UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




AMENDMENT NO.
1


to


FORM 10-K




x
            ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the fiscal year ended December 31, 2009





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





For
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.








EXPLANATORY
NOTES




This Form
10-K for the year ended December 31, 2009 originally filed on April 30, 2010
(File No. 000-30651) has been amended to correct omissions in the original
filing. This Amendment No. 1 to the Form 10-K replaces the original
filing.





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
      IITEM
      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)
              
              6PART
      IIITEM
      5.
              MARKET
      FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
      ITIES
              
              6ITEM
      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
              
              F1-F12ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
              
              13ITEM
      9A.
              CONTROLS
      AND PROCEDURES
              
              13ITEM
      9B.
              OTHER
      INFORMATION
              
              14PART
      IIIITEM
      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
              
              17ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
              
              17ITEM
      14.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
              
              18PART
      IVITEM
      15.
              EXHIBITS, FINANCIAL
      STATEMENT SCHEDULES
              
              18SIGNATURES
              
              19


1


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 Creek 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.  Subsequent to the year end, the Company’s subsidiary,
Northern Graphite Corporation (“Northern Graphite”, formerly Industrial Minerals
Canada Inc.), raised additional financing and has initiated the environmental
and permitting process, metallurgical testing and a Pre Feasibility Study with
the objective of being in a position to make a construction decision on Bissett
Creek in 2011.  As a result of the financings and other transactions
described herein, the company now has a 51.3% interest in Northern Graphite
which owns Bissett Creek.





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 51% owned subsidiary, Northern Graphite, an Ontario
corporation through which operations are conducted.


2





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.







3











On
January 31, 2002, the Company acquired its interest in Bissett Creek pursuant to
an assignment of the Bissett Creek 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. Bissett Creek is 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 Bissett Creek 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.


4





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 subsidiary, Northern Graphite. All payments owed to the
McLean Group are current and the remaining term of the Bissett Creek Lease is
approximately 6 years.





The
Bissett Creek lease, number 364704, consists of 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.  These claims expired and
Northern Graphite subsequently restaked or acquired claims covering essentially
the same area and now holds title to claim numbers 1192304 (10 units), 1192305
(10 units), 1192306 (9 units), 1192307 (3 units), 4200145 (4 units) and 4200146
(3 units) totally approximately 624 ha.  Together with the mining
lease, the total size of the Bissett Creek property is approximately 1,188
ha.





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 similar 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 independent 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 the supervision of Geostat
personnel.





A  building
and several pieces of equipment from a previous attempt to establish a mining
and processing operation at Bissett Creek are located on the property. A
substantial amount of additional equipment and infrastructure will be required
for any future mining 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.


5





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.  Geostat, now
SGS Canada Inc., has been retained to perform additional metallurgical testing
and complete a Pre Feasibility Study with the objective of being in a position
to make a construction decision in 2011.





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 with respect to a loan made to the Company. Subsequent to the year end,
the Company reached an 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 the high and
low bid prices of the Registrant's common stock for the periods indicated. Such
prices are inter-dealer prices, without mark-up, mark-down or commissions and do
not necessarily represent actual sales.





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.


6





Equity
Compensation Plan Information




PlanCategory
                          
                          (a) Numberofsecuritiestobe
                            issueduponexerciseof
                            outstandingoptions,warrants
                            andrights
                          
                          
                          (b) Weightedaverageexercise
                            priceofoutstandingoptions,
                            warrantsandrights
                          
                          
                          (c) Numberofsecurities
                            remainingavailableforfuture
                            issuanceunderequity
                            compensationplans(excluding
                            securitiesreflectedincolumn
                            (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.


7


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




MANAGEMENT
DISCUSSION AND ANALYSIS OF 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 CA and Mr. Gregory Bowes, MBA, were appointed
directors of the Company and Mr. Robert Dinning CA was appointed President and
CEO on June 23, 2008. Mr. Robert Dinning CA 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 is an independent director.





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 (“RBC”), 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, RBC acted as exclusive financial advisor in connection with a
potential transaction involving the Company including the potential sale of the
Company, investment by a third party, and an 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 the 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 its subsidiary, Northern Graphite,
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 and pay the costs of attempting to raise financing and take
Northern Graphite public in Canada. The Notes were secured by a security
interest over all of the assets of Northern Graphite, including the mineral
claims and leases comprising Bissett Creek.  Subsequent to year end
the amount of the Notes was increased to CDN$600,000 and they were converted
into units of Northern Graphite as described below.





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





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.




Subsequent
to the year end, on March 8, 2010, the Company announced that 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.


8





On April
1, 2010 Northern Graphite announced that it has completed additional private
placements totalling 1,327,000 units for gross proceeds of
CDN$331,750.  Each unit was priced at C$0.25 and is 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 Northern
Graphite or its successor becomes a reporting issuer in a jurisdiction of
Canada.  In addition, Northern Graphite issued 400,000 units, with the
same terms, as part of debt settlement agreements with three
creditors.





As a
result of the private placement, the conversion of the Notes and the debt
settlements, Northern Graphite issued a total of 11,155,571 common shares, and
11,155,571 common share purchase warrants, and now has 22,905,571 common shares
outstanding. The Company owns 11,750,000 common shares of Northern Graphite
which represents a 51.3% interest.  If all warrants were exercised
Northern Graphite would receive an additional CDN$3,544,450 and the Company’s
interest in Northern Graphite would be 34.5%.  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 placements, Note financings and debt settlements 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 will undertake a
Pre Feasibility Study and additional drilling at Bissett Creek  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.  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.


9





The
foreign exchange loss in 2009 of $139,298 versus $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.
The financial statements are in US Dollars while most expenses are incurred 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 Bissett Creek and 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 versus $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 available to affect the
proper reclamation and closure of Bissett Creek.





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 had 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 loans payable – current is a debt of $90,796 plus accrued interest owed 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 - current is an amount of $161,000 repayable on
December 31, 2009 with interest accruing at 10 per cent per annum. On February
15, 2010, the lender agreed to settle this loan in one year on receipt of
$150,000 with no interest payable on the extension. In addition, the lender will
receive a payment of CAD $35,000 on other loans due plus 140,000 units of
Northern Graphite as per the private placement terms.





Loans
payable – current 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 of Northern Graphite as per the private placement
terms.


10





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 was 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.  Agreement
was reached on settling this loan for stock which had not yet been issued at
year end.





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 April
1, 2010 Northern Graphite announced that it had completed private placements
totalling 1,327,000 units for gross proceeds of CDN$331,750.  Each
unit was priced at C$0.25 and is 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 Northern Graphite or its successor becomes
a reporting issuer in a jurisdiction of Canada.  In addition, Northern
Graphite issued 400,000 units, with the same terms, as part of debt settlement
agreements with three creditors.





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). Each unit was priced at C$0.25 and is 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 Northern Graphite or
its successor becomes a reporting issuer in a jurisdiction of
Canada.





In 2009
the Company’s subsidiary, 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 of the 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
Graphite, 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
Northern Graphite 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 converted 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 the
private placements described elsewhere herein.  As a result of the
private placements, Note conversion and debt settlements, Northern Graphite
issued a total of 11,155,571 common shares and 11,155,571 common
shares.  The Company owns 11,750,000 common shares of the Northern
Graphite which represents a 51.3% interest on an undiluted basis.





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.


11





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 Company's auditors have expressed a
concern that the Company may not be able to continue as a going concern and
the following is contained in the notes to the financial
statements.





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
$11,360,194 since the inception of the Company. Current liabilities exceed
current assets by $1,745,433 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 Bissett Creek. The Company has raised additional capital
subsequent to the year end to settle loans and payables and to advance Bissett
Creek.  Substantial addition capital is required to ultimately build a
mine and processing plant on Bissett Creek and to enable the Company to continue
its operations. However, there is a high degree of risk and many 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.





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 only 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.


12


ITEM 8- FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of Industrial 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 AccountantsVancouver,
      BC, CanadaApril
      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
 
 F1
  INDUSTRIAL
MINERALS, INC.


And
Subsidiary


(An
Exploration Stage Company)


CONSOLIDATED
BALANCE SHEETS


December
31, 2009 and December 31, 2008





December
                            31
                          
                          
                          December
                            312009
                          
                          
                          2008ASSETSCURRENT
      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
                          
                          
                          
                          28,472Convertible
      notes 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


F2




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


F3





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
      in Multiplex
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Acquisition
      of goodwill
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Loan
      to related party
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Long-term
      deposits
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Net
      cash used in investing activities
                                                
                                                
                                                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 servicesShares
      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




F4





INDUSTRIAL
MINERALS, INC. AND SUBSIDIARY


(An
Exploration Company)


CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY


December
31, 2009




AccumulatedDeficit
                                                
                                                
                                                Accumulated
                                                
                                                
                                                Common
                                                
                                                
                                                TotalCommon
      Stock
                                                
                                                
                                                Additional
                                                
                                                
                                                During
                                                
                                                
                                                Other
                                                
                                                
                                                Stock
                                                
                                                
                                                Stockholders'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 Industrial Minerals
      Incorporated
                                                
                                                
                                                35,000,000
                                                
                                                
                                                
                                                105,000,000
                                                
                                                
                                                
                                                10,500
                                                
                                                
                                                
                                                (1,747,393
                                                )
                                                
                                                
                                                1,696,982
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (39,911
                                                )Minimum
      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




F5





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.  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 is a high
degree of risk and many 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.).





(d) 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.




(e)
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.





(f)
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.


F6




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)





(g)
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.





(h) 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 calculation
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.





(i)
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.




(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.





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.


F7




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)





(k)
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.





(l)
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.





(m) 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.





(n)
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.




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.


F8




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 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.




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 the Company’s mineral properties
located in Ontario (Note 7c).





NOTE
3 - BUILDING AND EQUIPMENT





Building
and equipment are recorded at cost.  Building and equipment as at
December 31, 2009 and 2008 were 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 charge of
$453,327 on the building and equipment and an additional $230,000 on the mine
closure deposit (2008 - $nil).





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 installments
      required.Principal
      and accrued interest due July 2009.
                
                $
                90,796
                
                
                $
                90,796Non-affiliated
      shareholder, unsecured, interest at 10%. No installments
      required.
                
                
                288,996
                
                
                
                89,870Non-affiliated
      shareholders, unsecured
                
                
                55,000
                
                
                
                85,360Loans
      payable – current
                
                
                434,792
                
                
                
                255,274Principal,
      unsecured, no terms of repayment, 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




F9





INDUSTRIAL
MINERALS, INC.


(An
Exploration Stage Company)


Notes to
Consolidated Financial Statements


For the
years ended December 30, 2009 and 2008




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.  Subsequent to year end agreements were
reached to settle $379,792 of loans payable plus $102,183 of accrued interest
(see Note 11).





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 (the “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
occurrence of any material change in the business of the Company, are
automatically convertible into units of Northern Graphite if Northern Graphite
raises an additional CDN $1,000,000, and after six 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 exercisable
at a price of $0.03 per share for 24 months.





Funds
received in advance consist of amounts received prior to December 31, 2009 with
respect to Notes issued in January 2010 with the same terms and
conditions.  (see Note 11).




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).  In additional, the Company has a loan from
a director of $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 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 in Oakville,
Ontario. The lease executed was for a three year period. The Company moved its
head office to Ottawa Ontario in September 2008 where it has no lease
obligations. The Oakville Lessor has a judgment against the Company in the
amount of $19,781Cdn and Company is in negotiations with respect to a
settlement. The Company also had a lease which it terminated in 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.





(b)
Leased Mineral Claims





In
connection with 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 estimated amount that would be
required to restore the Bissett Creek 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 Bissett Creek Property site to its original environmental state
using the $299,277 financial assurance.




F10





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.




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
                )-
                
                
                
                -




F11





INDUSTRIAL
MINERALS, INC.


(An
Exploration Stage Company)


Notes to
Consolidated Financial Statements


For the
years ended December 30, 2009 and 2008





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 Promissory Notes
with identical terms to the Notes described in Note 5, bringing the total raised
through the issuance of the Notes to CAD $600,000. The Notes, pursuant to their
terms, automatically converted into units of Northern Graphite.





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 Northern Graphite or its successor becomes
a reporting issuer in a jurisdiction of Canada. Gross proceeds were C$1.475
million.





On April
1, 2010 Northern Graphite announced that it had completed private placements
totalling 1,327,000 units for gross proceeds of CDN$331,750.  Each
unit was priced at C$0.25 and is 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 Northern Graphite or its successor becomes
a reporting issuer in a jurisdiction of Canada.





On
February 15, 2010, an agreement was reached to settle $379,792 of loans payable
plus $102,183 of accrued interest through the issuance of 400,000 units of
Northern Graphite as per the private placement terms, the payment of $236,856
cash and the issuance of a $150,000, one year, non interest bearing
note.





Subsequent
to year end, 1,091,600 restricted common shares of the Company were issued in
settlement of a $385,665 loan payable.





As a
result of the private placements, the conversion of the Notes and the debt
settlements, Northern Graphite issued a total of 11,155,571 common shares and
11,155,571 common share purchase warrants. The Company owns 11,750,000 common
shares of Northern Graphite which represents a 51.3% interest on an undiluted
basis.





NOTE
12 – COMPARATIVE FIGURES





Certain
of the comparative figures have been reclassified to conform to the presentation
adopted in the current year.


F12





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 succeeded 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 to 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 the Company’s 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 internal controls 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 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.





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.


13





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 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. Effective April 1, 2010 Northern Graphite retained the services of
Miles Nagamatsu CA, to act as its Chief Financial Officer and Tracy Albert CFA,
to act as its Controller.  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





In
2008 Messrs. Dinning, Crupi and Bowes were granted stock awards of 2,000,000
common shares each for their services as directors.  In 2009 Messrs.
Dinning, Crupi and Bowes were granted an additional stock award of 500,000
common shares each for their ongoing services as directors of the
Company.




14





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.





Gregory
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.  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, particularly 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.




15




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 TABLE


Name
      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




Robert
Dinning CEO and CFO has a management contract whereby he is paid a monthly
retainer of Cdn $4,000.  The contract is cancellable by either party
upon three months written notice.





Northern
Graphite has a management contract with Gregory Bowes, its CEO, whereby Mr.
Bowes was paid a monthly retainer of CDN $6,000 per month from May 1, 2009 to
October 1, 2009, and is currently paid a monthly retainer of CDN $12,500 per
month.  The contract is cancellable on three months
notice.  In 2009 Mr. Bowes was granted 2,000,000 shares of the Company
as a stock award.  Subsequent to year end Mr. Bowes was paid a cash
bonus of CDN $12,000 and was granted an additional stock award of 2,500,000
common shares for his success in raising financing and turning the Company
around.





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 Gregory
Bowes. Mr. Dinning is an officer of the Company. Mr.Crupi is an independent
Director of the Company.  Mr. Bowes is a director only of the Company
but is an officer of a subsidiary company and is not
independent.





2) Audit
Committee - Members are Chris Crupi who acts as chairman and Gregory
Bowes.  Mr.Crupi is an independent Director of the
Company.  Mr. Bowes is an officer of a subsidiary company and is not
independent.





3)
Compensation Committee - Members are Chris Crupi, Gregory Bowes and Robert
Dinning. Mr.Crupi is an independent Director of the Company.  Mr.
Bowes is an officer of a 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.


16




Our Board
of Directors and the Compensation Committee are responsible for establishing,
implementing and monitoring the policies governing compensation for our
executives. Our officers are members of our Board of Directors and are able to
vote on matters of compensation. During the year ended December 31, 2009 neither
the Board nor the Compensation Committee employed any outside consultants to
assist in carrying out their responsibilities with respect to executive
compensation, although they have access to general executive compensation
information regarding both local and national industry compensation
practices.  In future periods the Company 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. The
Board has recognized that compensation packages must be able to attract and
retain highly talented individuals that are committed to the Company’s goals and
objectives, without at this time paying cash salaries that are competitive with
some peers that have greater economic resources. The Company’s 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





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





Base
Salary


Stock
Awards


Stock
Options


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: Executive Officers and employees receive no other
benefits.





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 were 163,248,416 shares
outstanding as at April 13, 2010.





NameandAddress*ofBeneficialOwner
                  
                  AmountofBeneficialOwnership
                  
                  
                  PercentofOwnershipofClassRobert
      G. Dinning, (1)
                    President
      & CEO And CFO
                  
                  
                  9,064,700
                  
                  
                  
                  5.29
                  %Chris
      Crupi, Director
                  
                  
                  2,500,000
                  
                  
                  
                  1.46
                  %Gregory
      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.


17




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:  None
            2008
      $3,392 for Services rendered for consent
letters


included
with registration statement.


(5) 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.




18


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:
      May 7, 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
                May
      7, 2010Robert
      Dinning/s/ Robert Dinning
                
                Principal
      Financial Officer and Principal Accounting
                May
      7, 2010Robert
      Dinning
                
                Officer,
      Director/s/ Chris Crupi
                
                Director
                May
      7, 2010Chris
      Crupi/s/ Greg Bowes
                
                Director
                May
      7, 2010Greg
      Bowes




19