UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM 10-K







x
            
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2009o
            
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the transition period from
                  
      to




Commission
file number:    0-30361




INDUSTRIAL
MINERALS, INC.


(Exact
name of registrant as specified in its charter)







DELAWARE
            
            11-3763974(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)#346
      Waverley Street, Ottawa Ontario, Canada,
            
            K2P
      0W5(Address
      of principal executive offices)
            
            (Zip
      Code)





604-970-0901


Registrant's
telephone number, including area code)





Securities
registered pursuant to Section 12(b) of the Act:  None





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





Common
Stock


Title of
Class





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  o 
 No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes o  No x





Indicate
by check mark whether the issuer (1) filed all reports required to be filed
by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days.


Yes  x   No  o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  Yes o  No x





Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of "large accelerated
filer,"  "accelerated filer" and "smaller reporting company" in Rule
12b-2 of the Exchange Act.




Large
      accelerated filer   o
            Accelerated
      filer  oNon-accelerated
      filer   o
            Smaller
      reporting company  x














Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).  Yes  o    No
x




The
aggregate market value of the Common Stock held by non-affiliates as of the last
business day of the registrant's most recently completed second fiscal quarter
was (145,285,016 shares) based on the average bid and asked price as of June 30,
2009 being $.02 per share: $2,905,700.





As of
April 13, 2010 there were 163,248,416 shares of Common Stock
outstanding.





DOCUMENTS INCORPORATED BY
REFERENCE:  None.








NOTE
REGARDING FORWARD LOOKING STATEMENTS





Except
for statements of historical fact, certain information contained herein
constitutes "forward-looking statements," including without limitation
statements containing the words "believes," "anticipates," "intends," "expects"
and words of similar import, as well as all projections of future results. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results or achievements of the Company
to be materially different from any future results or achievements of the
Company expressed or implied by such forward-looking statements. Such factors
include, but are not limited to the following: the Company's lack of an
operating history, the Company's minimal level of revenues and unpredictability
of future revenues; the Company's future capital requirements to develop its
mineral property within the defined claim; the risks associated with rapidly
changing technology; the risks associated with governmental regulations and
legal uncertainties; and the other risks and uncertainties described under
"Description of Business - Risk Factors" in this Form 10-K. Certain of the
Forward-looking statements contained in this annual report are identified with
cross-references to this section and/or to specific risks identified under
"Description of Business - Risk Factors".

















TABLE OF
CONTENTS





PART
I
   ITEM
      1.
                DESCRIPTION
      OF BUSINESS
                2ITEM
      1A.
                RISK
      FACTORS
                2ITEM
      1B.
                UNRESOLVED
      STAFF COMMENTS
                2ITEM
      2.
                DESCRIPTION
      OF PROPERTIES
                2ITEM
      3.
                LEGAL
      PROCEEDINGS
                6ITEM
      4.
                (REMOVED
      AND RESERVED)
                6
  PART
II
 ITEM
      5.
                  MARKET
      FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
      ITIES
                  7ITEM
      6.
                  SELECTED
      FINANCIAL DATA
                  7ITEM
      7.
                  MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                  8ITEM
      8.
                  FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                  F-1ITEM
      9.
                  CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                  13ITEM
      9A.
                  CONTROLS AND
      PROCEDURES
                  14ITEM
      9B.
                  OTHER
      INFORMATION
                  14
 PART
III
 ITEM
      10.
                  DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16 OF THE EXCHANGE ACT
                  14ITEM
      11.
                  EXECUTIVE
      COMPENSATION
                  16ITEM
      12.
                  SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                  18ITEM
      13.
                  CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                  18ITEM 14.
                  PRINCIPAL ACCOUNTANT
      FEES AND SERVICES
                  18     ITEM 15.
                  EXHIBITS, FINANCIAL
      STATEMENT SCHEDULES
                  18
 SIGNATURES
                    19











ITEM
1 - DESCRIPTION OF BUSINESS




BACKGROUND





The
Company was incorporated on November 6, 1996 and since December 2001 has
operated under the name of Industrial Minerals, Inc. On January 31, 2002, the
Company acquired a 100% interest in the Bissett Creek graphite property
(“Bissett Creek”) pursuant to an assignment of the Bissett Lease from Westland
Capital Inc.  Bissett Creek is the sole focus of the Company’s
activities.





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 was considered filed. Industrial Minerals, Inc. through its wholly owned
subsidiary Industrial Minerals Canada, Inc. was authorized to begin production
of graphite from Bissett Creek and during production must comply with the
Bissett Creek Graphite Closure Plan as filed.  Bissett Creek did not
achieve commercial production and has been kept on care and maintenance basis
since 2004.  The Company is currently re-evaluating its development
plans.








Item
1A   RISK FACTORS





The
Company's business is subject to numerous risk factors, including the following:
While the Company intends to develop its mineral property and produce graphite
from Bissett Creek, it has no history of operations and must raise the necessary
capital. A processing building and some equipment exists on site but the Company
will need to purchase and install a substantial amount of additional equipment
in order to commence production.





The
Company has the following concerns:





1. The
Company has no record of earnings or cash flow from mining operations. It is
also subject to all the risks inherent in a developing business enterprise
including lack of cash flow, and no assurance of recovery and sale of graphite.
Furthermore, there has been minimal graphite production to date on the property
and if the Company is able to proceed to production, commercial viability will
be affected by factors that are beyond its control, including the recoverability
of graphite from the deposit, uncertainty over graphite prices, the cost of
constructing and operating a mine, the availability of economic sources for
energy, government regulations including regulations relating to prices,
royalties, as well as costs of protection of the environment. The Company has no
purchase orders for graphite to be produced by the Company.





2. The
Company's success and possible growth will depend on its ability to mine the
Bissett Creek deposit, process and recover graphite, and successfully sell it on
world markets which in turn is dependent upon the market's acceptance of the
quality and consistency of the product produced.





3. The
need for additional financing is a concern for the Company as it must raise
substantial financing to build and operate a mine at Bissett Creek. The Company
is dependent on the ability of its management team and its Board of Directors to
obtain such capital and there is no assurance that the Company will be able to
do so, or do so on terms favorable to the Company. The Company may suffer from a
lack of liquidity in the future that could impair its production efforts and
adversely affect its results from operations.





4. The
Company is wholly dependent at the present upon the personal efforts and
abilities of its Officers and Directors, who exercise control over the
day-to-day affairs of the Company.





5. There
are no dividends anticipated by the Company. At the present time, the Company
intends to focus on raising additional capital to develop Bissett
Creek.





ITEM
1B  Unresolved Staff Comments





As a
smaller reporting company, the Company is not required to include this
Item.





ITEM
2 - DESCRIPTION OF PROPERTIES





The
Company is an exploration stage company that holds exclusive rights to explore
and if feasible, develop graphite mineral claims at a site located in Maria
Township in Northern Ontario, approximately 180 miles northeast of Toronto,
Ontario. The property and the claims are referred to as "Bissett Creek" because
of their proximity to the town of Bissett Creek. The rights to the Bissett Creek
property are held through a wholly-owned subsidiary, Industrial Minerals Canada,
Inc, an Ontario corporation through which Operations are conducted.





Transportation
into and around the property is by four wheel drive vehicle. The road off of Hwy
17 is hard gravel and extends about 6 miles to the claims owned by the
Company.



















































On
January 31, 2002, the Company acquired its interest in the Bissett Property
pursuant to an assignment of the Bissett Lease from Westland Capital
Inc.





The site
is close enough to all major highways, rail and power lines to provide access to
the substantial infrastructure that will be required for a large scale open pit
mining operation, if feasible. See map below for details. The core claims are
not subject to any alienation for parks or special management zones according to
information from the Ministry of Northern Development and Mines. The area comes
under the administration of the Southern Ontario Mining District, and does not
include any rural cottage properties.





The
rights to the Bissett Creek property are based upon a Lease granted by the
Province of Ontario on September 22, 1993 to Consolidated North Coast Industries
Ltd. ("North Coast"). This is referred to as the "Bissett Creek Lease". The
Bissett Creek Lease has a twenty-one year term and an annual rental payment
payable to Ministry of Northern Development and mines in an amount prescribed by
the Mining Act. Under the terms of the Bissett Creek Lease, the tenant is
obligated to pay all taxes on the Bissett Property and remain in compliance with
the Mining Act, the Mining Tax Act, the Forest Fires Prevention Act, the Ontario
Water Resources Act and any amendments to the foregoing
legislation.





On
December 29, 1997, North Coast amalgamated with Pacific Sentinal Gold Corp, and
the surviving corporation changed its name to Great Basin Gold Ltd. ("Great
Basin"). On December 21, 2001, Great Basin assigned its rights in the Bissett
Creek Lease to Paul C. McLean, Pierre G. Lacombe and Frank P. Tagliamonte
(collectively referred to as the "McLean Group"). In connection with that
assignment, the McLean Group entered into an option agreement with Great Basin
that was subsequently terminated by a court order on May 15, 2001. The court
order granted to the McLean Group all the rights of Great Basin to the Bissett
Creek Lease.





The
McLean Group assigned the Bissett Creek Lease to Westland Capital
Inc.("Westland") in January of 2002 who in turn assigned the Bissett Creek Lease
to the Company.





As part
of the assignment to Westland Capital Inc, Westland agreed to pay to the McLean
Group, an advance royalty payment of $27,000 CDN annually in two equal
installments of $13,500 Canadian each. These payments are due March 15, and
September 15 and each carry a 30 day payment extension provision. The assignment
agreement further provides that in the event that graphite carbon concentrate is
produced from Bissett Creek, a royalty of $20.CDN per ton must be paid to the
McLean Group. Further, pursuant to the Option Agreement a 2.5% net smelter
return royalty is payable to the McLean Group in the event that any other
minerals are derived from Bissett Creek.





As a
condition of the assignment of the Bissett Creek Lease to the Company, the
Company agreed to assume all of Westland's obligations under the assignment
agreement. On August 15, 2003, the Company assigned its rights in the Bissett
Creek Lease to its wholly owned subsidiary, Industrial Minerals Canada Inc. All
payments owed to the McLean Group are current and the remaining term of the
Bissett Creek Lease is approximately 6 years.





The
Company's wholly owned subsidiary, Industrial Minerals Canada, Inc. is the
lessee of mineral interests at Bissett Creek as follows:





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 ad measurement 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, 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. These claims
are registered in the Land Titles Office in North Bay, Ontario.





On June
20, 2002, the Company acquired unpatented mining claims SO 1249711 (11 units),
SO 1249723 (3 units) and SO 1234705 (2 units) totaling approximately 625 acres
or 248 hectares, in Maria township, from Messrs. P. McLean, F. Tagliamonte and
the estate of P. Lacombe for CAD$50,000.  In the spring of 2007, the
Company also added an additional 950 acres (380 hectares) of staked claims to
the site, bringing the total developable area to approximately 3,250 acres
(1,304 hectares).





Bissett
Creek is located in Maria Township, about 300 km northeast of Toronto and 100 km
east of North Bay, Ontario. The property connects to Highway 17 (the
Trans-Canada Highway) by 16 km of good gravel road, of which 14 km is maintained
by the Province of Ontario.  This represents approximately 4-5 hours
trucking time to industrial consumers in the Toronto area, which in turn is
12-16 hours from potential graphite markets in the northern and eastern regions
of the U.S.A.





The
Geology of the property consists predominantly of Middle Precambrian age
meta-sedimentary rocks. These are divided into graphite gneiss, transitional
graphitic gneiss, and barren gneiss for mapping purposes. The graphitic gneiss
is a distinctive recessive weathering unit, commonly exposed along rock cuts,
hill tops and occasional cliff faces. It is a calcareous,
biotite-amphibole-quartzofelspathic gneiss (generally with red-brown to pale
yellow-brown weathering). Graphite, pyrite and pyrrhotite occur
throughout.  Graphite occurs in concentrations visually estimated to
be from 1 to 4%.  Sulphides occur in concentrations from 1 to 5%. In
its unweathered state, the rock unit is pale to medium grey in
color.














The
graphite gneiss has a moderate 5 to 20 degree dip to the east and the high grade
layer dips 20 to 30 degrees to the south. This unit is sandwiched between the
upper barren  noncalcareous gneiss, which forms the hanging wall of
the deposit and a sim ilar lower barren gneiss which forms the footwall. A total
thickness of 75 m of graphitic gneiss was intersected by drilling. The barren
gneiss is a pale to dark grey-green non-calcareous unit. Black biotite, dark
green amphiboles and red garnets distinguish the units from the graphite bearing
varieties.





On May
22, 2007, the Company signed a contract with Geostat International Inc.
("Geostat") to prepare a technical report on the Bissett Creek property in
compliance with the requirements of Canadian National Instrument 43-101. The
Geostat work program included a site visit, an independent estimation,
classification and certification of resources, certification and validation of
the database, verification and validation of the interpretation of ore zones, an
assessment of mining and processing procedures, and an estimation of the capital
and operating costs to build and operate a mine at Bissett Creek. The process
included the drilling of an additional six holes in order to assist in
verification of previously obtained data. The specific drill targets were
determined by Geostat following their review of the original target data
prepared by Kilborn Engineering. The program provided independent assay results
and material to carry out metallurgical testing and validation. Six vertical NQ
size diamond drill holes were drilled in the eastern part of the deposit for a
total of 246.43 meters (808.5 ft) around the location of Pit #1. The last drill
hole (DDH-07-06) was drilled in an area of the property previously named the
"pencil zone". Drilling was done by George Downing Estate Drilling Ltd from
August 1 to August 8, 2007 under supervision of Geostat personnel.





The
Property consists of a building and several pieces of equipment from a previous
attempt to establish a mining and processing operation at Bissett Creek. A
substantial amount of additional equipment and infrastructure will be required
for any future operation at Bissett Creek.





To
December 31, 2007, the Company had incurred general exploration costs at Bissett
Creek of $418,599. For the year ending December 31, 2008, the Company incurred
additional exploration expenses of $49,565, for a cumulative total of $468,164
to December 31, 2008. In the year ending December 31, 2009. the Company incurred
expenses of $3,933, for a cumulative total of $472,097 to December 31,
2009.





The
Company has engaged Stantec Consulting to review the current status of the site
and the permit and to provide a detailed scope of work, schedule and estimated
costs to complete a Closure Plan amendment, obtain needed environmental
approvals, and conduct a critical issues assessment to allow the Company to
proceed with the development of a mine a Bissett Creek.





The
Company's mailing address is 346 Waverley Street, Ottawa Ontario Canada, K2P
0W5.





ITEM
3 - LEGAL PROCEEDINGS





The
Company has been named in a lawsuit filed by Windale Properties in the amount of
$19,781Cdn. The claim is the result of termination of leased premises in
Oakville, Ontario prior to expiry of the lease. Discussions regarding settlement
are ongoing.





MGI
Securities Inc. obtained a default judgment on September 1, 2009 in the amount
of $10,000Cdn. The Company is currently in discussions with MGI regarding
settlement of this claim.





Westwynd
Retail Consultants Inc. obtained a judgment for $110,000Cdn plus accrued
interest in regard to a loan made to the Company. Subsequent to the year end,
the Company reached a settlement agreement with Westwynd regarding settlement of
this claim. The parties have executed an agreement and the Company has obtained
a full and final release as part of the settlement.





ITEM
4 – REMOVED AND RESERVED




















PART
II




ITEM
5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS





(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 he 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.








Fiscal
      Quarter Ending
            High
            LowMarch
      31, 2008
            $0.08
            $0.07June
      30, 2008
            $0.08
            $0.06September
      30, 2008
            $0.04
            $0.02December
      31, 2008
            $0.01
            $0.01March
      31, 2009
            $0.05
            $0.05June
      30, 2009
            $0.02
            $0.02September
      30, 2009
            $0.04
            $0.04December
      31, 2009
            $0.02
            $0.01





(b) As of
December 31, 2009, there were 336 shareholders of record of the registrant's
common stock.





(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.





Equity
Compensation Plan Information




Plan
      Category
              (a)  Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rigihts
              (b)  Weighted
      average exercise price of outstanding options, warrants and
      rights
              (c)  Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a)Equity
      compensation plans approved by security holders
              None
              n/a
              n/aEquity
      compensation plans not approved by security holders
              7,349,999
              $0.106
              None




Using the
Black-Scholes option pricing model, the Company had stock compensation expense
for the year of $179,221. A balance of  $44,665 remains to be expensed
over the vesting period of the options.





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





As a
smaller reporting company, the Company is not required to include this
Item.

















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




MANAGEMENT
DISCUSSION AND ANALYSIS




CONSOLIDATED
RESULTS





Twelve
month periods ending December 31, 2009, 2008





Industrial
Minerals, Inc. ("the Company"), a Delaware Corporation, was incorporated on
November 6, 1996, under the name Winchester Mining Corp, and after a series of
mergers, and name changes, became known as Industrial Minerals, Inc in
2002.





For the
fiscal year commencing January 1, 2008, the Board of Directors was comprised of
William Thomson, William Booth and Robert Dinning. Mr. Thomson, who was also
Chairman of the Company, resigned on June 20, 2008 and Mr. Booth, an independent
director resigned on July 9, 2008. The President of the Company, David Wodar,
who was appointed July 9, 2007, resigned on June 12, 2008. Following these
resignations, Mr. Chris Crupi C.A. and Mr. Gregory Bowes, MBA, were appointed
directors of the Company and Mr. Robert Dinning C.A.was appointed President and
CEO on June 23, 2008. Mr. Robert Dinning C.A. continued as a director and was
also reappointed CFO effective June 23, 2008. Mr. Dinning was originally
appointed CFO and Director September 15, 2006. Mr. Crupi was appointed Chairman
of the Audit Committee and both Mr. Crupi and Mr. Bowes are independent
directors of the Company





The
Company also moved its corporate offices to 346 Waverley Street, Ottawa Ontario,
K2P 0W5, effective June 23, 2008.





Under the
mandate of the restructured Board of Directors, the Company significantly
reduced its monthly operating expenses and focused its efforts on settling
payables, reducing debt, raising financing and developing a plan to move the
Bissett Creek project forward. .





On
October 27, 2008, the Company engaged RBC Capital Markets, a division of the
Royal Bank of Canada, as financial advisor with respect to strategic options
facing the company. The engagement was for a term of 12 months with a success
fee based compensation for completion of a transaction. Under terms of the
agreement, the Company agreed to engage RBC Dominion Securities (RBC), a member
company of RBC Capital Markets, as its exclusive financial advisor in connection
with a potential transaction involving the Company. This includes potential sale
of the Company, investment by a third party, amalgamation, arrangement, or other
business transaction involving the Company. By mutual consent, this agreement
was terminated in June 2009.





In
addition to engaging outside technical professional consultants when needed, the
Company on November 7, 2008 announced appointment of George Hawley as Technical
Advisor to the Board of Directors. Mr. Hawley has 40 years experience in the
processing of industrial minerals including mica, graphite, and silica, all of
which are specific to the Bissett Creek property. Mr. Hawley worked for various
companies in the USA, Europe, Japan, Australia, Africa and Canada and has
published over 50 technical papers on industrial mineral products pertaining to
technical and marketing topics.





On
October 28, 2009, the Company announced that it had entered into a non brokered
agreement with various lenders, including a director of the Company, to issue
approximately CDN$300,000 (US$286,560) in senior secured convertible
non-interest bearing notes (the “Notes”) to provide working capital for its
subsidiary, Industrial Minerals Canada Inc, (“IMC”) and pay the costs of
attempting to raise financing and take IMC public in Canada. The Notes were
secured by a security interest over all of the assets of IMC, including the
mineral claims and leases comprising the Project.  Subsequent to year
end the amount of the Notes was increased to CDN$600,000 and they were converted
into units of IMC as described below.





In
addition to the short-term financing stated above, the Company announced on
October 28, 2009, that IMC had entered into a letter of intent to effect a
business combination with Rattlesnake Ventures Inc.(“RVI”) to form a new company
to be called Northern Graphite Corporation (“Northern Graphite”) (the
“Transaction”). The proposed Transaction would constitute the Qualifying
Transaction of RVI, a Capital Pool Company, and if completed would result in IMC
becoming publicly listed on the TSX Venture Exchange as Northern
Graphite.





In
conjunction with the Transaction, the Company also signed an engagement letter
with Research Capital to complete, on a best efforts basis, a financing for
Northern Graphite consisting of CDN$3,000,000  (US$2,865,600) in
subscription receipts at a price of $CDN0.50  (US$0.47) per subscription
receipt and CDN$3,000,000 (US$2,865,600) in flow-through common shares at a
price of CDN$0.50  (US$0.47) per share (the “Offering”). Each subscription
receipt was, subject to the satisfaction of certain conditions, convertible into
one unit consisting of one common share and one half of one common share
purchase warrant of Northern Graphite.  This transaction was not
completed and was terminated in December 2009.  Subsequent to the year
end, the agreement with Rattlesnake Ventures Inc was also
terminated.  The Company did complete the name change of IMC to
Northern Graphite Corporation.















Subsequent
to the year end, on March 8, 2010, the Company announced that its wholly-owned
subsidiary Northern Graphite had  completed a non-brokered private
placement financing consisting of the issuance of 5,900,000 units at a price of
C$0.25 per unit, each unit being comprised of one common share and one common
share purchase warrant exercisable at a price of C$0.35 per share for a period
of 18 months from the date upon which the Company or its successor becomes a
reporting issuer in a jurisdiction of Canada. Gross proceeds were C$1.475
million. In addition, Northern Graphite had increased the capital raised through
the issuance of the Notes to C$600,000 and the Notes, pursuant to their terms,
automatically converted into units upon the closing of the financing at a
conversion price of $0.175 per unit, each unit consisting of one common share
and one common share purchase warrant exercisable at a price of C$0.245 per
share for a period of 18 months from the date upon which Northern Graphite or
its successor becomes a reporting issuer in a jurisdiction of
Canada.





As a
result of the private placement and the conversion of the Notes Northern
Graphite issued a total of 9,328,571 common shares. The Company owns 11,750,000
common shares of Northern Graphite which represents a 55.7% interest. Subject to
the receipt of all required corporate, regulatory and stock exchange approvals,
Northern Graphite plans to complete a going public transaction in Canada as soon
as possible and the Company plans to distribute its Northern Graphite shares to
its shareholders.




While the
Company was unsuccessful in raising financing through Research Capital and
taking Northern Graphite public in Canada through the RVI transaction, the
private placement and Note financings enabled it to deal with critical issues
relating to payables and corporate debts and have put Northern Graphite on a
sound footing to move Bissett Creek forward.  It is still the
Company’s objective to take Northern Graphite public.  However, the
Company recognizes it will require substantial additional capital in the future
to continue the development of Bissett Creek.  While the Company is
optimistic such capital can be obtained, there is no assurance that it will be
available or available on terms that are attractive to the Company.




RESULTS
OF OPERATIONS





During
the fiscal years' ending December 31, 2009 and 2008, the Company had no
revenues. The Company originally planned to complete the installation of a pilot
plant that would have generated about 10 tons of graphite per day that could be
distributed to prospective customers for testing. The expected cost of the pilot
plant was higher than originally contemplated and the Company deferred setting
up the pilot plant as it did not have the capital to do so. The Company is
studying alternatives to building its own pilot plant.





Total
expenses and the resulting loss for the year ended December 31, 2009 amounted to
$1,629,281 vs. $1,579,801 in 2008. Due to a lack of capital and a significant
downturn in business activity the Company decided to reduce general overhead,
including consultants hired to assist in the development of Bissett Creek. The
most significant decrease was management fees which amounted to $448,719 in 2009
vs. $827,398 in 2008. These figures include stock compensation expense of
$179,221 in 2009 vs. $176,427 in 2008.





The
Company adopted SFAS 123 "Accounting for Stock-Based Compensation", effective
April 1, 2007. Compensation costs for the Company's stock options had been
determined in accordance with the fair value based method prescribed as SFAS
123. The fair value of each option is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for options granted during the year ending December 31, 2007.
Expected volatility of 98.47% at December 31, 2009, risk-free interest rate 4%;
and an expected life of up to 4 years. The Company confirms that all stock
compensation disclosures adhere to SFAS 123(R).





General
exploration expenses in 2009 were $3,933 vs. $49,565 in 2008. Because of
financial constraints, the Company reduced its exploration activities at Bissett
Creek in 2009 pending completion of additional financing. With the completion of
additional financing subsequent to the year end, the Company expects to
undertake pre feasibility studies and additional drilling at its Bissett Creek
property in 2010.





Professional
fees in the year amounted to $96,626 vs. $100,762 in 2008. This was the result
of legal expenses in excess of $50,000 in 2008 related to preparation of filings
for matters that did not proceed.





Total
depreciation expenses for 2009 were $111,579 compared to $201,843 in 2008 as the
Company also incurred an impairment charge of $683,327 in 2009 on assets deemed
obsolete. No such charge occurred in 2008.





Total
royalty expenses were $23,644 in 2009 compared to $22,059 in 2008. The expenses
in Canadian Dollars were the same each year with currency exchange rates
accounting for the difference between 2009 and 2008. The Company is required to
pay a yearly royalty of $27,000 Canadian whether graphite is produced or not.
These payments are due semi-annually in March and September of each
year.





General
and administrative expenses totaled $242,596 in 2009 vs. $395,677 in 2008. This
includes a charge for property taxes at Bissett Creek of $98,916.





The
foreign exchange loss in 2009 of $139,298 vs.$17,504 in 2008 reflects the large
swing in exchange rates in 2009 and 2008. In 2008 the Canadian Dollar was valued
at $0.8170US whereas in 2009, the Canadian Dollar increased to $0.9552US.
Financial statement reporting is conducted in $U.S. currency while most expenses
occur in Canadian Dollars.





The
Company had a net loss from operations of $1,629,281 in 2009 vs. $1,579,801 in
2008.  The Company recognizes that it must continue to acquire
additional financing in order to properly develop the Bissett Creek property and
to sell the resulting graphite on the world market. There is no assurance that
the Company or its management will be successful in its attempts to acquire such
financing.













Liquidity
and Capital Resources





The
Company had cash on hand at December 31, 2009 of $271,168 vs. $307 vs. at
December 31, 2008. The receivable on the Balance Sheet represents a refund of
GST tax due from the Government of Canada.





The
Company has no deposits at December 31, 2009 vs. $12,510 at December 31, 2008.
This includes a deposit on equipment in the amount of $10,000 in 2008 which was
returned in 2009.





The
Company has a long-term deposit with the Ministry of Finance for the Province of
Ontario. During the year ending December 31, 2004 a Mine Development and Closure
Plan was filed with, and accepted by, the Ministry of Northern Development and
Mines, in accordance with the MINING ACT, R.S.O. 1990 Ontario Regulation 240/00,
including the standards, procedures and requirements of the Mining Code of
Ontario. The Company's deposit in 2004 amounted to $288,363Cdn. Since that time
the deposit has accrued interest of $23,833 bringing the total Reclamation
Deposit at December 31, 2009 to $299,277. This is a financial guarantee to the
Province of Ontario ensuring that there are enough funds on hand to affect a
proper closure of the Bissett Creek property.





During
the year ending December 31, 2009, the Company had no fixed asset additions but
did sell some equipment and incur an impairment charge on obsolete equipment of
$683,327.





Various
equipment items originally costing $757,994, which had a current net book value
of $437,401, were written off based on management’s assessment that the
equipment was of no further use. Additional office equipment with a net book
value of $15,927 was also disposed of increasing the impairment write-off for
the year to $453,327. In addition the Company wrote off the asset retirement
obligation of $230,000, thus increasing the impairment charge for the year to
$683,327. In 2008, the Company agreed to sell some equipment to Montana Mining
LLC of Nassau Bahamas for a total consideration of $105,000Cdn ($99,3405US),
subject to receipt of all funds prior to completion of the sale. This
transaction completed in December 2009.





The
Company has total current liabilities in the amount of $2,024,604 at December
31, 2009 vs. $833,319 at December 31, 2008. This is comprised of:





Liability
            
            2009
            
            
            2008Accounts
      payable
            
            $
            405,049
            
            
            $
            270,150Accrued
      interest
            
            
            102,183
            
            
            
            65,317Loans
      payable  – current
            
            
            820,457
            
            
            
            416,274Due
      to related parties
            
            
            252,746
            
            
            
            28,472Notes
      payable
            
            
            300,888
            
            
            
            0Funds
      received in advance
            
            
            143,280
            
            
            
            0Customer
      Deposit
            
            
            0
            
            
            
            53,105$
            2,024,604
            
            
            $
            833,318








Included
in current loans payable is a debt of $90,796 plus accrued interest payable to
First Plain Inc. The debt was repayable on July 15, 2009. On February 15, 2010
First Plain Inc. agreed to a settlement consisting of CAD $95,000 to be paid in
cash, and 160,000 units of Northern Graphite as per the private placement as
settlement for accrued interest.





Also
included in loans payable is an amount owing to C.Birge in the amount of
$161,000 repayable on December 31, 2009 with interest accruing at 10 per cent
per annum. On February 15, 2010, Mr. Birge agreed to settle this loan in one
year on receipt of $150,000 with no interest payable on this extension. In
addition, Mr. Birge will receive a payment of CAD $35,000 on other loans due to
him plus 140,000 units of Northern Graphite as per the private placement
terms.





Current
loans payable also includes a loan payable to Westwynd Retail Consultants Inc.
of $105,072,US ($110,000Cdn) plus accrued interest at 10%. This note is
currently due and Westwynd had obtained both a judgment against the Company and
a Sheriff’s writ.  A full settlement was reached in February 2010
consisting of the payment of CDN$125,000 ($119,400US) plus the issuance of
100,000 units in Northern Graphite as per the private placement
terms.





The
remaining current loans are due to two shareholders and former officers and/or
directors of the Company and amount to $77,925 US. Agreement has been reached
subsequent to the year end regarding the settlement of one loan for $22,925US,
but there is no agreement to date on the remaining balance.





The
Company also has loans of $385,665 outstanding at December 31, 2009 vs. $334,714
at December 31, 2008. This is the same loan in both years and is in Canadian
funds, thus resulting in the foreign exchange fluctuation. This loan has been
settled subsequent to the year end and has been settled for stock.





There are
no terms of repayment at the present time regarding amounts due to related
parties.





The
Company intends to continue to seek debt or equity financing from
non-affiliates, officers, directors and shareholders.





On March
8, 2010, Northern Graphite completed a non brokered private placement of
5,900,000 units at $0.25 per unit for total proceeds of $1,475,000Cdn
($1,408,920US). This along with the sale of Convertible Secured Notes for
$600,000Cdn ($573,120US) brought the total of funds raised to $2,075,000Cdn
($1,982,040US).





All risks
and uncertainties inherent in any start-up company exist with respect to the
Company.





The
Company had long term loans payable amounting to $385,665 at December 31, 2009.
These loans were settled subsequent to the year end through the issuance of
1,091,600 restricted common shares












In 2009
the Company’s wholly owned subsidiary Industrial Minerals Canada, Inc., now
Northern Graphite, completing a non-brokered financing with various lenders,
including a director of the Company, for CDN$300,000 through the issuance of
senior secured convertible non-interest bearing notes (the “Notes”) A first mortgage and
security interest over all assets of Northern, including and specifically the
mineral claims and leases known as the Bissett Creek property was granted to
2221862 Ontario Inc., a newly-incorporated company incorporated and controlled
by Gregory Bowes, a Director of the Company and CEO of Northern, to hold the
security on behalf of the Note holders as well as to hold the proceeds from sale
of the Notes in trust, and to distribute such proceeds to the Company as
required to cover the costs that were to be incurred in connection with a
proposed transaction with RVI and the Research Capital financing and to pay
existing and future expenses which were critical and necessary to keep Northern
Graphite functional and solvent and protect its assets.  Northern
Graphite was specifically prohibited from using any of the proceeds to make any
payments to Directors or Officers or to repay existing loans.  In the
event that Northern Graphite raised not less than $1,000,000 in financing the
Notes automatically convert into units of Northern Graphite consisting of one
common share and one common share purchase warrant having terms substantially
similar to units issued in the financing except that the price of the units
would be at a 30% discount to the financing and the exercise price of the
warrants would also be at a 30% discount to the exercise price of the warrants
issued under the financing and holders of the Notes would be entitled to one
full warrant.





If
Northern Graphite raised less than $1,000,000 the Notes were convertible into
units of the Company at the option of the holder at any time after the date
which is six months from the date of closing of the issuance of the Notes, at a
conversion price of $0.02 per share and each such share would have attached one
common share purchase warrant entitling the holder to purchase one common share
of the Company at a price of $0.03 per share for a period of 24
months.





The Notes
would, unless previously converted, become fully due and payable on the date
which is 24 months from issuance and unless previously converted, became fully
due and payable in the event that there was any material adverse change in the
business or affairs of the Company or Northern Graphite including the initiation
of bankruptcy or insolvency proceedings, as determined by 2221862 Ontario Inc.
in its sole discretion.





Subsequent
to the end of 2009 the principal amount of the Notes was increased to
CAD$600,000 to provide additional working capital and the Notes were converted
to shares of Northern Graphite pursuant to their terms and the completion of a
private placement described elsewhere herein.





During
2008, the Company completed private placements as described below:





On
February 26, 2008, the Company completed a private placement to one accredited
investor for 227,273 restricted common shares at $0.11 per share for a total of
$25,000. There were no warrants attached to this investment.





On March
10, 2008, the Company completed a private placement with five accredited
investors for 1,780,000 units at $0.09 per unit for $160,200. Each unit
consisted of one share of common stock and one common stock purchase warrant
entitling the investor to acquire an additional share of common stock at $0.15
per share on or before March 10, 2010. The warrants were not exercised and have
expired.





On May
15, 2008, the Company completed a private placement to one accredited investor
for 416,667 restricted common shares at $0.06 per share for
$25,000.  There were no warrants attached to this
financing.





On June
30, 2008, the Company completed a private placement with six accredited
investors for 6,575,000 units at $0.04 per unit for $265,000. Each unit
consisted of one share of common stock and one-half of one common stock purchase
warrant entitling the investor to acquire an additional share of common stock
for each two common share purchase warrants held at $0.08 per share. These
warrants expired without being exercised.





On
November 7, 2008, the Company completed a private placement with one accredited
investor for 250,000 units at $0.04 per unit for $10,000. Each unit consisted of
one share of common stock and one-half of one common stock purchase warrant
entitling the investor to acquire an additional share of common stock for each
two common share purchase warrants held at $0.08 per share. These warrants
expired without being exercised.















CRITICAL
ACCOUNTING ESTIMATES





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 Company 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 Company'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 statements have been presented on the basis that it is a
going concern. The Company is in the exploration stage and has not earned
significant revenues from operations. The Company's current liabilities exceed
current assets by $1,745,433 and the Company recorded a net loss amounting to
$1,629,281 during the year ended December 31, 2009. The Company's ability to
continue as a going concern is dependent upon its ability to continue to
identify additional sources of capital to pay its payables and debts, meet
administrative expenses and advance its Bissett Creek Property and ultimately,
achieve profitable operations. Management has obtained additional financing
subsequent to the year end which will allow it to settle with existing creditors
and lenders and advance the Bissett Creek project.





If the
Company cannot 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.
The accompanying financial statements do not include any adjustments that might
result if the going concern assumption is not valid.





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 as well as
industry and market conditions and the Company’s future development plans. 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.





During
the year, the Company evaluated its fixed assets at the mine site and determined
that it would take an impairment charge of $683,327 regarding assets deemed
obsolete or non-functional.












ITEM
8- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
 To the Board of Directors and
Stockholders ofIndustrial
Minerals, Inc. (An Exploration Stage Corporation):
 We have
audited the accompanying consolidated balance sheet of Industrial Minerals,
Inc.("the Company") as at December 31, 2009 and the related consolidated
statement of operations, stockholders' equity and cash flows for the year then
ended. The consolidated financial statements for the period from November 6,
1996 (inception) through December 31, 2008 were audited by other auditors. Our
opinion, insofar as it relates to amounts included from inception through
December 31, 2008 is based solely on the reports of other auditors. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Industrial Minerals, Inc as of December
31, 2008, were audited by other auditors whose report dated March 31, 2009,
expressed an unqualified opinion on those 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 an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 for our
opinion.
 
 In our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 2009 and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles 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 1, the Company has not
generated revenues since its inception, has incurred annual losses, and further
losses are anticipated. The Company requires additional funds to meet its
obligations and ongoing operations. Management's plans in this regard are
described in Note 1. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
   Meyers Norris Penny LLP, Chartered
Accountants
 
 Vancouver,
BC, Canada
 April 14,
2010
        CHARTERED
      ACCOUNTANTS & BUSINESS ADVISORS
                2300 – 1055 DUNSMUIR STREET  VANCOUVER, BC  V7X
      1J1
                PH.
      (604)
      685-8408  FAX (604)
      685-8594   www.mnp.ca





INDUSTRIAL
      MINERALS, INC.And
      Subsidiary(An
      Exploration Stage Company)CONSOLIDATED
      BALANCE SHEETSDecember
      31, 2009 and December 31, 2008December
      31
                  
                  
                  December
      31ASSETS
                  
                  2009
                  
                  
                  2008CURRENT
      ASSETSCash
                  
                  $
                  271,168
                  
                  
                  $
                  307Receivables
                  
                  
                  8,003
                  
                  
                  
                  15,420Deposits
                  
                  
                  -
                  
                  
                  
                  12,026Total
      Current Assets
                  
                  
                  279,171
                  
                  
                  
                  27,753RECLAMATION
      DEPOSIT
                  
                  
                  299,277
                  
                  
                  
                  230,000FIXED
      ASSETSBuilding
      and Equipment
                  
                  
                  1,243,511
                  
                  
                  
                  2,388,876Asset
      retirement obligations
                  
                  
                  -
                  
                  
                  
                  230,000Less
      accumulated depreciation
                  
                  
                  (746,750
                  )
                  
                  
                  (1,097,209
                  )496,761
                  
                  
                  
                  1,291,667TOTAL
      ASSETS
                  
                  $
                  1,075,209
                  
                  
                  $
                  1,549,420LIABILITIES
      & STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                  
                  $
                  405,049
                  
                  
                  $
                  270,150Accrued
      interest payable
                  
                  
                  102,183
                  
                  
                  
                  65,317Loans
      payable - current
                  
                  
                  820,457
                  
                  
                  
                  416,274Due
      to related party
                  
                  
                  252,746
                  
                  
                  
                  28,472Notes
      payable
                  
                  
                  300,888
                  
                  
                  
                  -Funds
      received in advance
                  
                  
                  143,280
                  
                  
                  
                  -Other
      current liabilities
                  
                  
                  -
                  
                  
                  
                  53,105Total
      Current Liabilities
                  
                  
                  2,024,604
                  
                  
                  
                  833,319OTHER
      LIABILITIESAsset
      retirement obligations
                  
                  
                  299,277
                  
                  
                  
                  230,000Loans
      payable - Due beyond one year
                  
                  
                  -
                  
                  
                  
                  334,714299,277
                  
                  
                  
                  564,714STOCKHOLDERS'
      EQUITYCommon
      stock, 200,000,000 shares authorized, $0.0001par
      value; 163,248,416 and 137,644,476 sharesissued
      and outstanding, respectively
                  
                  
                  16,322
                  
                  
                  
                  16,072Additional
      paid-in capital
                  
                  
                  10,201,185
                  
                  
                  
                  9,972,214Accumulated
      other comprehensive income
                  
                  
                  (105,985
                  )
                  
                  
                  (105,985
                  )Deficit
      accumulated during exploration stage
                  
                  
                  (11,360,194
                  )
                  
                  
                  (9,730,913
                  )TOTAL
      STOCKHOLDERS' EQUITY
                  
                  
                  (1,248,672
                  )
                  
                  
                  151,388TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                  
                  $
                  1,075,209
                  
                  
                  $
                  1,549,420
 
 See
accompanying notes to consolidated financial statements
    
 
 INDUSTRIAL
MINERALS, INC.
 AND
SUBSIDIARY
 (An
Exploration Stage Company)
 CONSOLIDATED
STATEMENTS OF OPERATIONS
  Year
      Ended
                  
                  
                  Year
      EndedDecember
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008REVENUEIncome
      earned during exploration stage
                  
                  $
                  -
                  
                  
                  
                  -EXPENSESCost
      of revenues
                  
                  
                  -
                  
                  
                  
                  -Professional
      fees
                  
                  
                  96,626
                  
                  
                  
                  100,762Royalty
      fees
                  
                  
                  23,644
                  
                  
                  
                  22,059Depreciation
      and amortization
                  
                  
                  111,579
                  
                  
                  
                  201,843Impairment
      of long-lived assets
                  
                  
                  683,327
                  
                  
                  
                  -Loss
      on disposal of assets
                  
                  
                  -
                  
                  
                  
                  -Management
      fees and salaries
                  
                  
                  448,719
                  
                  
                  
                  827,398General
      exploration expense
                  
                  
                  3,933
                  
                  
                  
                  49,565Other
      general and administrative
                  
                  
                  242,597
                  
                  
                  
                  395,677TOTAL
      EXPENSES
                  
                  
                  1,610,425
                  
                  
                  
                  1,597,305LOSS
      FROM OPERATIONS
                  
                  
                  (1,610,425
                  )
                  
                  
                  (1,597,305
                  )OTHER
      INCOME (EXPENSE)Interest
      income
                  
                  
                  -
                  
                  
                  
                  -Gain
      from extinguishment of debt
                  
                  
                  -
                  
                  
                  
                  -Foreign
      currency loss
                  
                  
                  (139,298
                  )
                  
                  
                  (17,504
                  )Gain
      on sale of asset
                  
                  
                  99,340
                  
                  
                  
                  -Gain
      on debt settlement
                  
                  
                  21,102
                  
                  
                  
                  -TOTAL
      OTHER INCOME
                  
                  
                  (18,856
                  )
                  
                  
                  (17,504
                  )LOSS
      FROM OPERATIONS
                  
                  
                  (1,629,281
                  )
                  
                  
                  (1,579,801
                  )INCOME
      TAXESNET
      LOSS
                  
                  $
                  (1,629,281
                  )
                  
                  
                  (1,579,801
                  )NET
      LOSS PER SHARE, BASIC AND DILUTED
                  
                  $
                  (0.01
                  )
                  
                  
                  (0.01
                  )WEIGHTED
      AVERAGE NUMBER OFCOMMON
      STOCK SHARES OUTSTANDING, BASIC AND DILUTED:
                  
                  
                  162,742,617
                  
                  
                  
                  139,275,920
   See
accompanying notes to consolidated financial statements
   
 INDUSTRIAL
MINERALS, INC. AND SUBSIDIARY
 (An
Exploration Stage Company)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
  Year
                        
                        
                        YearEnded
                        
                        
                        EndedDecember
      31, 2009
                        
                        December
      31, 2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net loss
                        
                        $
                        (1,629,281
                        )
                        
                        $
                        (1,579,801
                        )Adjustments to reconcile net lossto net cash used by operating activities:Depreciation
                        
                        
                        111,579
                        
                        
                        
                        201,843Provision for bad debts
                        
                        
                        -
                        
                        
                        
                        -Stock issued for services
                        
                        
                        50,000
                        
                        
                        
                        446,700Impairment of long-lived assets
                        
                        
                        683,327
                        
                        
                        
                        -Stock based compensation
                        
                        
                        179,221
                        
                        
                        
                        176,427Loss on disposal of assets
                        
                        
                        -
                        
                        
                        
                        -Gain on settlement of debt
                        
                        
                        (21,102
                        )
                        
                        
                        -Gain on sale of assets
                        
                        
                        (99,340
                        )
                        
                        
                        -Changes in:Receivables
                        
                        
                        7,417
                        
                        
                        
                        3,100Inventory
                        
                        
                        -
                        
                        
                        
                        -Prepaid expenses
                        
                        
                        -
                        
                        
                        
                        -Deposits
                        
                        
                        12,026
                        
                        
                        
                        484Accounts payable and accrued expenses
                        
                        
                        156,001
                        
                        
                        
                        127,565Accrued interest payable
                        
                        
                        36,867
                        
                        
                        
                        13,228Due to related parties
                        
                        
                        -
                        
                        
                        
                        4,520Net cash used in operating activities
                        
                        
                        (513,285
                        )
                        
                        
                        (605,934
                        )Cash flows from investing activities:Purchase of building and equipment
                        
                        
                        
                        
                        
                        
                        -Advance received for sale of Equipment
                        
                        
                        46,235
                        
                        
                        
                        53,105Investment inMultiplex
                        
                        
                        -
                        
                        
                        
                        -Acquisition of goodwill
                        
                        
                        -
                        
                        
                        
                        -Loan to related party
                        
                        
                        -
                        
                        
                        
                        -Long-term deposits
                        
                        
                        -
                        
                        
                        
                        -Net cash used in investing activites
                        
                        
                        46,235
                        
                        
                        
                        53,105CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of notes
                        
                        
                        444,168
                        
                        
                        
                        -Due to related party
                        
                        
                        224,274
                        
                        
                        
                        -Current loans
                        
                        
                        69,469
                        
                        
                        
                        -Net proceeds from sale of common stock
                        
                        
                        -
                        
                        
                        
                        485,200Net proceeds from loans payable
                        
                        
                        
                        
                        
                        
                        -Loan repayments
                        
                        
                        
                        
                        
                        
                        (18,796
                        )Proceeds from mortgage
                        
                        
                        -
                        
                        
                        
                        -Principal payments on mortgage
                        
                        
                        -
                        
                        
                        
                        -Stock issued in settlement of debt
                        
                        
                        -Cash acquired in acquisition of Peanut Butter &Jelly,
      Inc.
                        
                        
                        -
                        
                        
                        
                        -Net
      cash provided by financing activities
                        
                        
                        737,911
                        
                        
                        
                        466,404Effect
      of exchange rate on Changes in Cash
                        
                        
                        
                        (17,504
                        )NET
      INCREASE (DECREASE) IN CASH
                        
                        
                        270,861
                        
                        
                        
                        (103,929
                        )Cash,
      beginning of period
                        
                        
                        307
                        
                        
                        
                        104,236Cash,
      end of period
                        
                        $
                        271,168
                        
                        
                        $
                        307SUPPLEMENTAL
      CASH FLOW DISCLOSURES:Interest paid
                        
                        $
                        -
                        
                        
                        $
                        -Income taxes paid
                        
                        $
                        -
                        
                        
                        $
                        -Non-cash investing and financing activities:Shares issued for related party debt
                        
                        
                        
                        
                        
                        
                        61,200Shares issued for debt
                        
                        
                        50,000
                        
                        
                        
                        65,000Shares issued for services
                        
                        
                        -
                        
                        
                        
                        -Shares issued for investment
                        
                        
                        -
                        
                        
                        
                        -Shares issued for accrued interest
                        
                        
                        -
                        
                        
                        
                        -Long term deposits financed by accounts payable
                        
                        
                        -
                        
                        
                        
                        -Property
      costs financed by issuance of common stock
                        
                        
                        -
                        
                        
                        
                        -Equipment financed by:Accounts payable
                        
                        
                        
                        
                        
                        
                        -Issuance of common stock
                        
                        
                        
                        
                        
                        
                        --
  See
accompanying notes to consolidated financial statements
  INDUSTRIAL
MINERALS, INC. AND SUBSIDIARY
 (An
Exploration Company)
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
 December 31,
2009
  Common
      Stock
                  
                  
                  Additional
                  
                  
                  AccumulatedDeficit
      During
                  
                  
                  AccumulatedOther
                  
                  Common
      Stock
                  
                  TotalStockholders'Number
                  
                  
                  Number
                  
                  
                  
                  
                  
                  Paid-in
                  
                  
                  Exploration
                  
                  
                  Comprehensive
                  
                  Subscriptions
                  
                  Equityof
      Shares
                  
                  
                  of
      Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Stage
                  
                  
                  Income
                  
                  Received
                  
                  (Deficit)Inception
      - November 6, 1996 - See Note A below
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  $
                  -Balance
      at December 31, 1998
                  
                  
                  252,500
                  
                  
                  
                  757,500
                  
                  
                  
                  76
                  
                  
                  
                  505,092
                  
                  
                  
                  (750,830
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (245,662
                  )Issuance
      of common stock for cash
                  
                  
                  30,000
                  
                  
                  
                  90,000
                  
                  
                  
                  9
                  
                  
                  
                  146,612
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  146,621Issuance
      of common stock for services
                  
                  
                  55,000
                  
                  
                  
                  165,000
                  
                  
                  
                  17
                  
                  
                  
                  274,983
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  275,000Net
      Loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (259,404
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (259,404
                  )Balance
      at December 31, 1999
                  
                  
                  337,500
                  
                  
                  
                  1,012,500
                  
                  
                  
                  102
                  
                  
                  
                  926,687
                  
                  
                  
                  (1,010,234
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (83,445
                  )Issuance
      of common stock for cash
                  
                  
                  84,900
                  
                  
                  
                  254,700
                  
                  
                  
                  25
                  
                  
                  
                  413,045
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  413,070Issuance
      of common stock for services
                  
                  
                  70,000
                  
                  
                  
                  210,000
                  
                  
                  
                  21
                  
                  
                  
                  349,979
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  350,000Issuance
      of common stock for Multiplex stock
                  
                  
                  3,000
                  
                  
                  
                  9,000
                  
                  
                  
                  1
                  
                  
                  
                  29
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  30Issuance
      of common stock for acquisition
                  
                  
                  475,463
                  
                  
                  
                  1,426,389
                  
                  
                  
                  143
                  
                  
                  
                  4,603
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  4,746Net
      Loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (694,758
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (694,758
                  )Balance
      at December 31, 2000
                  
                  
                  970,863
                  
                  
                  
                  2,912,589
                  
                  
                  
                  292
                  
                  
                  
                  1,694,343
                  
                  
                  
                  (1,704,992
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (10,357
                  )Issuance
      of common stock for compensation
                  
                  
                  30,000
                  
                  
                  
                  90,000
                  
                  
                  
                  9
                  
                  
                  
                  59,991
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  60,000Net
      Loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (67,251
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (67,251
                  )Balance
      at December 31, 2001
                  
                  
                  1,000,863
                  
                  
                  
                  3,002,589
                  
                  
                  
                  301
                  
                  
                  
                  1,754,334
                  
                  
                  
                  (1,772,243
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (17,608
                  )Issuance
      of common stock re acquisition of
                  
                  
                  35,000,000
                  
                  
                  
                  105,000,000
                  
                  
                  
                  10,500
                  
                  
                  
                  (1,747,393
                  )
                  
                  
                  1,696,982
                  
                  
                  
                  -
                  
                  
                  
                  
                  (39,911
                  )Industrial
      Minerals IncorporatedMinimum
      50 shares post-split allocation
                  
                  
                  30,758
                  
                  
                  
                  92,274
                  
                  
                  
                  6
                  
                  
                  
                  (6
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  -Net
      Loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (520,242
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (520,242
                  )Balance
      at December 31, 2002
                  
                  
                  36,031,621
                  
                  
                  
                  108,094,863
                  
                  
                  
                  10,807
                  
                  
                  
                  6,935
                  
                  
                  
                  (595,503
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (577,761
                  )Minimum
      50 shares post-split allocation
                  
                  
                  327
                  
                  
                  
                  981
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  -Net
      Loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,133,197
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (1,133,197
                  )Balance
      at December 31, 2003
                  
                  
                  72,063,896
                  
                  
                  
                  108,095,844
                  
                  
                  
                  10,807
                  
                  
                  
                  6,935
                  
                  
                  
                  (1,728,700
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (1,710,958
                  )Allocation
      on round-up of shares
                  
                  
                  7
                  
                  
                  
                  7
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  -Issuance
      of common stock in settlement of debt
                  
                  
                  3,492,115
                  
                  
                  
                  3,492,115
                  
                  
                  
                  349
                  
                  
                  
                  4,190,189
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  4,190,538Net
      Loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (561,153
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (561,153
                  )Balance
      at December 31, 2004
                  
                  
                  111,587,966
                  
                  
                  
                  111,587,966
                  
                  
                  
                  11,156
                  
                  
                  
                  4,197,124
                  
                  
                  
                  (2,289,853
                  )
                  
                  
                  -
                  
                  
                  
                  
                  1,918,427Net
      Loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,844,219
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (1,844,219
                  )Balance
      at December 31, 2005
                  
                  
                  111,587,966
                  
                  
                  
                  111,587,966
                  
                  
                  
                  11,156
                  
                  
                  
                  4,197,124
                  
                  
                  
                  (4,134,072
                  )
                  
                  
                  -
                  
                  
                  
                  
                  74,208Issuance
      of common stock for cash
                  
                  
                  200,000
                  
                  
                  
                  200,000
                  
                  
                  
                  20
                  
                  
                  
                  69,640
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  69,660Issuance
      of common stock in settlement of debt
                  
                  
                  6,255,810
                  
                  
                  
                  6,255,810
                  
                  
                  
                  625
                  
                  
                  
                  1,876,118
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  1,876,743Net
      Loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,255,584
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (1,255,584
                  )Balance
      at December 31, 2006
                  
                  
                  118,043,776
                  
                  
                  
                  118,043,776
                  
                  
                  
                  11,801
                  
                  
                  
                  6,142,882
                  
                  
                  
                  (5,389,656
                  )
                  
                  
                  -
                  
                  
                  
                  
                  765,027Issuance
      of common stock for cash
                  
                  
                  13,193,699
                  
                  
                  
                  13,193,699
                  
                  
                  
                  1,319
                  
                  
                  
                  1,569,486
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  1,570,805Issuance
      of common stock for services
                  
                  
                  6,407,001
                  
                  
                  
                  6,407,001
                  
                  
                  
                  641
                  
                  
                  
                  641,976
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  642,617Stock
      compensation expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  446,853
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  446,853Foreign
      Currency Translation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (105,985
                  )
                  
                  
                  
                  (105,985
                  )Net
      Loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,761,455
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (2,761,455
                  )Balance
      at December 31, 2007
                  
                  
                  137,644,476
                  
                  
                  
                  137,644,476
                  
                  
                  
                  13,761
                  
                  
                  
                  8,801,197
                  
                  
                  
                  (8,151,111
                  )
                  
                  
                  (105,985
                  )
                  
                  
                  
                  557,862Issuance
      of common stock for cash
                  
                  
                  -
                  
                  
                  
                  9,248,940
                  
                  
                  
                  925
                  
                  
                  
                  484,275
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  (265,000)
                  
                  
                  220,200Issuance
      of common stock for services
                  
                  
                  -
                  
                  
                  
                  12,605,000
                  
                  
                  
                  1,261
                  
                  
                  
                  445,439
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  446,700Stock
      compensation expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  176,427
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  176,427Common
      stock subscriptions received
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  265,000
                  
                  
                  265,000Issuance
      of common stock for settlement of debt
                  
                  
                  -
                  
                  
                  
                  1,250,000
                  
                  
                  
                  125
                  
                  
                  
                  64,875
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  65,000Net
      Loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,579,801
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (1,579,801
                  )Balance
      at December 31, 2008
                  
                  
                  -
                  
                  
                  
                  160,748,416
                  
                  
                  
                  16,072
                  
                  
                  
                  9,972,214
                  
                  
                  
                  (9,730,913
                  )
                  
                  
                  (105,985
                  )
                  -
                  
                  
                  151,388Issuance
      of common stock for services
                  
                  
                  -
                  
                  
                  
                  2,500,000
                  
                  
                  
                  250
                  
                  
                  
                  49,750
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  -
                  
                  
                  50,000Stock
      compensation expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  179,221
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  -
                  
                  
                  179,221Net
      Loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,629,281
                  )
                  
                  
                  -
                  
                  -
                  
                  
                  (1,629,281
                  )Balance
      at December 31, 2009
                  
                  
                  -
                  
                  
                  
                  163,248,416
                  
                  
                  
                  16,322
                  
                  
                  
                  10,201,185
                  
                  
                  
                  (11,360,195
                  )
                  
                  
                  (105,985
                  )
                  -
                  
                  
                  (1,248,672
                  )
   See
accompanying notes to consolidated financial statements
   
 
 INDUSTRIAL
MINERALS, INC.
 (An
Exploration Stage Company)
 Notes to
Consolidated Financial Statements
 For the
years ended December 30, 2009 and 2008
 
 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 and Going Concern
 The
Company owns 100% of the mineral rights to the Bissett Creek graphite property
(the Bissett Creek Property”) which is located in the Province of Ontario,
Canada. The Company began commissioning a dry recovery based processing plant in
September 2004, but commercial production was never achieved and the Bissett
Creek Property has been inactive since 2005.  In 2007, Geostat
Services Inc. produced a NI 43-101 Preliminary Assessment Report which included
estimates of resources and capital and operating costs with respect to building
an open pit mine and conventional 2,500 tonne per day processing plant using a
standard flotation process.  The Company intends to complete
additional infill confirmation drilling and metallurgical testing as part of a
Pre- Feasibility Study, and to initiate the environmental and mine permitting
processes with the objective of making a construction decision in
2011.
 
 The
Company is an Exploration Stage Company that incurred a net loss of $1,367,280
for the year ended December 31, 2009 and has an accumulated deficit of
$11,098,194 since the inception of the Company. Current liabilities exceed
current assets by $883,599 and the Company’s ability to continue as a going
concern is dependent upon its ability to seek additional capital to continue the
development of the Bissett Creek Property. The Company has raised additional
capital subsequent to the year end to settle loans and payables and to advance
the Bissett Creek Property.  However, substantial addition capital is
required to ultimately build a mine and processing plant on the Bissett Creek
Property and to enable the Company to continue its operations. However, there
are inherent uncertainties in mining operations and management cannot provide
assurances that it will be successful in its endeavors.
 
 The
Company’s management believes that it will continue to be able to generate
sufficient funds from public or private debt or equity financing for the Company
to continue to operate. The accompanying financial statements do not include any
adjustments that might result from negative outcomes with respect to these
uncertainties. (c) Basis of Accounting and Consolidation
 The
Company’s 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.  The consolidated financial
statements include all accounts of the Industrial Minerals, Inc. and its wholly
owned subsidiary, Northern Graphite Corporation (“Northern Graphite”) (formerly
Industrial Minerals Canada, Inc.).
 
 (c) Cash
and Cash Equivalents
 Cash and
cash equivalents include bank balances, funds held in trust with lawyers, and
short term investments that are readily convertible into cash with original
maturities of three months or less.
    
 
 INDUSTRIAL
MINERALS, INC.
 (An
Exploration Stage Company)
 Notes to
Consolidated Financial Statements
 For the
years ended December 30, 2009 and 2008
 
 NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
  (d) Use
of Estimates
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities at the date of the
financial statements, and revenues and expenses for the period.  By
their nature, these estimates and judgments are subject to management
uncertainty and the effect on the financial statements of changes in such
estimates in future periods could be significant.  Significant
estimates and judgments include  those relating to the assessment of
the Company’s ability to continue as a going concern, estimates to determine
whether impairment of long lived assets is required, asset retirement
obligations, the fair value of stock options, depreciation rates and estimated
useful lives of buildings and equipment, and the recognition of income tax
assets and liabilities.  Actual results may differ from those
estimates and judgments.
 
 (e)
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)
Long-Lived Assets
 The
Company monitors the recoverability of long-lived assets based on factors such
as current market value, future asset utilization, business climate and future
undiscounted cash flows expected to result from the use of the related
assets.  The Company records an impairment loss in the period it is
determined that the carrying amount of the asset may not be
recoverable.  The impairment loss is calculated as the amount by which
the carrying value of the asset exceeds its fair value.
 
 (g) Basic
and Diluted Loss Per Share
 Basic
loss per share was computed by dividing the amount of the loss for the period by
the weighted average number of common shares outstanding during the period.
Diluted loss per share is calculated using the treasury stock method, whereby
the weighted average number of shares outstanding used in the calculated assumes
that the deemed proceeds received from the exercise of stock options that are
“in the money” would be used to repurchase common shares of the Company at the
average market price during the year.  Existing stock options have not
been included in the computation of diluted loss per share as they are
anti-dilutive, and therefore, basic and diluted loss per share amounts are the
same.
 
 (h)
Comprehensive Income (Loss)
 The
Company adopted ASC 220 (formerly SFAS No. 130), “Comprehensive Income”. ASC 220
establishes standards for reporting and presentation of comprehensive income
(loss) and its components in a full set of financial statements. Comprehensive
income (loss) is presented in the consolidated financial statements of
operations and foreign currency translation adjustments. ASC 220 requires only
additional disclosures in the consolidated financial statements and does
not affect the Company’s consolidated financial position or results of
operations.
     
 INDUSTRIAL
MINERALS, INC.
 (An
Exploration Stage Company)
 Notes to
Consolidated Financial Statements
 For the
years ended December 30, 2009 and 2008
  NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
 (j) Fair
Value of Financial Instruments
 On July
1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to
choose to measure many financial instruments and certain other assets and
liabilities at fair value on an instrument-by-instrument basis (fair value
option) with changes in fair value reported in earnings.  The adoption
of SFAS 159 had no impact on the financial statements as management did not
elect the fair value option for any other financial instruments or other assets
and liabilities.
 
 Fair
Value Measurements
 
 FASB ASC
820 (formerly SFAS 157) defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. ASC 820 defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. This
standard is now the single source in GAAP for the definition of fair value,
except for the fair value of leased property as defined in SFAS 13. ASC
820  establishes a fair value hierarchy that distinguishes between (1)
market  participant assumptions developed based on market data
obtained from independent sources (observable inputs) and (2) an entity’s own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). The fair value
hierarchy consists of three broad levels, which gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). The three
levels of the fair value hierarchy under ASC 820 are described
below:
 
 Level
      1
              Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or liabilities.Level
      2
              Inputs
      other than quoted prices included within Level 1 that are observable for
      the asset or liability, either directly or indirectly, including quoted
      prices for similar assets or liabilities in active markets; quoted prices
      for identical or similar assets or liabilities in markets that are not
      active; inputs other than quoted prices that are observable for the asset
      or liability (e.g., interest rates); and inputs that are derived
      principally from or corroborated by observable market data by correlation
      or other means.Level
      3
              Inputs
      that are both significant to the fair value measurement and
      unobservable.
 
   
 
 
 
 INDUSTRIAL
MINERALS, INC.
 (An
Exploration Stage Company)
 Notes to
Consolidated Financial Statements
 For the
years ended December 30, 2009 and 2008
 
 NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
 
 As
required by ASC 820, assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value
measurement.
 
 Cash and
accounts receivable (level 1), accounts payable, loans payable, notes payable,
and due to related parties (level 2) are reflected in the consolidated balance
sheets at carrying value, which approximates fair value due to the short-term
nature of these instruments.
 
 (l)
Income Taxes
 The
Company uses the asset and liability method of accounting for income taxes.
Under this method future income tax assets and liabilities are determined based
on differences between the financial statement carrying values of existing
assets and liabilities and their respective income tax bases (temporary
differences), and losses carried forward. Future income tax assets and
liabilities are measured using the enacted tax rates which will be in effect
when the temporary differences are likely to reverse. The effect on future
income tax assets and liabilities of a change in tax rates is included in
operations in the period in which the change is enacted. The amount of future
income tax assets recognized is limited to the amount of the benefit that is
more likely than not to be realized.
 
 (m)
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.
Revenue and expense items are translated at the rate of exchange in effect on
the transaction date.  Foreign currency transaction gains or losses
are reflected in the results of operations.
 
 (n) Asset
Retirement Obligations
 The fair
value of an asset retirement obligation is recorded in the period in which it is
incurred.  When the liability is initially recorded, the cost is
capitalized by increasing the carrying amount of the related long-lived
asset.  Over time, the liability is adjusted to reflect the passage of
time (accretion expense) and for changes in estimated future cash
flows.  Accretion expense is charged to the statement of operations,
while adjustments related to changes in estimated cash flows are recorded as
increases or decreases in the carrying value of the asset.  The
capitalized cost is amortized over the useful life of the related
asset.  Upon settlement of the liability, a gain or loss is recorded
if the actual costs incurred are different from the liability
recorded.
 
 (o)
Recent Pronouncements
 In May
2008, the FASB issued ASC 105 (formerly SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles). This statement identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States. Any effect
of
 applying
the provisions of this Statement shall be reported as a change in accounting
principle in accordance with ASC 250 (formerly SFAS No. 154, Accounting for Changes and Error
Corrections). This standard did not have a significant effect upon the
financial statements.
  
  
 INDUSTRIAL
MINERALS, INC.
 (An
Exploration Stage Company)
 Notes to
Consolidated Financial Statements
 For the
years ended December 30, 2009 and 2008
 NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
 
 In April
2009, the FASB issued ASC 825 (formerly FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments) a statement of position that will require
companies to provide disclosures required by ASC 825 (formerly FASB No. 107,
Disclosures about Fair Value
of Financial Instruments). The position statement is effective for
interim reporting periods ending after June 15, 2009 with early adoption
permitted for periods ending after March 15, 2009. This standard did not have a
significant effect upon the financial statements.
 
 In April
2009, the FASB issued ASC 320 (formerly FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-than-Temporary Impairments) which amends the other-than-temporary
impairment guidance in U.S. GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. This statement does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities. The
position statement is effective for interim and annual reporting periods ending
after June 15, 2009 with early adoption permitted for periods ending after March
15, 2009. Earlier adoption for periods ending before March 15, 2009 is not
permitted. This standard did not have a significant effect upon the financial
statements.
 
 In April
2009, the FASB issued ASC 820 (formerly FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That are Not Orderly). ASC 820
provides additional guidance for estimating fair value when the volume and level
of activity for the asset or liability have significantly decreased. This ASC
also includes guidance on identifying circumstances that indicate a transaction
is not orderly. ASC 820 becomes effective for interim and annual reporting
periods after June 15, 2009 and shall be applied prospectively. This standard
did not have a significant effect upon the financial statements.
 
 In May
2009, the FASB issued ASC 855 (formerly SFAS 165, Subsequent Events) which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued. In particular, the standard addresses: the period after the balance
sheet date during which management of a reporting entity shall evaluate events
or transactions that may occur for potential recognition or disclosure in the
financial statements; the circumstances under which an entity shall recognize
events or transactions occurring after the balance sheet date in its financial
statements; and the disclosures that an entity shall make about events or
NOTE
 transactions
that occurred after the balance sheet date. The statement is effective for
interim and annual reporting periods ending after June 15, 2009. This standard
did not have a significant effect upon the financial statements.
 
 In June
2009, the FASB issued an accounting standard that is intended to establish
standards of financial reporting for the transfer of assets and transferred
assets to improve the relevance, representational faithfulness, and
comparability.  The standard was established to clarify de-recognition of
assets under Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.  The standard is effective for
financial statements
issued for fiscal years and interim periods beginning after November 15,
2009.  The Company has determined that the adoption of the standard
will have no impact will have on its financial statements.
   
 INDUSTRIAL
MINERALS, INC.
 (An
Exploration Stage Company)
 Notes to
Consolidated Financial Statements
 For the
years ended December 30, 2009 and 2008
  
 In June
2009, the FASB issued ASC 105 (formerly SFAS No. 168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles,” (“Codification”)), which supersedes all existing accounting
standard documents and will become the single source of authoritative
non-governmental U.S. GAAP.  All other accounting literature not
included in the Codification will be considered
non-authoritative.  The Codification was implemented on July 1, 2009
and will be effective for interim and annual periods ending after September 15,
2009.  This standard did not have a significant effect upon the
financial statements.
 
 In August
2009, the FASB issued Accounting Standards Update ASU 2009-05, “Measuring
Liabilities at Fair Value” which clarifies, among other things, that when a
quoted price in an active market for the identical liability is not available,
an entity must measure fair value using one or more specified
techniques.  ASU 2009-05 was effective for the first reporting period,
including interim periods, beginning after issuance. The Company adopted the
update effective 2009 with no impact on its consolidated financial
statements.
 
 
 NOTE
2 – RECLAMATION DEPOSITS
 
 The
Company is required to post bonds with the Ontario Ministry of Northern
Development and Mines for reclamation of planned mineral exploration programs
work associated with the Company’s mineral properties located in Ontario (Note
7c).
 
 
 NOTE
3 - BUILDING AND EQUIPMENT
 
 Building
and equipment are recorded at cost. A summary of building and equipment as at
December 31, 2009 and 2009 are as follows:
  2009
              
              
              2008Building and
      improvements
              
              $
              591,005
              
              
              $
              591,005Equipment
              
              
              652,506
              
              
              
              1,567,871Mine closure
      deposit
              
              
              -
              
              
              
              230,000Total building and
      equipment
              
              
              1,243,511
              
              
              
              2,388,876Less accumulated
      depreciation
              
              
              746,750
              
              
              
              1,097,209Net building and
      equipment
              
              $
              496,761
              
              
              $
              1,291,667
 
 During
the year ended December 31, 2009, the Company recorded an impairment of $453,327
on the building and equipment and an additional $230,000 on the mine closure
deposit (2008 - $nil).
 
   
 
 INDUSTRIAL
MINERALS, INC.
 (An
Exploration Stage Company)
 Notes to
Consolidated Financial Statements
 For the
years ended December 30, 2009 and 2008
 NOTE
4 - LOANS PAYABLE
 
 Loans
payable at December 31, 2009 and 2008 consisted of the following:
  2009
              
              
              2008Non-affiliated
      shareholder, unsecured,interest
      at 7%. No installmentsrequired.Principal
      and accrued interest dueJuly
      2009.
              
              $
              90,796
              
              
              $
              90,796Non-affiliated
      shareholder, unsecured,interest
      at 10%. No installmentsrequired.
              
              
              288,996
              
              
              
              89,870Non-affiliated
      shareholders(2), unsecured
              
              
              55,000
              
              
              
              85,360Loans payable –
      current
              
              
              434,792
              
              
              
              255,274Principal,
      unsecured, no terms ofRepayment,
      and no interest
              
              
              385,665
              
              
              
              495,714Total notes
      payable
              
              $
              820,457
              
              
              $
              750,987Less current
      portion
              
              
              (820,457
              )
              
              
              (255,274
              )Loans payable
      non-current
              
              $
              -
              
              
              $
              495,174
  
 An
agreement was reached during the year ended December 31, 2009 whereby $385,665
of loans payable was settled for shares. As at December 31, 2009, these shares
had not yet been issued.
  NOTE
5 - CONVERTIBLE NOTES PAYABLE
 
 The
Company’s wholly owned subsidiary, Northern Graphite issued $300,888 (CAD
$315,000) of Senior Secured Convertible Promissory Notes on November 23,
2009.The Notes are non-interest bearing, become fully due and payable on the
earlier of November 23, 2011 (the “Maturity Date”) or the occurance of any
material change in the business of the Company, are automatically convertible
into units of Northern Graphite if the company raises an additional (US fig),
and after 6 months from the date of issue, are convertible at the option of the
holder into units of the Company at a conversion price of 500 units per CAD $100
Principal amount. Each unit consists of one common share and one common share
purchase warrant.
 
 Funds
received in advance consist of amounts received prior to December 31, 2009 from
Convertible Notes Payable issued in January 2010 with the same terms and
conditions.  Refer to Note 11 of these Financial
Statements.
   
 
 INDUSTRIAL
MINERALS, INC.
 (An
Exploration Stage Company)
 Notes to
Consolidated Financial Statements
 For the
years ended December 30, 2009 and
2008
 NOTE
6 - RELATED PARTY TRANSACTIONS
 
 Included
in due to related party are amounts due to two directors and an officer of the
Company for professional fees and reimbursement of expenses in the amount of
$249,880 (2008: $28,472) Additionally, the Company has a loan to one director
for $2,866.
 
 Included
in accounts payable is $25,522 owing to an officer of the Company for expense
reimbursements.
 
 At
November 23, 2009, $38,208 of the Senior Secured Convertible Promissory Notes
were issued to a director of the Company.
  NOTE
7 - COMMITMENTS
 
 (a)
Office Space
 
 As of
July 1, 2007, the Company leased premises for its head office at 2904 South
Sheridan Way, Suite 100, Oakville Ontario, L6J 7L7. The lease executed was for a
three year period. The Company moved its head office to 346 Waverley Street,
Ottawa Ontario, K2P 0W5 in September 2008 where it has no lease obligations. The
Company is in negotiations regarding termination of the lease in Oakville. The
Company also had a lease which it terminated at #304 - 201 Broad Street,
Mankato, Minnesota. This lease was originally set to expire on September 30,
2008 but the landlord and tenant agreed to terminate the lease in return for a
termination fee of $5,000 which was paid.
 
 (b)
Leased Mineral Claim
 
 In
connection with leased mineral claims on the Bissett Creek Property, the Company
is required to make royalty payments of $20 (Canadian dollars) per ton of
graphite carbon concentrate produced to the previous owners as well as a 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 is also payable in
semi-annual installments.
 
 (c) 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
$299,277 has been accounted for as a long term deposit.  The Company
has paid this amount to the Minister of Finance for the Province of Ontario.
This financial assurance represents the amount that would be required to restore
the Company's Bissett Creek Graphite Property to its 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 its 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 its original
environmental state using the $299,277 financial assurance.
  
  INDUSTRIAL
MINERALS, INC.
 (An
Exploration Stage Company)
 Notes to
Consolidated Financial Statements
 For the
years ended December 30, 2009 and
2008
 NOTE
8 - CAPITAL STOCK
 
 There
were 2,500,000 common shares of capital stock issued during 2009 in return for
services and settlement of debt. The share issuance was recorded at a trading
value of $0.02 for total consideration of $50,000. The Company has 163,248,416
shares issued and outstanding at December 31, 2009 (2008-
160,748,416).
 
 
 Note
9 - STOCK OPTION PLAN
 
 The
Company adopted ASC 718 (formerly SFAS 123) “Stock-Based Compensation”,
effective April 1, 2007. Compensation cost for the Company’s stock options have
been determined in accordance with the fair value based method prescribed as ASC
718. The fair value of option grants is estimated on the date of grant utilizing
the Black-Scholes option pricing model. The fair value of each option is
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for options granted:
Expected volatility of 86.74%, risk-free interest rate 4%; and an expected life
of up to 4 years.
 
 The
following summarized the stock options were outstanding as at December 31,
2009:
  Number
      of Options
              
              
              Weighted
      Avg exercise priceBalance, December
      31, 2008
              
              
              7,799,999
              
              
              $0.11Expired during the
      year
              
              
              450,000
              
              
              $0.20Balance, December
      31, 2009
              
              
              7,349,999
              
              
              $0.11
 
 
 As of
December 31, 2009 the range of exercise prices of the outstanding options are as
follows:
 Range of exercise
      prices
                Number of
      options
                Average remaining
      contractual life$0.07-$0.20
                7,349,999
                0.68
      years
 
 
 Using the
Black-Scholes option pricing model, the Company had stock compensation expense
for the year of $179,221. There remains a balance of $44,665 to be expensed over
the vesting period of the options.
 
 
 INDUSTRIAL
MINERALS, INC.
 (An
Exploration Stage Company)
 Notes to
Consolidated Financial Statements
 For the
years ended December 30, 2009 and
2008
 
 NOTE
10 - INCOME TAXES
 
 The
income tax expense differs from the amounts computed by applying statutory tax
to pre-tax losses as a result of the following:
   2009
              
              
              2008Net loss per
      financial statements
              
              
              1,629,281
              
              
              
              1,579,801Statutory tax
      rate
              
              
              34
              %
              
              
              34
              %Expected recovery at above rates
              
              
              553,956
              
              
              
              537,132Increase (decrease) due to:Effect of lower
      tax rate in subsidiary
              
              
              (146,635
              )
              
              
              (48,342
              )Change in valuation allowance
              
              
              (407,321
              )
              
              
              (488,790
              )
  
 The tax
effects of the significant components within the Company’s deferred tax asset
(liability) at December 31, 2009 are as follows:
 2009
                
                
                2008Deferred tax
      assetsLoss carry
      forwards
                
                
                3,093,462
                
                
                
                2,856,974Property and
      equipment
                
                
                170,832
                
                
                
                -Valuation
      allowance
                
                
                (3,264,294
                )
                
                
                (2,856,974
                )-
                
                
                
                -
 Potential
benefit of the operating losses have not been recognized in these financial
statements because the Company cannot be assured it is more likely than not it
will utilize the net operating losses carried forward in future
years.
  NOTE
11 - SUBSEQUENT EVENTS
 
 On
January 20, 2010, the Company’s wholly owned subsidiary, Northern Graphite
issued $272,232 (CAD $285,000) of Senior Secured Convertible notes with
identical terms to the notes previously described in Note 5, bringing the total
raised through the Notes to CAD $600,000. The Notes, pursuant to their terms,
automatically converted into units of Northern Graphite.
 
 
 INDUSTRIAL
MINERALS, INC.
 (An
Exploration Stage Company)
 Notes to
Consolidated Financial Statements
 For the
years ended December 30, 2009 and
2008
 
 
 Subsequent
to the year end, on March 8, 2010, the Company announced that its wholly-owned
subsidiary Northern Graphite had  completed a non-brokered private
placement financing consisting of the issuance of 5,900,000 units at a price of
C$0.25 per unit, each unit being comprised of one common share and one common
share purchase warrant exercisable at a price of C$0.35 per share for a period
of 18 months from the date upon which the Company or its successor becomes a
reporting issuer in a jurisdiction of Canada. Gross proceeds were C$1.475
million.
 
 As a
result of the private placement and the conversion of the Notes Northern
Graphite issued a total of 9,328,571 common shares. The Company owns 11,750,000
common shares of Northern Graphite which represents a 55.7%
interest.
 
 On
February 15, 2010, an agreement was reached to settle $379,792 of loans payable
plus $102,183 of accrued interest by the issuance of 400,000 units of Northern
Graphite as per the private placement terms, and $386,856 cash.
 
 Subsequent
to year end, an additional $385,665 of loans payable was settled by the issuance
of 1,091,600 restricted common shares of the Company.
 
 NOTE
12 – COMPARATIVE FIGURES
 
 Certain
of the comparative figures have been reclassified to conform to the presentation
adopted in the current year.
 
   
   
 ITEM
9- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





Effective
October 1, 2009 Rotenberg and Company LLP merged with another CPA firm, EFP
Group, to form a new firm. Rotenberg and Company, LLP resigned as the Company’s
auditors in connection with such merger. All of the partners and employees of
Rotenberg and Company LLP and EFP Group have joined the new firm, EFP Rotenberg
LLP.  EFP Rotenberg LLP succeeds Rotenberg and Company LLP as the
Registrant’s independent registered public accounting firm.





On
October 30, 2009, with the approval of the Audit Committee of the Company’s
Board of Directors, EFP Rotenberg, LLP was engaged as the Company’s independent
registered public accountant effective concurrent with the
merger.  Prior to such engagement, during the two most recent years,
the Company has not consulted with EFP Rotenberg, LLP on any
matter.





The audit
reports of Rotenberg and Company LLP for the years ended December 31, 2008 and
December 31, 2007, expressed an unqualified opinion and included an explanatory
paragraph relating to the Registrant’s ability to continue as a going concern
due to significant recurring losses and other matters.  Such audit
reports did not contain any other adverse opinion or disclaimer of opinion or
qualification.





The
Registrant and Rotenberg and Company LLP have not, during the Registrant’s two
most recent fiscal years or any subsequent period through the date of dismissal,
had any disagreement on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to Rotenberg and Company LLP’s satisfaction, would
have caused Rotenberg and Company, LLP to make reference to the subject matter
of the disagreement in connection with its reports.





The
Registrant provided Rotenberg and Company LLP with a copy of the
disclosures made in the Current Report on Form 8-K prior to
filing.  A copy of Rotenberg and Company LLP’s letter, dated November
4, 2009 was attached as Exhibit 16.1.





On March
1, 2010 the Registrant dismissed EFP Rotenberg LLP as the Registrant’s
independent registered public accounting firm.  Also on March 1, 2010,
with the approval of the Audit Committee of the Registrant’s Board of Directors,
Meyers Norris Penny LLP was engaged as the Company’s independent registered
public accountant.





EFP
Rotenberg LLP merged with the Registrant’s prior auditors, Rotenberg & Co.,
LLP which was reported on Form 8-K filed on November 11, 2009.  The
audit reports of EFP Rotenberg LLP’s predecessor, Rotenberg & Co., LLP for
the years ended December 31, 2008 and December 31, 2007, expressed an
unqualified opinion and included an explanatory paragraph relating to the
Registrant’s ability to continue as a going concern due to significant recurring
losses and other matters.  Such audit reports did not contain any
other adverse opinion or disclaimer of opinion or qualification.





The
Registrant and EFP Rotenberg LLP’s predecessor Rotenberg & Co., LLP have
not, during the Registrant’s two most recent fiscal years and the subsequent
interim periods until the change, had any disagreement on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement, if not resolved to Rotenberg & Co.,
LLP’s satisfaction, would have caused Rotenberg & Co., LLP to make reference
to the subject matter of the disagreement in connection with its
reports.   EFP Rotenberg LLP has not advised the Company of any
reportable events as defined in Item 304(a)(1)(v) of Regulation
S-K.





EFP
Rotenberg, LLP was not required or engaged to audit our internal control
over financial reporting. However, in connection with their audits of the
financial statements, in a letter dated March 31, 2009, they communicated the
following deficiencies in our internal control that they considered to be
material weaknesses, each of which has been discussed with the
Board:





(i)
inadequate staffing and supervision, and the resulting ability of management to
override our internal control systems, and





(ii) the
significant amount of manual intervention required in our accounting and
financial reporting process are material weaknesses in our internal control over
financial reporting.





The
Registrant provided EFP Rotenberg LLP with a copy of the disclosures
it made in the Current Report on Form 8-K prior to filing.  A
copy of EFP Rotenberg LLP’s letter, dated March 4, 2010 was attached as
Exhibit 16.2.





During
the years ended December 31, 2008 and 2007, and through March 1, 2010, the
Company did not consult with Meyer Norris Penny LLP regarding any of the matters
or events set forth in Item 304(a)(2)(i) and (ii) of Regulation
S-K.















ITEM
9A - CONTROLS AND PROCEDURES





Under the
supervision and with the participation of Robert G. Dinning, Chief Executive
Officer and Chief Financial Officer, an evaluation of the effectiveness of
disclosure controls and procedures as defined in Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934 was conducted as of the end of the
period covered by this report. Based on his evaluation, Mr. Dinning concluded
that the Company's disclosure controls and procedures are not effective to
ensure that information required to be included in the Company's periodic SEC
filings is recorded, processed, summarized, and reported within the time periods
specified in the SEC rules and forms.





The
internal control deficiencies noted consisted primarily of inadequate staffing
and supervision that could lead to the untimely identification and resolution of
accounting and disclosure matters and failure to perform timely and effective
reviews. However, the size of the Company prevents it from being able to employ
sufficient resources to enable it to have adequate segregation of duties within
its internal control system. Mr. Dinning oversees accounting and general
internal control processes, allowing him to override internal control systems.
The Company has a very limited staff, and does not have other management staff
with financial accounting experience for purposes of crosschecking or advising
Mr. Dinning on our accounting or financial reporting processes. Current
processes and procedures require substantive manual intervention, estimation and
reliance on several sources of information that are not integrated with
accounting system.





Accordingly,
a material weakness exists in the Company’s internal controls over financial
reporting. Other than described above, there have been no significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to December 31, 2009.





Management's
Annual Report on Internal Control over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal controls over
financial reporting. Internal control over financial reporting is a process
designed by, or under the supervision of, the CEO and implemented by the board
of directors, management and other personnel, 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.





The
evaluation of internal controls over financial reporting includes an analysis
under the COSO framework, an integrated framework for the evaluation of internal
controls issued to identify the risks and control objectives related to the
evaluation of the control environment by the Committee of Sponsoring
Organizations of the Treadway Commission.





Based on
the evaluation described above, management has concluded that the Company’s
internal control over financial reporting was not effective during the fiscal
year ended December 31, 2009. Management has determined that (i) inadequate
staffing and supervision, and the resulting ability of management to override
internal control systems, and (ii) the significant amount of manual intervention
required in the accounting and financial reporting process are material
weaknesses in the Company’s internal control over financial
reporting.





This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation requirements by its
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.




ITEM
9B - OTHER INFORMATION





Not
Applicable.








PART
III





ITEM
10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT





The
current Chief Executive Officer and Chief Financial Officer of Registrant at
April 13, 2010 is Robert G. Dinning





The
directors of the Registrant at April 15, 2010 are:




NAME
            AGERobert G.
      Dinning
            70Chris
Crupi
            40Greg
      Bowes
            55














Business
Experience





The
following is a brief account of the business experience during at least the past
five years of the 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.





Mr.
Robert G. Dinning, - Director - is President, CEO, CFO and Secretary of the
Company. Mr. Dinning is a Chartered Accountant, and a lifetime member of the
Alberta Institute of Chartered Accountants. Mr. Dinning has an extensive
background in corporate finance, having been an officer of a large public
broadcasting company, a former investment officer of a subsidiary of a large
Canadian bank, and in recent years, an officer and director of several public
companies, primarily in the resource industry and the high tech industry. For
the past five years, Mr. Dinning has acted as a self employed management
consultant to both public and private companies, primarily in the resource
industry. Mr. Dinning is currently a director of three other public
companies.





Chris
Crupi - Director - Appointed a director on June 23, 2008, Mr. Crupi is a
chartered accountant. Mr. Crupi is currently president and chief executive
officer and a director of Paramount Gold and Silver Corp, a publicly traded
company listed on the AMEX and TSX stock exchanges. From 2000 to 2004, Mr. Crupi
was a Vice President of Pricewaterhouse Coopers LLP. From 1996 to 2000 Mr. Crupi
was with Ernst and Young. From 2005 to December 2007, Mr. Crupi was also
president and chief financial officer of AMMEX Gold and Silver Corp., a
publicly


traded
exploration mining company with property interests in the United States and
Mexico. Mr. Crupi received a Bachelor of Commerce degree from the University of
Ottawa in 1992. Mr. Crupi received his Chartered Accountant designation in 1995.
Mr. Crupi was formerly a special assistant to the Honorable Don Mazankowski,
Deputy Prime Minister and Minister of Finance from 1988 to 1993.  Mr.
Crupi is 40 years old. Mr. Crupi serves as Chairman of the audit committee for
the Company.





Greg B.
Bowes - Director - Appointed a director on June 23, 2008, Mr. Bowes holds an MBA
in Finance and Accounting from Queens University (1979) and an Honours BA in
Earth Sciences (Geology) from the University of Waterloo (1977). Mr. Bowes has
been CFO and Senior VP of Orezone Gold corporation, a publicly traded mining
company with projects in West Africa.





From
February of 2006 to March of 2008, Mr. Bowes was the president and CEO of San
Anton Resource Corporation, an exploration company listed on the Toronto Stock
Exchange. From January of 2004 to March of 2007, Mr. Bowes was the vice
president and then chief financial officer of Orezone Resources Inc. which was
listed on the Toronto Stock Exchange. From 1992 to 2003, Mr. Bowes operated his
own consulting firm providing financial, investment and management services to
mining, mineral exploration and engineering clients. Mr. Bowes is 55 years
old.  In May 2009, Mr. Bowes was appointed President and CEO of the
Company’s wholly owned subsidiary, Northern Graphite.





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: Robert G. Dinning did
not timely file a Form 4 Change in Beneficial Ownership for a single
transaction. Chris Crupi and Greg Bowes did not timely file a Form 3, Initial
Statement of Beneficial Ownership.





Conflicts
of Interest





Members
of the Company's management are associated with other firms involved in a range
of business activities, particularily in the mineral exploration industry.
Consequently, there are potential 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, it may affect the amount of time they
can devote 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 actual or potential conflicts
of interest in favor of the Company.














ITEM
11- EXECUTIVE COMPENSATION





The
following table discloses all compensation received by the Company's Chief
Executive Officer and Chief Financial Officer during the fiscal years ending
December 31, 2009; 2008; and 2007. During this period no executive officer
received annual salary and bonus payments from the Company in excess of
$100,000.




SUMMARY
      COMPENSATION TABLEName
      and Principal position
              
              Year
              
              Salary($)
              
              
              Bonus
      ($)
              
              
              Stock
      Awards ($)
              
              
              Option
      Awards ($)
              
              
              Non-Equity
      Incentive Plan Compensation ($)
              
              
              Nonqualified
      Deferred Compensation Earnings ($)
              
              
              All
      Other Compensation ($)
              
              
              Total
      ($)Robert
      Dinning (CEO
      & CFO)
              
              2009
              
              78,000
              
              
              0
              
              
              10,000
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0Robert
      Dinning, CEO
              
              2008
              
              108,000
              
              
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0David
      Wodar, CEO
              
              2009
              
              50,000
              
              
              0
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0David
      Wodar, CEO
              
              2008
              
              61,212




GRANTS
OF PLAN-BASED AWARDS





The
Company did not grant any Plan Based Awards during the fiscal year ended
December 31, 2010.





The
Company adopted SFAS 123 "Accounting for Stock-Based Compensation", effective
April 1, 2007. Compensation cost for the Company's stock options had been
determined in accordance with the fair value based method prescribed as SFAS
123. The fair value of option grants is estimated on the date of grant utilizing
the Black-Scholes option pricing model. The fair value of each option is
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for options granted during
the year ending December 31, 2007.  Expected volatility of 86.74%,
risk-free interest rate 4%; and an expected life of up to 4 years.





Using the
Black-Scholes option pricing model, the Company had stock compensation expense
for the year of $179,221. There remains a balance of $44,665 to be expensed over
the vesting period of the options.





Other
than as disclosed above, no director or officer has been or was previously paid
separate annual fees, meeting fees or any other form of compensation. Fees as
outlined above to the three officers listed above are the sum total of
compensation paid during the year.








The
following committees have been formed and membership as of December 31, 2010 is
as follows:





1)
Nominating Committee - Members are Robert Dinning, Chris Crupi and Greg Bowes.
Mr. Dinning is an officer of the Comp. Mr.Crupi is an independent Director of
the Company.  Mr. Bowes is a director only of the Company but is an
officer of the wholly owned subsidiary company  and not
independent.





2) Audit
Committee - Members are Chris Crupi who acts as chairman and Greg
Bowes.  Mr.Crupi is an independent Director of the
Company.  Mr. Bowes is an officer of the wholly owned subsidiary
company.





3)
Compensation Committee - Members are Chris Crupi, Greg Bowes and Robert Dinning.
Mr.Crupi is an independent Director of the Company.  Mr. Bowes is an
officer of the wholly owned subsidiary company and Mr. Dinning is an officer of
the Company.





Compensation
Discussion and Analysis





The
following Compensation Discussion and Analysis (CD&A) provides information
on the compensation programs established for our "Named Executive Officers"
during our fiscal year ended December 31, 2009. All information provided herein
should be read in conjunction with the tables provided below.














Our Board
of Directors is responsible for establishing, implementing and monitoring the
policies governing compensation for our executives. Currently our Board does not
have a compensation committee. Our officers are members of our Board of
Directors and are able to vote on matters of compensation. We are not currently
under any legal obligation to establish a compensation committee and have
elected not to do so at this time. In the future, we may establish a
compensation committee if the Board determines it to be advisable or we are
otherwise required to do so by applicable law, rule or regulation. During the
year ended December 31, 2009 our Board did not employ any outside consultants to
assist in carrying out its responsibilities with respect to executive
compensation, although we have access to general executive compensation
information regarding both local and national industry compensation
practices.





In future
periods we may participate in regional and national surveys that benchmark
executive compensation by peer group factors such as company size, annual
revenues, market capitalization and geographical location.





The
executive employment market in general is very competitive due to the number of
companies with whom we compete to attract and retain executive and other staff
with the requisite skills and experience to carry out our strategy and to
maintain compliance with multiple Federal and State regulatory agencies. Many of
these companies have significantly greater economic resources than our own. Our
Board has recognized that our compensation packages must be able to attract and
retain highly talented individuals that are committed to our goals
and


objectives,
without at this time paying cash salaries that are competitive with some of our
peers with greater economic resources. Our compensation structure is weighted
towards equity compensation in the form of stock awards and options to acquire
common stock, which the Board believes motivates and encourages executives to
pursue strategic opportunities while managing the risks involved in our current
business stage, and aligns compensation incentives with value creation for our
shareholders.





Components
of Our Executive Compensation Program





Our
executive compensation program incorporates components we believe are necessary
in order for the Company to provide a competitive compensation package relative
to our peers and to provide an appropriate mix between short-term and long-term
cash and non-cash compensation. Elements of our executive compensation are
listed below:





Base
Salary


Stock
Awards


Other
benefits available to all employees


Items
specific to our President and Chief Executive Officer per an employment
agreement








Base
Salary: At present we do not have a salary structure for employees and
Executives, and amounts are based on skill set, knowledge and responsibilities.
Base salaries are established as necessary. During the year ended December 31,
2009 none of our Named Executive Officers received a salary
increase.





Stock
Awards: A portion of compensation paid to our executives is equity based. We
believe equity compensation helps align the interests of our executives with the
interests of our shareholders. In that regard, our executives' compensation is
subject to downside risk in the event that our common stock price
decreases.  In addition, we believe stock awards provide incentives to
aid in the retention of key executives. No stock compensation awards were
granted during the year ending December 31, 2009.





Other
Benefits: Our Executive Officers and employees receive no other
benefits.











17








ITEM
12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS





The
following table shows the share ownership of officers, directors and 5% or
greater shareholders as of April 13, 2010. There are 171,499,716 at April 13,
2010.





Name
      and Address* of Beneficial Owner
            Amount
      of Beneficial Ownership
            Percent
      of Ownership of ClassRobert
      G. Dinning, (1)
              President
      & CEO And CFO
            9,064,700
            5.29%Chris
      Crupi, Director
            2,500,000
            1.46%Gregg
      Bowes. Director
            4,500,000
            9.37%Directors
      and officers as a Group
            16,064,700
            16.12%





*346
Waverley Street, Ottawa, Ontario, Canada K2P 0W5


(1)  Total
includes options exercisable by Mr. Dinning on April 3, 2010 in the amount of
1,500,000 shares.





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





Not
Applicable.





ITEM
14.  PRINCIPAL ACCOUNTING FEES AND SERVICES





(1) Audit
Fees:    2009:  $22,873  2008:  $20,975


(2)
Audit-Related Fees:  None


(3) Tax
Fees:  None


(4) All
Other Fees:  2009:  $0    2008: 
 $3,392 for Services rendered for consent letters included with
registration statement.


(5) (i)
The audit committee has not established any pre-approval policies and procedures
for Audit Fees.






PART IV


ITEM
15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 (1) See
attached Financial Statements.
 
 (2) Not
applicable.
 
 (3) Exhibits
filed or incorporated by reference with this annual report.
 
 EXHIBIT NO.
              DESCRIPTION3.1
              Articles
      of Incorporation (1)3.2
              Bylaws
      (2)14.1
              Code
      of Ethics (3)16.1
              Rotenberg
      and Company, LLP letter dated November 4, 2009 (4)16.2
              EFP
      Rotenberg, LLP letter dated March 4, 2010 (5)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.
 
 (3)  Incorporated
by reference from the exhibits included with the Company's 8-K filed with the
Securities and Exchange Commission, January 6, 2004
 
 (4)  Incorporated
by reference from the exhibits included with the Company's 8-K filed with the
Securities and Exchange Commission, November 9, 2009.
 
 (5)  Incorporated
by reference from the exhibits included with the Company's 8-K filed with the
Securities and Exchange Commission, March 5, 2010.












SIGNATURES





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





INDUSTRIAL
      MINERALS, INC./s/
      Robert DinningDated:
      April 30, 2010
            By: 
      Robert Dinning, President and Chief Executive Officer








In
accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.





/s/
      Robert Dinning
            
            President
      and Principal Executive Officer, Director
            April
      30, 2010Robert
      Dinning/s/
      Robert Dinning
            
            Principal
      Financial Officer and Principal Accounting Officer,
    Director
            April
      30, 2010Robert
      Dinning/s/
      Chris Crupi
            
            Director
            April
      30, 2010Chris
      Crupi/s/
      Greg Bowes
            
            Director
            April
      30, 2010Greg
      Bowes