidated financial statements.
                                      F-5
<PAGE>
                           INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)

                Consolidated Statements of Cash Flows (Audited)

              Twelve months ended December 31, 2004, 2003 and 2002
          and for the period from November 6, 1996 (Date of Inception)
                              to December 31, 2004
<TABLE>
<CAPTION>

                                                                                         Twelve Months Ended            Nov. 6, 1996
                                                                                             December 31,                (inception)
                                                                           ---------------------------------------------  to Dec.31,
                                                                                2004              2003            2002       2004
                                                                           -------------     ------------     ----------  ----------
Cash flows from operating activities:
<S>                                                                        <C>               <C>              <C>       <C>
              Net loss                                                     $  (561,153)      $(1,133,197)     $(520,242)$(3,986,835)
              Adjustments to reconcile net loss to cash
              used in operating activities:
                          Depreciation and amortization                        131,674            68,717         56,193     256,584
                          Provision for bad debts                                    -                 -              -      49,676
                          Stock issued for services                                  -                 -              -     414,606
                          Impairment of long-lived assets                            -                 -              -     297,882
                          Gain on extinguishment of debt                    (1,047,634)                -              -  (1,047,634)
                          Changes in:
                                      Receivables                              (65,658)          (20,673)       (19,594)   (110,094)
                                      Inventory                                      -                 -              -      (5,527)
                                      Prepaid expenses                          (5,079)           (4,062)        (6,400)    (16,080)
                                      Deposits                                  53,453           (64,446)          (796)    (11,789)
                                      Accounts payable and accrued expenses   (115,827)          161,908        (38,243)    (38,102)
                                      Due to related parties                    11,787          (180,000)       (20,000)    406,787
                                                                           -------------     ------------     ----------  ----------

Net cash used in operating activities                                       (1,598,437)       (1,171,753)      (549,082) (3,790,526)
                                                                           -------------     ------------     ----------  ----------

Cash flows from investing activities:
              Purchase of building and equipment                              (998,484)         (614,355)      (217,207) (1,834,206)
              Investment in Multiplex                                                -                 -              -     (75,000)
              Acquisition of goodwill                                                -                 -              -    (149,057)
              Loan to related party                                                  -                 -              -     (50,000)
              Loan repayments                                                        -                 -              -       4,493
              Long-term deposits                                              (159,600)                -              -    (159,600)
                                                                           -------------     ------------     ----------  ----------

Net cash used in investing activities                                       (1,158,084)         (614,355)      (217,207) (2,263,370)
                                                                           -------------     ------------     ----------  ----------

Cash flows from financing activities:
              Net proceeds from sale of common stock                                 -                 -              -     744,859
              Net proceeds from loans payable                                2,001,980         2,283,335        754,920   5,040,235
              Proceeds from mortgage                                                 -                 -         17,000      17,000
              Principal payments on mortgage                                    (1,081)             (409)          (115)     (1,605)
              Accrued interest payable                                         197,414            83,579              -     280,993
              Cash acquired in acquisition of Peanut
                          Butter & Jelly, Inc.                                       -                 -              -         140
                                                                           -------------     ------------     ----------  ----------

Net cash provided by financing activities                                    2,198,313         2,366,505        771,805   6,081,622
                                                                           -------------     ------------     ----------  ----------
                                                                                                                         (continued)
</TABLE>

          See accompanying notes to consolidated financial statements.
                                      F-6
<PAGE>
                           INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)

                Consolidated Statements of Cash Flows (Audited)

              Twelve months ended December 31, 2004, 2003 and 2002
          and for the period from November 6, 1996 (Date of Inception)
                              to December 31, 2004 (continued)
<TABLE>
<CAPTION>

                                                                                         Twelve Months Ended            Nov. 6, 1996
                                                                                             December 31,                (inception)
                                                                           ---------------------------------------------  to Dec.31,
                                                                                2004              2003            2002       2004
                                                                           -------------     ------------     ----------  ----------

<S>                                                                        <C>               <C>              <C>         <C>
Net increase (decrease) in cash                                            $  (558,208)      $   580,397      $   5,516   $  27,726

Cash, beginning of period                                                      585,934             5,537             21           -
                                                                           -------------     ------------     ----------  ----------

Cash, end of period                                                        $    27,726       $   585,934      $   5,537   $  27,726
                                                                           =============     ============     ==========  ==========

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

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

              Non-cash investing and financing activities:
                          Shares issued for debt                             4,969,891                 -              -   5,564,891
                                                                           =============     ============     ==========  ==========
                          Shares issued for services                                 -                 -              -     414,606
                                                                           =============     ============     ==========  ==========
                          Shares issued for investment                               -                 -              -          30
                                                                           =============     ============     ==========  ==========
                          Shares issued for accrued interest                   268,281                 -              -     268,281
                                                                           =============     ============     ==========  ==========
                          Long term deposits financed by accounts
                           Payable                                              70,400                 -              -      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.
                                      F-7
<PAGE>


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

            Consolidated Statement of Stockholders' Equity (Audited)
                                December 31, 2004

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

Net loss                                            -             -               -        (1,133,197)   (1,133,197)
                                        -------------   -----------    ------------      ------------     ----------
Balance at December 31, 2003               72,063,896         3,600          14,142        (1,728,700)   (1,710,958)

3-for-2 split                              36,031,948             -               -                 -             -

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   $     3,949       4,204,331        (2,289,853)    1,918,427
                                        =============   ===========    ============      ============     ==========

</TABLE>
          See accompanying notes to consolidated financial statements.
                                      F-8
<PAGE>
                            INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)

                   Notes to Consolidated Financial Statements


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)      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,  Incorporated. On
May 2,  2002,  the  Company  merged the  remaining  9% of  Industrial  Minerals,
Incorporated into PNW Capital, Inc. and changed its name to Industrial Minerals,
Inc.

(b)      Nature of Operations
The Company is in the graphite  mining  industry,  and has mineral rights on the
Company's Bissett Creek Graphite property in Ontario,  Canada.  Commissioning of
the plant began in September 2004 and it is expected that  production will begin
in fiscal 2005.

(c)      Basis of Presentation - Exploration Stage Company
The  Company  has  not  earned  significant   revenues  from  limited  principal
operations.  Accordingly,  the Company's  activities  have been accounted for as
those of a "Development  Stage Enterprise" as set forth in Financial  Accounting
Standards Board (SFAS) No. 7. Among the  disclosures  required by SFAS No. 7 are
that the Company's consolidated  statements of operations,  stockholders' equity
and cash flows  disclose  activity  since the date of the  Company's  inception.
Since the  Company has not  entered  into  production,  it is  classified  as an
"Exploration Stage Company."

(d)      Basis of Accounting
The  accompanying  consolidated  financial  statements have been prepared on the
accrual basis of accounting in accordance with accounting  principles  generally
accepted in the United States of America.

(e)      Cash and Equivalents
For the  purpose  of the  consolidated  statement  of cash  flows,  the  Company
considers  all  highly  liquid  debt  instruments,  purchased  with an  original
maturity of three months or less, to be cash equivalents.

(f)      Estimates
The  preparation  of financial  statements in conformity  with general  accepted
accounting principles requires management to make estimates and assumptions that
affect certain  reported amounts and  disclosures.  Accordingly,  actual results
could differ from those estimates.

(g)      Property and Equipment
Property and equipment are recorded at cost.  Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, from 3 to 20
years.  Significant   improvements  are  capitalized,   while  expenditures  for
maintenance,  repairs and replacements are charged to expense as incurred.  Upon
disposal of depreciable property,  the appropriate property accounts are reduced
by the  related  costs and  accumulated  depreciation  and gains and  losses are
reflected in the consolidated statements of operations.

                                      F-9
<PAGE>

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

                   Notes to Consolidated Financial Statements


The Company reviews long-lived assets for impairment  whenever events or changes
in  circumstances  indicated  that the carrying  amount of the assets may not be
recoverable. In determining whether there is an impairment of long-lived assets,
the Company compares the sum of the expected future net cash flows (undiscounted
and without interest  charges) to the carrying amount of the assets. At December
31, 2004, no impairment in value has been recognized.

(h)      Net Loss Per Share
Net loss per share is based on the weighted  average number of common shares and
common share equivalents outstanding during the year.

(i)      Other Comprehensive Income
The  Company has no  material  components  of  comprehensive  income  (loss) and
accordingly, net loss is equal to comprehensive loss in all periods.

(j)      Fair Value of Financial Instruments
The  fair  value  of the  Company's  financial  instruments  approximated  their
carrying values at December 31, 2004 and 2003.

(k)      Segment Information
The Company's  operating  segments all involve the development of mineral rights
on the Company's  Bissett Creek Graphite property for future production and sale
of large crystalline flake graphite.

(l)      Income Taxes
The Company is liable for income taxes on future taxable income generated. As of
December 31, 2004, the Company has net loss carry forwards of $3,986,835,  which
will be used as an offset to future taxable income. Due to the Exploration Stage
nature of the Company,  a deferred  tax asset has not been  recorded at December
31, 2004.

(m)      Principles of Consolidation
The  consolidated  financial  statements  include  all  accounts  of  Industrial
Minerals, Inc. and its wholly owned subsidiary, Industrial Minerals Canada, Inc.
All material inter-company transactions have been eliminated.

(n) Recent Pronouncements
In April 2004, the EITF released Issue No. 03-06,  Participating  Securities and
the Two Class Method under SFAS No. 128,  Earnings per Share,  which addressed a
number of questions regarding the computation of earnings per share by companies
that have issued securities other than common stock that  contractually  entitle
the holder to participate in dividends and earnings of the company when, and if,
it  declares  dividends  on its common  stock.  It requires  that  undistributed
earnings for the period be allocated to a  participating  security  based on the
contractual  participation  rights of the security to share in those earnings as
if all the earnings for the period had been distributed in calculating  earnings
per share.  EITF Issue No. 03-06 is effective for fiscal periods beginning after
March 15,  2004.  It requires  that prior period  earnings per share  amounts be
restated to ensure  comparability year over year. The adoption of EITF Issue No.
03-06 did not have an impact on the  Company's  financial  position,  results of
operations or cash flows.

                                      F-10
<PAGE>
                           INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)

                   Notes to Consolidated Financial Statements

In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment of ARB
No. 43, Chapter 4. The standard  requires that abnormal amounts of idle capacity
and spoilage  costs should be excluded  from the cost of inventory  and expensed
when  incurred.  The provision is effective for fiscal periods  beginning  after
June 15, 2005. The Company does not expect the adoption of this standard to have
a material  effect on its  financial  position,  results of  operations  or cash
flows.

In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary  Assets, an
amendment  of APB No. 29,  Accounting  for  Nonmonetary  Transactions.  SFAS 153
requires  exchanges  of  productive  assets to be  accounted  for at fair value,
rather than at carryover  basis,  unless (1) neither the asset  received nor the
asset surrendered has a fair value that is determinable within reasonable limits
or (2) the  transactions  lack commercial  substance.  SFAS 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005.  The  Company  does not expect the  adoption  of this  standard  to have a
material effect on its financial position, results of operations or cash flows.

In December 2004, the FASB released its final revised  standard,  SFAS No. 123R,
Share-Based Payment. SFAS 123R requires that a public entity measure the cost of
equity based  service  awards based on the  grant-date  fair value of the award.
That cost  will be  recognized  over the  period  during  which an  employee  is
required to provide service in exchange for the award or the vesting period.  No
compensation  cost is recognized for equity  instruments  for which employees do
not render the requisite  service.  A public entity will  initially  measure the
cost of liability based service awards based on its current fair value; the fair
value of that award  will be  remeasured  subsequently  at each  reporting  date
through the settlement date.  Changes in fair value during the requisite service
period will be recognized  as  compensation  cost over that period.  Adoption of
SFAS 123R is required for fiscal  periods  beginning  after June 15,  2005.  The
Company is evaluating  SFAS 123R and believes it does not expect the adoption of
this standard to have a material  effect on its financial  position,  results of
operations or cash flows.


NOTE 2 -  BUILDING AND EQUIPMENT

Building and equipment are recorded at cost. A summary of building and equipment
at December 31, 2004 are as follows:

Building and improvements                  $    551,521
Equipment                                     1,483,108
                                           -------------
Total building and equipment                  2,034,629
Less accumulated depreciation                   256,167
                                           -------------
Net building and equipment                 $  1,778,462
                                           =============


                                      F-11
<PAGE>
                            INDUSTRIAL MINERALS, INC.
                                 AND SUBSIDIARY
                         (An Exploration Stage Company)

                   Notes to Consolidated Financial Statements

NOTE 3- LOANS PAYABLE
<TABLE>
<CAPTION>
Loans payable at December 31,
2004 and 2003 consists of the following:
<S>                                                              <C>                    <C>
Non-affiliated shareholder, unsecured, interest at 7%.              2004                    2003
                                                                    ----                    ----
No monthly installments are required.
Principal and accrued interest due July 2005.                    $      -               $2,967,911
The entire amount, including accrued interest, was
Repaid through the issuance of common shares on
December 30, 2004 (Note 11)

Non-affiliated shareholder,  unsecured,  interest at 7%.
No monthly installments are required.
Principal and accrued interest due July 2005.                    $ 90,796               $   90,796
                                                                 --------               ----------
Total loans payable                                              $ 90,796               $3,058,707

Less current portion                                             $(90,796)              $        -
                                                                 --------               ----------
Loans payable non-current                                        $      -               $3,058,707
                                                                 ========               ==========
</TABLE>

NOTE-4 MORTGAGE PAYABLE

Mortgage payable, seller, monthly payments of $320 with
interest at 7% beginning September  2002  through  August 2007
and a balloon  payment  for the  remaining balance due at August 2007.
Secured by real property located in Bissett Creek, Ontario, Canada.    $ 15,395

                    Less current installments                             2,763
                                                                       ---------
                    Mortgage payable, less current installments        $ 12,632
                                                                       =========

The  aggregate  maturity of the mortgage  payable for the three years  following
December 31, 2005 is as follows:

2005    $ 2,763
2006      2,955
2007      9,677
         ------
        $15,395
         ======

NOTE-5 RELATED PARTY TRANSACTION

The Company was liable to two  officers of the  Company,  for  business  related
expenses.  The balance of this accounts  payable amounted to $11,787 at December
31, 2004.

NOTE-6 COMMITMENTS

(a) Office Space

The Company is obligated under the terms of a lease for its Toronto office space
for monthly rent of $741 until April 30, 2005. After April 30, 2005, the Company
will occupy the premises on a month-to-month basis.

                                      F-12
<PAGE>

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

                   Notes to Consolidated Financial Statements

(b) Leased Mineral Claim

In  connection  with  leased  mineral  claims,  the  Company is required to make
royalty  payments to the seller of $20  (Canadian  dollars)  per ton of graphite
carbon concentrate  produced and 2.5% of net smelter return payable on any other
minerals  derived from the  property.  An advance  royalty of $27,000  (Canadian
dollars) per annum will be paid to the seller in semi-annual installments.

(c) Marketing

The Company is committed to pay to $7,500 monthly for marketing  services.  This
commitment ends on May 31, 2005.

(d) Mine Development and Closure

A Mine  Development  and Closure Plan has been 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. A financial  assurance in the amount
of $230,000 has been accounted for as a long term deposit.  The Company has paid
$159,600  to the  Minister  of Finance  for the  Province  of Ontario  leaving a
balance of $70,400  which is due and  payable  on or before May 31,  2005.  This
financial assurance  represents the amount that would be required to restore the
Company's Bissett Creek Graphite Property to it's original  environmental state.
The money pledged for this  financial  assurance will be returned to the Company
once the  Ministry  of  Northern  Development  and Mines is  satisfied  that the
obligations  contained  in the Mine  Development  and  Closure  Plan  have  been
performed  by the  Company.  Should the  Company not  perform  it's  obligations
contained  in the Mine  Development  and Closure  Plan the  Ministry of Northern
Development and Mines will restore the Company's Bissett Creek Graphite property
site  to  it's  original   environmental  state  using  the  $230,000  financial
assurance.

NOTE-7 CAPITAL STOCK

The Company issued  36,031,948 shares of common stock as the result of a 3 for 2
forward  stock split.  The forward  stock split was  effective on September  27,
2004.  Shares and per share  amounts were restated to reflect this forward stock
split.  The Company issued an additional 7 shares so that no  shareholder  would
have a fraction of a share as a result of this 3 for 2 forward split.

The  Company  issued  3,492,115  shares  of  common  stock  to a  non-affiliated
shareholder to convert $5,238,172 of debt to equity (Note 3 and 11).

                                      F-13
<PAGE>

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

                   Notes to Consolidated Financial Statements

NOTE 8- GOING CONCERN

The Company's  financial  statement has been presented on the basis that it is a
going concern.  The Company is in the  exploration  stage and has not earned any
revenues from  operations.  The Company's  current  liabilities  exceed  current
assets by $77,403  and the  Company  recorded a net loss  amounting  to $561,153
during the year ended December 31, 2004. The Company's ability to continue, as a
going  concern is dependent  upon its ability to develop  additional  sources of
capital  to  operate  it's  Bissett  Creek  Property  and  ultimately,   achieve
profitable operations.  Management plans to obtain sufficient additional debt or
equity financing to finance operations, capital improvements and other necessary
activities to ensure the business becomes profitable. The accompanying financial
statements do not include any adjustments  that might result from the outcome of
these uncertainties.

NOTE 9- TRANSLATION OF FOREIGN CURRENCIES

The assets and liabilities of subsidiaries  located outside of the United States
are  translated  in U.S.  dollars at the rates of exchange at the balance  sheet
dates. Foreign currency transaction gains or losses are reflected in the results
of operations.

NOTE 10-INCOME TAXES

The  Company  has made no  provision  for income  taxes  because the Company has
incurred operating losses in all periods and for all jurisdictions.

The FASB has issued Statement of Financial Accounting Standards Number 109 (SFAS
109)  "Accounting  for Income Taxes",  which requires a change from the deferred
method to the asset and liability  method of accounting for income taxes.  Under
the asset and liability method, deferred income taxes are recognized for the tax
consequences of "temporary  differences" by applying enacted statutory tax rates
applicable  to future  years to  differences  between  the  financial  statement
carrying amounts and the tax basis of existing liabilities.

The net deferred  income tax asset  consisted  of the  following  components  at
December 31, 2004 and 2003:

                                                          2004             2003
                                                          ----             ----
         Deferred tax asset:
           Net operating loss carryforwards         $3,986,835        3,425,682

            Valuation allowance                     (3,986,835)      (3,425,682)
                                                    -----------       ----------

           Net deferred income tax asset            $        -                -
                                                    ===========       ==========

At December  31,  2004,  the Company had net  operating  loss  carryforwards  of
approximately $3,986,835 for federal income tax purposes. These carryforwards if
not utilized to offset taxable income will begin to expire in 2018.

                                      F-14
<PAGE>

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

                   Notes to Consolidated Financial Statements


NOTE-11 EXTRAORDINARY GAIN FROM EXTINGUISHMENT OF DEBT

The Company  converted  $5,238,172 of debt consisting of $4,969,891 and $268,281
of principal and interest  respectively into 3,492,115  restricted common shares
of the Company.  This was converted at $1.50 per share and the Company's  common
shares closed on December 30, 2004 at $1.20. The difference of $.30 per share at
the date of this transaction resulted in a gain of $1,047,634.

NOTE-12 SUBSEQUENT EVENT

During the first quarter of the Company's  fiscal year ending December 31, 2005,
additional  financing in the amount of $202,500 at annual  interest  rate of 10%
has been obtained.  The principal along with accrued interest is due and payable
on December 31, 2005. A non-affiliated shareholder has advanced these funds.




























                                      F-15