Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Overview

Industrial Minerals, Inc. ("the Company"), a Delaware Corporation, was incorporated on November 6, 1996 under the name Winchester Mining Corp. The name of the Company was subsequently changed to PNW Capital, Inc. on May 16, 2000.

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

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

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

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

On January 31, 2002, PNW Capital, Inc. ("PNW" or the "Company"), entered into a definitive acquisition agreement to acquire Industrial Minerals Incorporated ("IMI"), a private Nevada Corporation, owner of certain mineral leases located in the Townships of Head, Clara and Maria in the County of Renfrew and the Province of Ontario, Canada. The Agreement for Share Exchange was executed January 31, 2002 and approved by the Board of Directors on January 31, 2002. Under the terms of the acquisition agreement, PNW exchanged a total of 31,511,700 shares of its common stock for 91% of the issued and outstanding shares of IMI. As a result of the transaction, IMI became a wholly owned subsidiary of PNW and changed its company name to Industrial Minerals, Inc.

On June 13, 2003, the directors approved a resolution to forward split the common shares of the Company on a two shares for one basis, and a majority of the shareholders consented in writing to the forward split. This resulted in the issuance of an additional 36,031,948 shares of common stock.

The Ministry of Environment of the Province of Ontario has requested a storm water management plan from the Company. The Company has retained Knight Piesold to author this plan and that this plan will be submitted to the Ministry of Environment when completed.

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

In March, 2007, a significant management change occurred when three of the existing board members resigned and two new directors were appointed. Mr. William Thomson was appointed a director and Chairman of the Board, and Mr. William Booth was appointed a director. They joined Mr. Robert Dinning C.A. who continued as CFO, secretary, and a director of the Company.

On April 3, 2007, Mr. Dick van Wyck was appointed interim President and CEO. Mr. van Wyck is a practicing lawyer with over 20 years of business and commercial law, mergers and acquisitions, and intellectual property matters, and was formerly in-house counsel with the Department of Justice, as well as with two large Corporations. Mr. van Wyck resigned July 9, 2007 and provides legal opinions from time to time when requested.

On July 9, 2007, Mr. David Wodar was appointed President and CEO. Mr. Wodar is a private business consultant and an Economics graduate from University of Western Ontario. Mr. Wodar operated his own Consulting business, Vantage Point Capital for the past 11 years, specializing in Marketing and Communications for private and public entities. Mr. Wodar resigned his position with the Company on June 12, 2008.

In June 2007, Mr. Paul Hynek was appointed to the Advisory Board. Mr.Hynek has an extensive background in large scale mining projects and was formerly with Inco. Mr. Hynek was joined on the advisory board by David Michaud, as Senior Metallurgical Advisor.

Mr. Michaud, who holds a degree in Mining Engineering, has more than 15 years of experience in mine and mill design, including operations in Canada and South America. Mr. Michaud resigned from the advisory board on February 18,2008.

The former Chairman and Director, Mr. William Thomson resigned as Chairman and a Director of the Company, effective June 20, 2008.

On June 23, 2008, Mr. Chris Crupi C.A. and Mr. Gregory Bowes, MBA joined the Board of Directors. Mr. Robert Dinning C.A. continued as a director and was reappointed CFO of the Company and also appointed President and CEO effective June 23, 2008.

On July 9, 2008, Mr. William Booth resigned as a director of the Company.

The Company signed a contract with Geostat International Inc on May 22, 2007 regarding the preparation of a technical report NI-43101 on the Bissett Creek Project. The Geostat work program included a site visit and independent certification of resources, estimation of resources and classification of resources, certification and validation of the database, verification and validation of the interpretation of ore zones, and an assessment of the mill and processing procedures, the market, the Capex, and related operating costs. The process included the drilling of an additional 6 holes for just under 300 meters in order to assist in verification of previously obtained data. The specific drill targets have been determined by Geostat following their review of the original drill target data prepared by Kilborn Engineering. These samples have been analyzed for verification and validation of the graphite ore zones. The report was finalized and on December 27, 2007.

As previously outlined, the Company has a 100% undivided interest in the mineral lease. The property consists of 28 claims covering 1,400 acres (566 hectares) plus 900 acres (364 hectares) which are contiguous to its mine property. In July, 2007, the Company completed the staking of an additional 950 acres (384 hectares), for a total area available for development of approximately 3,250 acres (1,315 hectares). The Bissett Creek mine site is located in Maria Township, about 180 miles (300 km) north-northeast of Toronto Ontario and about 8 miles (14 km) south of Highway 17 in Northern Ontario Canada.

During the nine months ending September 30, 2008, the Company continued work at the mine site, including various meetings with Knight-Piesold (environmental consulting firm) to review and update environmental monitoring requirements under the Mine Closure Plan (MCP), initial meetings with the area First Nations communities (Algonquin)including an inter-ministerial meeting to work towards a Memorandum of understanding between the Company, Government agencies, and First Nations leaders, general site cleaning, building repairs, and commencement of construction of a lab facility.

The Company is delaying its plans to install a one (1) metric ton per hour pilot plant at the mine site while it explores different options available, including financial options, regarding the production of product samples for prospective customers.

The Company has also completed a comprehensive program of metallurgical testing to identify the key liberation and classification characteristics of the ore body. This review included a general review of existing dry process at Bissett Creek and existing processes used elsewhere for the liberation and extraction of graphite. The dry process has many shortcomings which would require a complete re-engineering and rebuild at great risk to stakeholders whereas the froth flotation system is used extensively elsewhere in the world and is proven. The Company selected Process Research Ortech (Mississauga Ontario) and Actlabs (of Ancaster Ontario) as its processing and assaying entities. Both were approved by Geostat and they provided the necessary data for the completion of the NI 43101 that was been prepared by Geostat. The positive preliminary assessment was completed and filed with Sedar on December 27, 2007.

Effective August 1, 2007, the Company moved into new corporate headquarters, located at 2904 South Sheridan Way, Suite 100, Oakville Ontario, Canada, L6J 7L7. It previously occupied premises in Toronto, Ontario, on a month-to-month basis. On September 22, 2008, the Company moved its headquarters to 346 Waverley Street, Ottawa Ontario, Canada, K2P 0W5.

On October 27, 2008, the Company engaged RBC Capital Markets, a division of the Royal Bank of Canada, as financial advisor with respect to strategic options facing the company. The engagement is for a term of 12 months with success fee based compensation for completion of a transaction.

RESULTS OF OPERATIONS

For the nine month period ending September 30, 2008, the Company incurred a loss of $ 1,322,284 compared to a loss of $ $2,058,862 for the nine months ending September 30, 2007. The Company had no revenues for the nine months ending September 30, 2008. The Company continues as an Exploration Stage Company and will not have revenues until a proposed feasibility study is completed, a determination is made as to the method of production, and the Company acquires the necessary equipment to commence production.

During the nine month period ending September 30, 2008, the Company completed the following private placements:

The first private placement was completed on February 26, 2008 with one accredited investor at a price of $0.11 per share for net proceeds of $25,000. This financing resulted in the issuance of 227,273 common shares.

The second private placement was completed on March 10, 2008 with five accredited investors, at a price of $0.09 per share for net proceeds of $160,200. This financing resulted in the issuance of 1,780,000 common shares plus 1,780,000 warrants exercisable at $0.15 per share up to March 10, 2010.

At June 30, 2008, the Company completed an additional private placement of $25,000 with an accredited investor at a price of $0.06 per common share which resulted in the issuance of 416,667 restricted common shares. As well, the Company received $175,000 in subscription agreements for issuance of restricted common shares. Subsequent to Sept 30, 2008, two subscription agreements totaling $175,000 resulted in issuance of 3,125,000 restricted common shares at $0.04 per share plus a half warrant for one year at $0.08 per share to the first accredited investor and 1,250,000 restricted common shares at $0.04 per share plus a half warrant for one year at $0.08 per share to the second accredited investor.

In the quarter ending September 30, 2008, the Company completed private placements totaling $90,000 to four accredited investors. Three of the investors acquired a total of 2,000,000 restricted common shares at $0.04 per share while the fourth investor acquired 200,000 restricted common shares at $0.05 per share.

The Company relied on Section 4(2) of The Securities Act of 1933, as amended and Regulation S regarding the issuance of unregistered shares.

For the nine months ending September 30, 2008, expenses amounted to $1,338,180 compared to $2,010,448 for the nine months ending September 30, 2007. Professional fees have increased to $105,915 compared to $44,130 for the nine months ended September 30, 2007 mainly because of increased legal fees related to proposed financings, and statutory filings related to financings.

Management fees and salaries were $759,130 for the nine months ended September 30, 2008 compared to $933,883 for the nine months ending September 30, 3007. This is the result of a reduction in management fees and personnel in the current year. Fees for the current year include payment to a marketing consultant involved in identifying potential market opportunities in North America.

General exploration expenses in the nine months ending September 30, 2008 of $40,742 vs. $268,055 for the nine month period ending September 30, 2007 is a reflection of more significant work done in 2007 in preparation of a technical report, which included drilling at the site. This work was completed in December 2007 and resulted in the issuance of a NI 43-101 report. Very little exploration work has been carried out at the site this year as the Company reviews its financial requirements for further development work at Bissett Creek.

For the nine months ending September 30, 2008 stock compensation expense amounted to $125,590 compared to $286,245 in the nine month period ending September 30, 2007. Stock options were approved by the Board of Directors for directors, officers and consultants but the options have not been registered nor have they been submitted to shareholders for approval. Stock compensation expense in total amounts to $482,321 and this is being amortized over the life period of the stock options. This life period varies between 24 and 60 months.

At December 31, 2007, the Company had outstanding options in the amount of 20,450,000 shares. In 2008, an additional 2,500,000 options were issued. As of September 30, 2008, with the resignations and terminations of various people, the number of option shares still outstanding have been reduced to 6,766,665 shares of which 5,266,665 are currently vestible. When an employee/consultant/director resigns or is terminated, only shares vested at time of departure remain with the individual as an option.

General and administrative expenses for the nine months ending September 30, 2008 amount to $268,153 compared to $266,030 in the nine months ended September 30, 2007. The Company expects a significant reduction in general and administrative expenses in the future as it has reduced its general overhead overall while assessing its options for additional financing.

On September 23, 2008, the Company moved its headquarters to 346 Waverley St. Ottawa Ontario, Canada K2P 0W5 and intends to seek a sublease for its previous premises in Oakville Ontario.

The Company currently has no full time employees and it contracts with four consultants for engineering, technical and administrative support and financial services.

The Company will continue the use of outside professional consultants as it continues its mineralogical assessment and its development of a detailed mineralogy study. On November 7, 2008, the Company announced the appointment of Mr. George Hawley as Technical Advisor to the Board of Directors and to assist both the Board of Directors and RBC Dominion Capital Markets regarding their current financial advisory services mandate. Mr. Hawley has nearly 40 years of experience in the processing of industrial minerals including mica, graphite, and silica, all of which are specific to the Bissett Creek property. He has conducted projects for government agencies, mining companies in the USA, Europe, Japan, Australia, Africa and Canada and has published over 50 papers on technical and marketing topics pertaining to industrial minerals products. As it is uncertain when revenue will be generated, expenses will need to be financed by continued outside financial support. The Company has completed several private placements this year as indicated earlier and intends to seek additional equity financing and/or loans from shareholders and other interested parties in order to finance its operations. While the Company feels it can obtain the necessary financing there is no assurance that such investments, loans, or other financial assistance will be forthcoming.

For the nine months ended September 30, 2008, the Company incurred a loss of $ $1,322,284 vs. a loss of $2,058,862 for the nine months ended September 30, 2007. While the Company has been successful in arranging necessary private placement financing over the years, the Company cautions that until it has completed its feasibility study and Baseline Mineralogical Assessment, there is no assurance that a commercially viable mineral deposit exists on the property, and that further exploration may be required before a final evaluation as to any economic and legal feasibility is determined. The Company received its NI 43101 report December 27, 2007 and it was filed with regulatory authorities at that time.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2008, the Company had cash on hand in the amount of $ $4,609 compared to $104,236 at December 31, 2007. The Company has completed several private placements in the nine months ending September 30, 2008 resulting in $475,200 being raised. This includes subscription agreements outstanding at September 30, 2008 that have subsequently been converted to restricted common shares.

The Company also has a $10,000 deposit on a fuel tank located at the mine site in Bissett Creek, and a deposit of $2,414 representing the last month's rent on its facilities in Oakville, Ontario. The Company has a lease on premises located at 2904 South Sheridan Way, Suite #100, Oakville Ontario, Canada, L6J 7L7. The lease is for a period of 3 years at a monthly rate of $2,480 in Canadian dollars and expires in June 2010. At September 22, 2008, the company moved its head offices to 346 Waverley Street, Ottawa Ontario, Canada, K2P 0W5.

The Company has a long-term deposit of $230,000 with the Ministry of Finance for the Province of Ontario. During the year ending December 31, 2004 a Mine Development and Closure Plan was filed with, and accepted by, the Ministry of Northern Development and Mines, in accordance with the MINING ACT, R.S.O. 1990, Ontario Regulation 240/00, including the standards, procedures and requirements of the Mining Code of Ontario. The Company's deposit in the amount of $230,000 is a financial guarantee to the Province of Ontario ensuring that there are enough funds on hand to affect a proper closure of the Bissett Creek Graphite property.

The Company has accounts payable of $332,321 at September 30, 2008 vs. $114,986 at December 31, 2007. Accrued interest payable of $60,849 is outstanding at September 30, 2008. This pertains to accruals on loans payable of $218,415 currently due. Negotiations are continuing regarding settlement of this debt.

In September, 2002, the Company purchased a house at the entrance to the road leading into the Bissett Creek property at a cost of $24,050. Subsequent additions increased the house cost to $45,191. At the time of purchase, the Company negotiated a first mortgage in the amount of $17,000 with the vendor which required a payment of $359 (Canadian $400) monthly for five years. The mortgage matured August 29, 2007 and $11,837 was paid in October 2007 in full settlement.

The Company has current loans payable of $218,415 at September 30, 2008. Loans of $195,558 have promissory notes and consist of a loan of $90,796 with interest at 7% and a loan of $104,762 with interest at 10%. The remaining balance of $22,,857 is unsecured and is being retired in an orderly basis. The promissory notes are currently due and discussions are in process regarding settlement. The Company has non-current loans of $ 600,626 as at September 30, 2008. This includes loans from non affiliated parties in the amount of $384,626 which have no specific terms of repayment and no promissory notes. The balance of $216,000 also has no specific terms or repayment and the amount is due to two former officers of the Company who have assisted the Company in financing its current deficit and in retiring current liabilities outstanding. Discussions are proceeding with these former officers regarding an orderly settlement of this debt.

The Company intends to obtain additional financing either by way of private placements, loans, or a combination of both from shareholders and other interested parties to retire outstanding debt, and finance its operations over the next twelve months. While the Company intends to procure these private placements and/or loans, there is no assurance that the Company will be successful in its attempt to obtain said funding.

It is the Company's opinion that the intrinsic value of the Bissett Creek property deposit lies in the large 1 to 6 mm (18 mesh to 1/4") Graphite and Mica flakes. There is not presently any data available as to the specific size-by-size weight distribution of graphite and mica in the ore. Graphite flake values vary widely based on its size, but due to the fundamental lack of size and chemical data, it is not possible at this stage to assign a clear specific value to the rock.

Going Concern Consideration

As the independent certified public accountants have indicated in their report on the financial statements for the year ended December 31, 2007, and as shown in the financial statements, the Company has experienced significant operating losses that have resulted in an accumulated deficit of $9,473,396 at September 30, 2008. These conditions raise doubt about the Company's ability to continue as a going concern.

The ability of the Company to achieve its operating goals and thus positive cash flows from operations is dependent upon the future market price of graphite, future capital raising efforts, and the ability to achieve future operating efficiencies. Management's plans will require additional financing, and completion of final feasibility report. While the Company has been successful in these capital-raising endeavors in the past, there can be no assurance that its future efforts, and anticipated operating improvements will be successful. Depending on the level of exploration activity, the Company does not have adequate capital to continue its contemplated business plan through December 31, 2009, The Company is presently investigating all of the alternatives identified above to meet its short-term liquidity needs. The Company believes that it can arrange a transaction or transactions to meet its short-term liquidity needs, however there can be no assurance that any such transactions will be concluded or that if concluded they will be on terms favorable to the Company.