UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-KSB
Amendment No. 1

[ X ]
     
     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended May 31, 2005[    ]
     
     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to  
                                                                                       Commission File Number  0-17232


TERRA NOSTRA RESOURCES CORP.(Name of small business issuer in its charter)

NEVADA
     
     86-0875500(State or other jurisdiction of incorporation or organization)
     
     (I.R.S. Employer Identification No.)55 S. Lake Ave., Suite 700, Pasadena, CA
     
     91101(Address of principal executive offices)
     
     (Zip Code)Registrants telephone number, including area code: (626) 796-0088


Securities registered under Section 12(b) of the Exchange Act:Title of each class
     
     Name of each exchange on which registeredNone
     
     NoneSecurities registered under Section 12(g) of the Exchange Act:100,000,000 Common Shares, US$0.001 Par Value(Title of Class)


Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.[  ]Note Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d)of the Exchange Act from their obligations under those Sections.Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes [X] No[ ]Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form,and no disclosure will be contained, to the best of the registrants knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.[  ]Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes [  ] No [ X ]

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State issuer's net revenues for its most recent fiscal year:US$5,107,982

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act):

US$51,054,186 as of September 22, 2006

Note: If determining whether a person is an affiliate will involve an unreasonable effort and expense, the issuer may calculate the aggregate market value of the common equity held by non-affiliates on the basis of reasonable assumptions, if the assumptions are stated.

(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST 5 YEARS)

Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.

Yes [  ]No [  ]

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:

As of September 15, 2006, the Issuer had a total of 49,156,448 common shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-KSB (e.g. Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1990).

Transitional Small Business Disclosure Format (Check one): _______Yes         _______No

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|Note to Reader  Reason for Amendment
|-------------------------------------

On or about November 22, 2006, management of Terra Nostra Resources Corp. (the Registrant) became aware of potential errors in the classification of certain transactions
and an omission which affected the balance sheet as at May 31, 2005. Management undertook an analysis of the affected Registrants balance sheet items and has subsequently corrected the errors. The major items included the omission of an
inter-company entry and a misstatement of a credit to additional paid in capital that should have been allocated between paid in capital and minority interest. These errors caused material misstatements to additional paid in capital, retained
earnings, and minority interest. These errors did not affect the Statement of Operations.

In connection with the changes described above, the Registrant is hereby re-filing the Financial Statements along with the Report of Independent Registered Public Accounting Firm, the
Notes to Financial Statements, and Item 8A - Controls and Procedures in this Amendment No. 1 to its annual report on Form 10-KSB.

The other sections of the originally filed Form 10-KSB, such as the Management Discussion and Analysis, are not affected by the change and, therefore, were not repeated in this
filing.

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INDEX TO FINANCIAL STATEMENTSTERRA NOSTRA RESOURCES CORP.

FINANCIAL STATEMENTS

With

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

PageReport of Independent Registered Public Accounting Firm
     
     F-2Financial Statements:Consolidated Balance Sheets
     
     F-3 to F-4Consolidated Statements of Operations
     
     F-5Consolidated Statements of Cash Flows
     
     F-6Consolidated Statement of Stockholders Equity
     
     F-7Notes to Financial Statements
     
     F-8to F-24F-1


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TERRA NOSTRA RESOURCES FINANCIAL STATEMENTS

AS AT THE FISCAL YEARS ENDED MAY 31, 2006 and 2005
with

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and StockholdersTerra Nostra Resources Corporation andSubsidiariesPasadena, CA

We have audited the accompanying consolidated balance sheets of Terra Nostra Resources Corporation and Subsidiaries as of May 31, 2006 and 2005, and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for each of the two years in the period ended May 31, 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

As described more fully in Note 16, the consolidated financial statements for the years ended May 31, 2006 and 2005 have been restated.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 31, 2006 and 2005, and the results of its operations and its cash flows for each of the two years in the period ended May 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

Rotenberg & Co., LLP
Rochester, New YorkSeptember 5, 2006 (Except for Note 16 as to which the date is December 8, 2006)

F-2

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|TERRA NOSTRA RESOURCES CORP.        CONSOLIDATED BALANCE SHEETS        AS OF MAY 31, 2006 AND 2005
|--------------------------------------------------------------------------------------------------
|
|
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Current Assets                                                                                    
|Cash                                                                                              
|Cash - Restricted                                                                                 
|Notes Receivable                                                                                  
|Accounts Receivable                                                                               
|Other Receivables, Net                                                                            
|Other Receivables - Related party                                                                 
|Short Term Investment                                                                             
|Inventory                                                                                         
|Prepaid Expenses                                                                                  
|Prepaid Expenses - Related party                                                                  
|Total Current Assets                                                                              
|                                                                                                  
|Long-Term Assets                                                                                  
|Investment                                                                                        
|PP&E                                                                                              
|Less Accumulated Depreciation                                                                     
|Construction Materials                                                                            
|Construction in Progress                                                                          
|Land Use Rights                                                                                   
|Total Long-Term Assets                                                                            
|                                                                                                  
|Other Assets                                                                                      
|Deferred and Other Assets                                                                         
|Total Deferred and Other Assets                                                                   
|                                                                                                  
|Total Assets                                                                                      
|                                                                                                  
|Liabilities and Shareholders' Equity                                                              
|Current Liabilities                                                                               
|Accounts Payable                                                                                  
|Bank Loans, Short Term                                                                            
|Notes Payable, Other                                                                              
|Land Use Rights Payable                                                                           
|Construction Costs Payable                                                                        
|Tax Payable                                                                                       
|Other Liabilities                                                                                 
|Other Liabilities - Related Party                                                                 
|Total Current Liabilities                                                                         
|                                                                                                  
|Long Term Liabilities                                                                             
|Land Use Rights Payable                                                                           
|Total Long Term Liabilities                                                                       
|Minority interest                                                                                 

F-3

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|                                                             |  | 2006         |  | 2005        
|------------------------------------------------------------ |  | ------------ |  | ------------
|Shareholders' Equity                                         |  | (Restated)   |  | (Restated)  
|                                                             |  |              |  |             
|Class A Common Stock - authorized 100,000,000 shares with a  |  |              |  |             
|par value of $0.001; 49,156,448 issued and outstanding as at |  |              |  |             
|May 31, 2006; 40,146,448 shares issued and outstanding as at |  |              |  |             
|May 31, 2005                                                 |  | 49,156       |  | 40,146      
|Additional Paid in Capital                                   |  | 34,682,250   |  | 13,640,818  
|Accumulated Other Comprehensive Income                       |  | 254,677      |  | -           
|Retained Earnings                                            |  | (22,696,757) |  | (12,737,144)
|Total Shareholders' Equity                                   |  | 12,289,326   |  | 943,820     
|                                                            
|Total Liabilities and Shareholders' Equity                   |  | 169,921,482  |  | 99,225,591  
|                                                            
|                                                            
|F-4                                                          |  |              |  |             
|                                                             |  |              |  |             

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|TERRA NOSTRA RESOURCES CORP.              
|------------------------------------------
|CONSOLIDATED STATEMENTS OF OPERATIONS     
|FOR THE YEARS ENDED MAY 31, 2006 AND 2005 
|US$                                       
|Revenues                                  
|Cost of Sales                             
|                                          
|Gross Profit                              
|Expenses:                                 
|                                          
|Selling                                   
|General and Administrative - North America
|General and Administrative - PRC          
|Depreciation and Amortization             
|Total Expenses                            
|                                          
|Operating Profit / (Loss)                 
|Interest (Expense)                        
|Other Income / (Expense)                  
|Other Income                              
|Non-operating Expense                     
|Income / (Loss) Before Income Tax         
|Provision for Income Tax                  
|                                          
|Income / (Loss) Before Minority Interest  
|Minority Interest                         
|Net Income (Loss)                         
|Other Comprehensive Income:               
|Foreign Currency Translation Adjustment   
|Comprehensive Income (Loss)               
|(Loss) Per Share - weighted average       
|(Loss) Per Share - fully diluted          
|Weighted Average Number of Shares         
|Fully Diluted Number of Shares            

F-5

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|TERRA NOSTRA RESOURCES CORP.      CONSOLIDATED STATEMENTS OF CASH FLOWS      FOR THE YEARS ENDED MAY 31, 2006 AND 2005
|----------------------------------------------------------------------------------------------------------------------
|
|
|                                                                                                                      
|US$                                                                                                                   
|Net Income (Loss)                                                                                                     
|Adj. to Reconcile Net Income to Net Cash from Operating Activities:                                                   
|Depreciation                                                                                                          
|Amortization                                                                                                          
|Imputed Interest                                                                                                      
|Minority Interest                                                                                                     
|Management Options and Investor Warrants                                                                              
|Changes in Assets and Liabilities:                                                                                    
|Accounts Receivable                                                                                                   
|Other Receivables                                                                                                     
|Other Receivables - Related Party                                                                                     
|Notes Receivable                                                                                                      
|Inventory                                                                                                             
|Prepaid Expenses                                                                                                      
|Prepaid Expenses - Related Party                                                                                      
|Accounts Payable                                                                                                      
|Tax Payable                                                                                                           
|Other Liabilities                                                                                                     
|Other Liabilities - Related Party                                                                                     
|Net Cash Flows from Operating Activities                                                                              
|Cash Flows from Investing Activities:                                                                                 
|Acquisition of Property, Plant and Equipment                                                                          
|Construction Materials                                                                                                
|Construction in Progress                                                                                              
|Construction Costs Payable                                                                                            
|Short Term Investment                                                                                                 
|Land Use Right Payable                                                                                                
|Investment in Intangible Assets                                                                                       
|Deferred Assets                                                                                                       
|Investment                                                                                                            
|Net Cash Flows from Investing Activities                                                                              
|Cash Flows from Financing Activities:                                                                                 
|Proceeds from Borrowings                                                                                              
|Cash Pledged to Bank                                                                                                  
|Notes Payable                                                                                                         
|Addition of Minority Interest                                                                                         
|Capital Contributions                                                                                                 
|Net Cash Flows from Financing Activities                                                                              
|Net Increase (Decrease) in Cash                                                                                       
|Effect of Exchange Rates on Foreign Currency Transactions                                                             
|Cash - Beginning of Period                                                                                            
|Cash - End of Period                                                                                                  
|Supplemental Cash Flow Disclosures:                                                                                   
|Interest Paid                                                                                                         
|Income Tax Paid                                                                                                       

F-6

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|                                                 |  | TERRA NOSTRA RESOURCES CORP.                    |  |               |  |                          |  |                                        
|------------------------------------------------ |  | ----------------------------------------------- |  | ------------- |  | ------------------------ |  | ---------------------------------------
|                                                 |  | CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY |  |               |  |                         
|                                                 |  | FOR THE YEARS ENDED MAY 31, 2006 AND 2005       |  |               |  |                          |  |                                        
|                                                
|                                                
|                                                 |  |                                                 |  |               |  |                          |  | AccumulatedOther  Comprehensive  Income
|                                                 |  |                                                 |  |               |  | AdditionalPaid inCapital |  |                                        
|                                                 |  | CommonStock
Shares                              |  | Common Stocks |  |                          |  |                                        
|                                                 |  |                                                 |  |               |  | (Deficit)                |  |                                        
|                                                 |  |                                                 |  |               |  |                          |  |                                        
|Balance at May 31, 2004                          |  | 30,758,727                                      |  | 30,759        |  | 9,618,574                |  | -                                      
|                                                 |  |                                                 |  |               |  |                          |  |                                        
|Issuance of common stock for private placement   |  | 9,387,721                                       |  | 9,387         |  | 2,467,379                |  |                                        
|Net Income (Loss)                                |  |                                                 |  |               |  |                          |  |                                        
|Imputed Interest - SQSS                          |  |                                                 |  |               |  | 1,554,865                |  |                                        
|Capital Contributed by Minority Shareholder      |  |                                                 |  |               |  |                          |  |                                        
|                                                 |  |                                                 |  |               |  |                          |  |                                        
|Balance at May 31, 2005 (Restated)               |  | 40,146,448                                      |  | 40,146        |  | 13,640,818               |  | -                                      
|                                                 |  |                                                 |  |               |  |                          |  |                                        
|Issuance of common stock for private placement   |  | 9,010,000                                       |  | 9,010         |  | 20,057,476               |  |                                        
|Net Income (Loss)                                |  |                                                 |  |               |  |                          |  |                                        
|Issuance of management options                   |  |                                                 |  |               |  | 2,422,026                |  |                                        
|Warrants issued to investors and arrangers       |  |                                                 |  |               |  | 97,040                   |  |                                        
|Imputed Interest - Terra Nostra level            |  |                                                 |  |               |  | 19,755                   |  |                                        
|Foreign currency translation adjustments         |  |                                                 |  |               |  |                          |  | 254,677                                
|Elimination SQSS due to consolidation with STJMC |  |                                                 |  | (1,554,865)   |  |                          |  | 1,636,329                              
|Capital Contribution by Minority Shareholder     |  |                                                 |  |               |  |                          |  |                                        
|                                                 |  |                                                 |  |               |  |                          |  |                                        
|Balance at May 31, 2006 (Restated)               |  | 49,156,448                                      |  | 49,156        |  | 34,682,250               |  | 254,677                                
|                                                 |  |                                                 |  |               |  |                          |  |                                        
|                                                
|                                                
|                                                 |  |                                                 |  |               |  | F-7                      |  |                                        
|                                                 |  |                                                 |  |               |  |                          |  |                                        

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TERRA NOSTRA RESOURCES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

Terra Nostra Resources Corp (Terra Nostra or the Company) was formed through a reverse merger with Terra Nostra Technology Ltd (TNRL), a fully reporting OTC/Bulletin Board company and a Nevada Corporation. As part of this transaction, Terra Nostra paid a finders fee and other consideration while TNRL completed a divestiture and cleared other outstanding debts pursuant to the agreement. The reverse merger was consummated in April, 2005.

In 1994, Shandong Jinpeng Copper Co. Ltd. (SJCC) was founded as a wholly Sino private company. SJCC was owned by Ke Zhang, an individual of the PRC (Sino Partner) and used to acquire an existing copper processing operation, having associated assets and land use rights, from a local government agency.

On December 23, 2002, Shandong Quanxin Stainless Steel Co. Ltd. (SQSS) was formed through a foreign Sino joint venture agreement between SJCC and Hong Kong Hanbang Investment (HKHI). Pursuant to the agreement, each party held 50% of the joint venture, which had total registered capital of $26,600,000.

On January 2, 2005, the December 23, 2002 agreement between SJCC and HKHI was amended and restated (the SQSS JV). Under SQSS JV, TNRL was substituted for HKHI as the foreign partner of the Sino Joint Venture and the ownership ratio was changed to 51% and 49% for the foreign and Sino partners, respectively. Under the SQSS JV, TNRL had a total capital contribution commitment of US$13,566,000.

Under the laws of the Peoples Republic of PRC on Joint Ventures Using Chinese and Foreign Investment, SJCC agreed to contribute certain fixed assets utilized in the production of stainless steel, including equipment, buildings, production lines, property rights and other fixed assets to the joint venture company in exchange for its 49% ownership. Pursuant to the SQSS JV , the effectiveness of the agreement was subject to the fulfillment of certain conditions precedent, including satisfactory due diligence among others by TNRL. Both parties have fulfilled their registered capital obligations under the SQSS joint venture agreement.

On January 10, 2005, Shandong Terra-Nostra Jinpeng Metallurgical Co. Ltd (STJMC) was formed under a Sino-Foreign Joint Venture Contract (STJMC JV) by converting the corporate structure of SJCC from a private PRC company to a Sino-Foreign joint venture company. TNRL, with a total capital contribution commitment of US$27,234,000, became a 51% foreign owner and Sino Partner became a 49% owner. Sino Partner agreed to contribute certain fixed assets, property rights, and other assets in return for its 49% ownership in the STJMC. Pursuant to the STJMC JV agreement, the effectiveness of the agreement was subject to the fulfillment of certain conditions precedent, including satisfactory due diligence among others by TNRL.

On January 20, 2005, the TNRL changed its name from Terra Nostra Technology Ltd. to Terra Nostra Resources Corp.

On August 17, 2005, Terra Nostra reported all requirements had been fulfilled under the SQSS JV and STJMC JV, leading to the completion of the acquisition of 51% of two Sino-Foreign Joint Venture Companies (together the Joint Ventures). As a result of the transactions, Terra Nostra changed its fiscal year end to May 31.

With respect to STJMC, on October 7, 2005, the parties to STJMC entered into an Amended and Restated Joint Venture Contract, whereby the combination of fixed assets contributed by Sino Partner was modified to lessen the tax impact of the transaction on Sino Partner.

F-8

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TERRA NOSTRA RESOURCES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005

In further respect to STJMC, on December 16, 2005, the parties to STJMC entered into a Second Amended and Restated Joint Venture Contract to reflect the intent of the parties to substitute other assets of the Sino Partner pursuant to the October 7, 2005 agreement and to clarify certain elements of the Amended and Restated Joint Venture Contract. Certain assets (the Existing Assets) contributed by Sino Partner to STJMC prior to December 16, 2005 remained as previously disclosed. These Existing Assets included land use rights, equipment, property, among other assets located in Shandong Province, PRC, having operational production capacity of approximately 30,000 MT (MT)of copper and additional production capacity of related products. In addition, the Existing Assets include a new 80,000 MT facility that has been constructed but is not yet operational, as discussed below.

The fixed assets that Sino Partner had intended to contribute to STJMC that belonged to Zouping Jinwang and Zouping Regenerated Resources (the Replaced Assets) were substituted with assets under construction as Dongying, Shandong Province, PRC (the New Assets). The Replaced Assets are used in the recycling of copper and metal scrap and the processing and fabrication of commodity copper and related products. The New Assets are associated with the processing and fabrication of commodity copper. The New Assets have the potential to generate greater productive output and revenues than the Replaced Assets, are better documented, and represent a better fit with STJMCs strategic goals of improving product quality, expanding production, developing new products, and gaining a greater position in world markets.

The required capital contribution by Terra Nostra to STJMC is unchanged at US$27,234,000. To date, Terra Nostra has contributed US$2,000,000 towards this obligation. Terra Nostra holds a 51% shareholding in STJMC and has treated the transaction, for accounting purposes, as an acquisition. Moreover, under the terms of the Second Amended and Restated Joint Venture Contract, Sino Partners capital obligation to STJMC remains as US$26,166,000 for a 49% shareholding in STJMC, and is expected to be satisfied through contributions of assets.

Terra Nostra and Sino Partner have closed the Second Amended and Restated Joint Venture Contract which took full force and effect on May 31, 2006.

STJMC is planning to phase in approximately 140,000 MT of production capacity that has been newly constructed by Sino Partner. There are two parts to this production capacity: the New Assets, which are located in Dongying, Shandong Province, having production capacity of 60,000 MT; and, a new 80,000 MT capacity facility that is among the Existing Assets, but not yet operational. These facilities are intended to be contributed to STJMC by Sino Partner as a component of the obligation under the STJMC JV, as amended. Although the construction of the plants is completed, Sino Partner has not yet conveyed the respective assets to STJMC as contemplated under the STJMC JV, as revised and restated. The effective dates for conveying the assets under the STJMC JV is a function of the parties completing additional legal, accounting, and governmental obligations, which have commenced. Once these two plants are fully operational and legally established within STJMC, STJMC will have 170,000 MT of production capacity of electrolytic copper output.

SQSS is an integrated stainless steel plant, operating out of Zibo City, Shandong Province, PRC and employs three electric-arc furnaces and two AOD refining furnaces in its casting mill that was built with an initial design capacity of 180,000 MT. SQSS is currently in the process of retrofitting the casting mill to expand its design capacity to up to 230,000 MT, potentially a more than 25% increase. The downstream strip rolling mill is to be phased in over the next fiscal year. The downstream strip rolling mill is to be phased in over the coming fiscal year and has a design capacity of 150,000 MT per annum. The Company also has advanced plans to develop a 30,000 MT capacity welded tube line and a 60,000 MT capacity rod line, both of which are under evaluation by management. Terra Nostra owns 51% of SQSS under the SQSS JV. Terra Nostra has fulfilled its registered capital funding obligation of US$13,566,000 with the final installment contributed in May, 2006, securing a certificate of completion from the requisite PRC regulatory bodies.

STJMC is a producer, seller, and distributor of electrolytic copper, value-added copper products, and precious metals with production locations in Changshan Town and Dongying City, Shandong Province, PRC. The company currently sells approximately 8,500 MT per annum of electrolytic copper, 6,000 MT per annum of low-oxygen rod, and 7,000 MT per annum of no-oxygen rod. The amount of gold and silver sold various widely from year to year based on the mix of scrap and ore used in the production process and precious mineral content of the raw materials. Sales of precious metals make up less than 1% of total sales.

F-9

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|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005



|2. BASIS OF PRESENTATION
|------------------------

The financial statements are prepared in accordance with generally accepted accounting principles used in the United States of America (US GAAP) and include the accounts of Terra Nostra and its Subsidiaries for all periods presented. The Consolidated financial statements of Terra Nostra reflect the activities of the following Subsidiaries:

|Subsidiary                                           |  | Percentage of Ownership
|---------------------------------------------------- |  | -----------------------
|Shandong Quanxin Stainless Steel Co.                 |  | 51%                    
|Shandong Terra-Nostra Jinpeng Metallurgical Co. Ltd. |  | 51%                    

Also, STJMC owns the 49% minority interest in SQSS. For accounting purposes, the investment follows the equity method as discussed below. STJMCs share of SQSS net income or losses is treated as investment income in the period earned.

Since the acquisition of STJMC was effective May 31, 2006, the balance sheet of STJMC as at that date will be included in the consolidated financial statements and the Statement of Shareholders Equity for the Year Ended May 31, 2006. Furthermore, the accounts of STJMC will not be included in the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows.



|Basis of Consolidation
|----------------------

An investment entity is regarded as a subsidiary if the Company has control over its operating and financial policies, generally determined by the ownership of more than 50% of the voting stock of the investment entity. In such cases, the Companys policy is to consolidate the accounts of the subsidiary or Subsidiaries with material inter-company accounts and transactions eliminated. Post-acquisition earnings of the acquired entity are combined with the Companys earnings.

Entities over which the Company has the ability to exercise significant influence, generally determined by ownership of between 20% and 50% of the voting stock of the investment entity, are accounted for under the equity method of accounting. An investment is recorded under the cash method where the ownership level of voting stock is less than 10% and the Company is deemed to have nominal, if any, influence over operating and financial policies.

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES



|A. Cash and Equivalents
|-----------------------

Cash and cash equivalents include cash on hand, and any other highly liquid investments purchased with an original maturity of three months or less. The carrying amounts approximate fair value because of the short-term maturity of those instruments. A portion of cash is restricted cash, which has been pledged to its banks to secure notes payable. This restricted cash is not as liquid as other cash, and has accordingly been given a separate sub-classification in the attached financial statements.



|B. Accounts Receivable
|----------------------

In order to determine the fair value of accounts receivable, a provision is recorded for doubtful accounts to cover estimated credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collect-ability of outstanding accounts receivable. The policy is to evaluate the credit risk of its customers utilizing historical data and estimates of future performance. Accounts receivable balances of the Company and its Subsidiaries were US$7,862,083 as at May 31, 2006. The accounts receivable balance for SQSS was US$302,723 as at May 31, 2006.



|F-10
|----

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|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005



|C. Other Receivables
|--------------------

The majority of this item reflects cash advances against which there are neither formal agreements nor contractual rates of interest. The Company accrues imputed interest at the rate of 4.5% . These amounts will be reduced as advances are repaid, services are rendered, or supplies/equipment conveyed. In order to determine the fair value of other receivables, a provision for doubtful accounts is booked to cover estimated credit losses. Management will review and adjust this allowance periodically based on historical experience and its evaluation of the collectibility of outstanding other receivables.



|D. Short Term Investment
|------------------------

Short term investments are made from time to time in PRC based investment funds and trusts. The investments are valued at the lower of net asset value or estimated net recoverable value. The Company reviews its short term investment positions periodically. The short term investment as at May 31, 2006 was with a listed investment fund in the amount of US$24,941.



|E. Inventory
|------------

Inventories are stated at the lower of cost or net realizable value. Cost is calculated on the moving average basis and includes all costs to acquire and other costs incurred in bringing the inventories to their present location and condition. The net realizable value of its inventories will be evaluated on a regular basis and a provision for loss will be booked accordingly to reduce the computed moving-average cost if it exceeds the net realizable value.



|F. Property, Plant, and Equipment
|---------------------------------

Property, plant and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.

Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. The estimated useful lives within ranges or as otherwise specified, as follows:

|Asset Category                   |  | Estimated Useful Life
|-------------------------------- |  | ---------------------
|Buildings                        |  | 30- 40 years         
|Plant and machinery              |  | 5-20 years           
|Motor vehicles                   |  | 5-10 years           
|Office equipment and furnishings |  | 5 years              

When assets are retired or disposed of, the costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in the statement of operations in the year of disposition.



|F-11
|----

---



|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005



|G. Financial Instruments
|------------------------

Statement of Financial Accounting Standards No. 107 (SFAS 107),Disclosures about Fair Value of Financial Instrumentsrequires disclosure of the fair value of financial instruments held by the Company. SFAS 107 defines the fair value of financial instruments as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying value of financial instruments including cash, receivables, prepaid expenses, accounts payable, bank loans and notes payable approximates their fair value at the reporting balance sheet dates due to the relatively short-term nature of these instruments. The fair market value of long-term debt can not be determined due to a lack of comparability of similar market instruments.



|H. Construction in Progress
|---------------------------

Construction in progress represents buildings, machinery and other long-term assets under construction or installation, which accounts are stated at cost less any impairment losses, and are not depreciated. Cost comprises the direct costs of purchase, construction and installation. Construction in progress is reclassified to the appropriate category of long-term assets when completed and ready for use. The management is of the opinion that no impairment loss is considered necessary at either year-end.



|I. Deferred Assets
|------------------

Deferred assets are payments that will be assigned as expenses in a later period, but that are paid in advance and temporarily set up as assets on the balance sheet. Deferred assets were US$357,711 as at May 31, 2006 and US$394,163 as at May 31, 2005.



|J. Related Parties
|------------------

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial or operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.



|K. Impairment of Long-Term Assets
|---------------------------------

In accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", an impairment loss is recorded against the balance of a long-lived asset in the period when it is determined that the carrying amount of the asset may not be recoverable. This determination is based on an evaluation of such factors as the occurrence of a significant event, a significant change in the environment in which the business assets operate or if the expected future non-discounted cash flows of the business was determined to be less than the carrying value of the assets. If impairment is deemed to exist, the assets will be written down to fair value. Management also evaluates events and circumstances to determine whether revised estimates of useful lives are warranted. As of May 31, 2006, and May 31, 2005, management expects the Companys long-term assets to be fully recoverable.



|F-12
|----

---



|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005



|L. Foreign currency translation
|-------------------------------

The Company maintains its books and accounting records at the subsidiary level in the functional currency of PRC, the Renminbi ("RMB"). Translation of amounts from RMB to United States dollars ("US$") has been made at the following exchange rates for the respective years:

May 31, 2006:Balance Sheet -RMB 8.0188 to US$1

May 31, 2005:Balance Sheet -RMB 8.2766 to US$1

Foreign currency transactions in RMB are reflected using the temporal method. Under this method, all monetary items are translated into the functional currency at the rate of exchange prevailing at the balance sheet date. Non-monetary transactions are translated at historical rates. Income and expenses are translated at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in other comprehensive income.

In translating the financial statements of the subsidiary companies from their functional currency into its reporting currency in US$, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and income and expense accounts are translated using the average exchange rate prevailing during the reporting period. Adjustments, if any, resulting from the translation are included in Accumulated Other Comprehensive Income/Loss in stockholder's equity.

The RMB is not readily convertible into United States dollars or other foreign currencies. No representation is made that the RMB amounts could have been or could be converted into United States dollars or any other currency at any particular rate. The foreign exchange rate between the United States dollar and the RMB had been stable at approximately 1 RMB to US$ 0.1205 for several years, until July 21, 2005, when the People's Bank of China (PBOC) announced two changes in the RMB exchange rate regime, both effective on that date. First, the central parity rate against the U.S. dollar was changed to RMB 8.11=US$ 1 (i.e., an immediate 2% revaluation from the previous rate of around RMB 8.278=US$ 1), and going forward, the RMB has followed a basket of currencies (including the U.S. dollar, the euro, the yen and other major currencies) rather than exclusively the U.S. dollar. The PBOC also references a band system, whereby the RMB can appreciate or depreciate by up to 0.3% against the previous day's closing US$ price. This change is reflected in the May 31, 2006 financial statements.

M. Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

N. Revenue Recognition / Returns

The Subsidiaries recognize revenue when the significant risks and rewards of ownership have transferred pursuant to the law of PRC, including factors such as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable, sales and value-added tax laws have been complied with, and collectibility is reasonably assured. The Subsidiaries generally recognize product sales when the product is shipped. In the event goods are returned from a customer, revenue is reduced, and the returned goods are placed back into inventory during the period that the returned goods are received. Returns on products sold are minimal as Subsidiaries sell basic metals and commodities and the Subsidiaries follow rigorous internal quality control systems and procedures.



|F-13
|----

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|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005



|O. Employees Benefits and Pension Obligations
|----------------------------------------------

The PRC governmental entities mandate that certain contributions are made to the government's health, retirement benefit and unemployment schemes at the statutory rates in force during the period, based on the basic salaries and wages of qualifying employees. It is noted that the Binzhou City Municipal Government mandates that all enterprises established in Binzhou contribute to a retirement insurance fund administered by the Binzhou City Municipal Government at a rate of 20% of the basic salaries of STJMCs staff. Similarly, the Zibo City Government mandates that all enterprises established in Zibo contribute to a retirement insurance fund administered by the Zibo City Government at a rate of 23% of the basic salaries of the staff. Neither subsidiary has fully complied with the funding obligation of these insurances for its personnel and, therefore, arent fully compliant with the requirements as described above. Allowances for the cost of these benefits and pension obligations are charged to the Statements of Operations, as required under US GAAP. Both Subsidiaries have calculated the costs to fully comply with the government regulations and have established a liability representing the portion of these expenses that it reasonably expects to pay.



|P. Comprehensive Income / (Loss)
|--------------------------------

The Company and its Subsidiaries have adopted the principles of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting and display of comprehensive income, its components and accumulated balances, in a full set of general purpose financial statements. SFAS No. 130 defines comprehensive income or loss to include all changes in equity except those resulting from investments by owners and distributions to owners, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable securities. The element of this standard having the most direct affect on the Company is foreign currency translation.



|Q. Income Taxes
|---------------

The Company and its Subsidiaries follow the assets and liability method of accounting for income taxes, whereby deferred tax assets and liabilities are recognized for the expected deferred tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. A valuation allowance is required when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

For operations in PRC, under the laws promulgated to Sino-Foreign joint ventures, the Subsidiaries are entitled to certain benefits. In summary, the joint venture companies are entitled to a two year tax holiday beginning with the first year of profitable operations. Moreover, the joint ventures will be obligated to pay income taxes at only half of the statutory rate in effect over the subsequent three years. In total, the joint ventures will enjoy special tax benefits over a five year period, beginning in the first year of profitable operations.



|R. Concentration of Credit Risk
|-------------------------------

Financial instruments that potentially subject the Company and its Subsidiaries to significant concentrations of credit risk consist primarily of Other Receivables and Other Receivables  Related Party. The Companys Subsidiaries perform ongoing credit evaluations with respect to the financial condition of the counterparties involved in these transactions, but do not require collateral. To determine the value of Other Receivables, the Companys Subsidiaries record a provision for doubtful accounts to cover probable credit losses. For the applicable reporting periods, managements opinion is that the balances of Other Receivables and Other Receivables  Related Party, net of allowance for doubtful accounts, are fully recoverable. Management will review and possibly adjust this allowance periodically based on historical experience and its evaluation of the collect-ability of outstanding other receivables.



|S. Research and Development Costs
|---------------------------------

Research and development costs are charged to operations when incurred, and are included in operating expenses. No amounts for research and development costs were charged in the periods up to and including May 31, 2006.

F-14

---



|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005



|T. Advertising Costs
|--------------------

The Company recognizes advertising expenses in accordance with Statement of Position 93.7 Reporting on Advertising Costs and EITF 09-09. As such, the Company expenses the cost of advertising in the period in which the advertising space or airtime is used. Advertising costs were incurred at SQSS in years ending May 31, 2006 and 2005, as follows:

|            |  | US$ |  | May 31, 2006 |  | May 31, 2005
|----------- |  | --- |  | ------------ |  | ------------
|Advertising |  |     |  | 92,151       |  | 27,823      



|U. New Accounting Pronouncements
|--------------------------------

FASB 156 - In March 2006, FASB issued FASB 156, Accounting for Servicing of Financial Assets--an amendment of FASB Statement No. 140. FASB 156 requires the recognition of a servicing asset or servicing liability under certain circumstances when an obligation to service a financial asset by entering into a servicing contract. FASB 156 also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value utilizing the amortization method or fair market value method. FASB 156 is effective June 1, 2007 (the beginning of the first fiscal year that begins after September 15, 2006). FASB 156 is not expected to have a material impact on our financial statements.

FASB 155 - In February 2006, FASB issued FASB 155, Accounting for Certain Hybrid Financial Instruments as an amendment to FASB 133, Accounting for Derivative Instruments and Hedging Activities, and FASB 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. FASB 155 provides the framework for fair value re-measurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation as well as establishes a requirement to evaluate interests in securitized financial assets to identify interests. FASB 155 further amends FASB 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The FASB 155 guidance also clarifies which interest-only strips and principal-only strips are not subject to the requirement of FASB 133 and concentrations of credit risk in the form of subordination are not embedded derivatives. This statement is effective for financial instruments acquired or issued after June 1, 2007 (i.e., the beginning of an entity's first fiscal year that begins after September 15, 2006). FASB 155 is not expected to have a material impact on our financial statements.

In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements, and (EITF 05-6). EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception. The guidance on EITF 05-6 will be applied prospectively and is effective for periods after June 29, 2005. EITF 05-6 is not expected to have a material impact on our financial statements.

FASB 154  Accounting Changes and Error Corrections. This statement was issued in May, 2005 and is applicable to fiscal years beginning after December 15, 2005. This Statement replaces APB Opinion No. 20,Accounting Changes,and FASB Statement No. 3,Reporting Accounting Changes in Interim Financial Statements,and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This pronouncement will have limited effect, if any, and does not apply until the fiscal year beginning June 1, 2006.



|F-15
|----

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|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005



|4. OTHER RECEIVABLES
|--------------------

The Company and its Subsidiaries Other Receivables at May 31, 2006 and 2005, are summarized as follows:

|                                                                                              |  | (US$)        |  |             
|--------------------------------------------------------------------------------------------- |  | ------------ |  | ------------
|                                                                                              |  | May 31, 2006 |  | May 31, 2005
|Current Assets                                                                                |  |              |  |             
|Other Receivables                                                                             |  | 7,884,020    |  | 4,910,629   
|Other Receivables - Related Party                                                             |  | 25,707,370   |  | 23,579,287  
|Less: Allowance for doubtful accounts                                                         |  | (747,417)    |  | ---         
|                                                                                             
|Other Receivables, Net                                                                        |  | 32,843,973   |  | 28,489,906  
|                                                                                             
|Allowance for doubtful accounts was US$747,417 as at May 31, 2006 and nil as at May 31, 2005. |  |             

Although lending between companies, including related parties is a common occurrence in the PRC, the practice is technically contrary to regulations, which provide that only lending institutions are permitted to extend loans to companies.

|5. INVENTORIES        |  |       |  |              |  |             
|--------------------- |  | ----- |  | ------------ |  | ------------
|                     
|                      |  | (US$) |  |              |  |             
|                      |  |       |  | May 31, 2006 |  | May 31, 2005
|                     
|Raw Materials         |  |       |  | 9,482,043    |  | --          
|Work in Progress      |  |       |  | 12,297,856   |  | --          
|Finished Goods        |  |       |  | 2,327,356    |  | --          
|Consignment Inventory |  |       |  | 1,321,920    |  | --          
|Sundry                |  |       |  | 75,904       |  | --          
|Total Inventories     |  |       |  | 25,505,079   |  | --          
|                      |  |       |  |              |  |             

Inventories for SQSS and STJMC as at May 31, 2006 were primarily comprised of raw materials such as scrap stainless steel and copper, ore, and alloys. The inventories at May 31, 2005 were nil because SQSS at that time was still under development and was not capitalized. The provisions for inventory for year ending May 31, 2006, are US$919,420 for finished goods and US$182,845 for consignment inventory, for a total of US$1,102,265.

|6. PREPAID EXPENSES              |  |       |  |              |  |             
|-------------------------------- |  | ----- |  | ------------ |  | ------------
|                                 |  | (US$) |  | May 31, 2006 |  | May 31, 2005
|Prepaid Expenses                 |  |       |  | 3,537,389    |  | 18,004      
|Prepaid Expenses  Related Party |  |       |  | 1,452,259    |  | --          
|Total Prepaid Expenses           |  |       |  | 4,989,648    |  | 18,004      
|                                 |  |       |  |              |  |             

The increase in prepaid expenses from May 31, 2005 to May 31, 2006 was principally in connection with the procurement of construction materials at SQSS. The remaining prepaid expenses were primarily comprised of deposits and advances to third party suppliers and a related party supplier (refer to Note 13, herein, RELATED PARTY TRANSACTIONS).



|F-16
|----

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|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005

|7. PROPERTY, PLANT, AND EQUIPMENT     |  |       |  |              |  |             
|------------------------------------- |  | ----- |  | ------------ |  | ------------
|                                      |  | (US$) |  | May 31, 2006 |  | May 31, 2005
|Building                              |  |       |  | 16,784,936   |  | 773,665     
|Machinery                             |  |       |  | 28,106,271   |  | 666,118     
|Vehicles                              |  |       |  | 917,273      |  | 317,021     
|Office Equipment                      |  |       |  | 272,941      |  | 170,578     
|Land Use Rights (net of amortization) |  |       |  | 5,025,487    |  | 4,563,792   
|Construction Materials                |  |       |  | 40,623       |  | 57,056      
|Construction in Progress              |  |       |  | 17,192,511   |  | 58,880,411  
|Cost                                  |  |       |  | 68,340,042   |  | 65,428,641  
|Less: Accumulated Depreciation        |  |       |  |              |  |             
|Building                              |  |       |  | 911,566      |  | 25,789      
|Machinery                             |  |       |  | 3,504,135    |  | 64,916      
|Vehicles                              |  |       |  | 217,180      |  | 36,558      
|Office Equipment                      |  |       |  | 78,116       |  | 27,158      
|                                      |  |       |  |              |  |             
|Accumulated Depreciation              |  |       |  | 4,710,997    |  | 154,420     
|Net Book Value                        |  |       |  |              |  |             
|Building                              |  |       |  | 15,873,370   |  | 747,876     
|Machinery                             |  |       |  | 24,602,136   |  | 601,202     
|Vehicles                              |  |       |  | 700,093      |  | 280,463     
|Office Equipment                      |  |       |  | 194,825      |  | 143,420     
|Land Use Rights                       |  |       |  | 5,025,487    |  | 4,563,792   
|Construction Materials                |  |       |  | 40,623       |  | 57,056      
|Construction in Progress              |  |       |  | 17,192,511   |  | 58,880,411  
|Long-Term Assets - Net                |  |       |  | 63,629,045   |  | 65,274,221  

Total depreciation expense for the years ended May 31, 2006 and 2005 was US$1,432,795 and US$720,857, respectively.



|Land Use Rights
|---------------

The Company owns and leases plants in PRC and has long-term land use rights, which are common in PRC. SQSS has land use certificates for 189,387 square meters of the approximately 352,000 square meters it occupies in the Zibo High New Technology Property Development Zone, in Shandong Province. The local government entity has represented it will issue SQSS land use certificates for the entire land area it occupies after a land survey is performed. SQSS built and owns the production, offices, warehouses, testing labs, power conversion station, oxygen/argon facilities, canteen, roadways, hard-scapes and soft-scapes, gateways, and other buildings on the site. SQSS also owns the production equipment, fixtures, and other chattels.

Neither the Company nor STJMC hold land use rights certificates corresponding with the properties they occupy. Specifically, there is 41,961 square meters of land, an office building and 22 autos on the books of STJMC that are not titled to STJMC. Officially, the land is used under the name of the company that sold the building and site to SJCC in 1994. The seller company was a collectively-owned enterprise. Notwithstanding the above, STJMC has obtained a special certificate issued by Zouping County State Land Resource Administration Bureau (ZCSLRAB), which certifies that STJMC is the legal user of the land and that the Land Use Rights Certificate, naming STJMC, is in process. STJMC owns the real and personal property located on the site, although these assets would theoretically revert back to the local government upon the expiration of the land use rights. The assets include production facilities, offices, warehouses, testing labs, canteen, roadways, hard-scapes and soft-scapes, gateways and other buildings on the site. STJMC also owns the production equipment, fixtures, and other chattels.

F-17

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|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005

Land use rights are amortized using the straight-line method over a 50 year period. The land use rights and accumulated depreciation are summarized for the four balance sheet dates, as follows:

|                               |  | (US$) |  | May 31, 2006 |  | May 31, 2005
|------------------------------ |  | ----- |  | ------------ |  | ------------
|Land Use Rights                |  |       |  | 5,241,179    |  | 4,704,939   
|Less: Accumulated Amortization |  |       |  | 215,692      |  | 141,147     
|Land Use Rights - Net          |  |       |  | 5,025,487    |  | 4,563,792   
|                               |  |       |  |              |  |             

In the event that an extension on land rights cannot be negotiated between the parties, the residual value would be zero.

|8. BANK INDEBTEDNESS AND NOTES PAYABLE |  |                               |  |       |  |            |  |             
|-------------------------------------- |  | ----------------------------- |  | ----- |  | ---------- |  | ------------
|                                      
|Bank Loans & Short Term Loans          |  |                               |  |       |  |            |  |             
|                                      
|                                       |  |                               |  | (US$) |  | Annual     |  | Amount at   
|Bank                                   |  | Period                        |  |       |  | Int. Rate  |  | May 31, 2006
|Huaxia Bank                            |  | Dec 1, 2005  Dec 1, 2006     |  |       |  | 5.58%      |  | 5,611,812   
|Agricultural Bank                      |  | Jul 31, 2005  Jul 31, 2006   |  |       |  | 8.928%     |  | 299,297     
|Agricultural Bank                      |  | Aug 29, 2005  Aug 29, 2006   |  |       |  | 8.928%     |  | 311,767     
|Agricultural Bank                      |  | Nov 18, 2005  Nov 18, 2006   |  |       |  | 8.928%     |  | 187,060     
|CITIC Bank                             |  | Jan 16, 2006  Jul 13, 2006   |  |       |  | 4.698%     |  | 399,063     
|CITIC Bank                             |  | Jan 18, 2006  Jul 17, 2006   |  |       |  | 4.698%     |  | 1,197,187   
|CITIC Bank                             |  | Feb 23, 2006  Oct 15, 2006   |  |       |  | 6.696%     |  | 1,247,069   
|CITIC Bank                             |  | Oct. 8, 2005  Jul. 15, 2006  |  |       |  | 6.138%     |  | 1,247,069   
|CITIC Bank                             |  | Oct. 20, 2005  Jun. 19, 2006 |  |       |  | 6.138%     |  | 1,247,069   
|CITIC Bank                             |  | Apr. 5, 2006  Nov. 4, 2006   |  |       |  | 6.138%     |  | 1,247,069   
|CITIC Bank                             |  | Apr. 13, 2006  Oct. 20, 2006 |  |       |  | 6.138%     |  | 1,247,069   
|CITIC Bank                             |  | Apr. 20, 2006  Nov.14, 2006  |  |       |  | 6.138%     |  | 1,247,069   
|Zibo Commercial                        |  | Aug. 5, 2005  Jul. 24, 2006  |  |       |  | 8.37%      |  | 2,494,139   
|Zibo Commercial                        |  | Sep. 30, 2005  Sep.5, 2006   |  |       |  | 5.58%      |  | 22,447,249  
|Zibo Commercial                        |  | Jan. 17, 2006  Jan.9, 2007   |  |       |  | 8.37%      |  | 3,741,209   
|Heng Feng Bank                         |  | Apr. 5, 2006  Apr. 5, 2007   |  |       |  | 6.138%     |  | 6,235,348   
|CITIC Bank                             |  | Jan 27,2005 - Nov 27, 2005    |  |       |  | 6.138%     |  |             
|CITIC Bank                             |  | Mar 2, 2005 - Oct 18, 2005    |  |       |  | 6.138%     |  |             
|CITIC Bank                             |  | Mar 23, 2005 - Sep 26, 2005   |  |       |  | 6.138%     |  |             
|CITIC Bank                             |  | Apr 14, 2005 - Oct 14, 2005   |  |       |  | 5.22%      |  |             
|Zibo Commercial                        |  | Feb 5, 2005 - Jan 10, 2006    |  |       |  | 8.37%      |  |             
|Zibo Commercial                        |  | Aug 17, 2004 - Aug 3, 2005    |  |       |  | 7.65%      |  |             
|                                       |  |                               |  |       |  |            |  |             
|                                      
|Total Bank Loans Outstanding           |  |                               |  |       |  | 50,406,545 |  | 10,559,892  
|                                       |  |                               |  |       |  |            |  |             
|                                      
|                                      
|                                      
|                                       |  |                               |  | F-18  |  |            |  |             
|                                       |  |                               |  |       |  |            |  |             

---



|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005

As of May 31, 2006 and 2005, the Subsidiaries had several outstanding bank loans and short-term loans, which were used primarily to fund working capital and operating expenses. The loans, which had cumulative balances of US$50,456,545 for 2006 and US$10,559,892 for 2005, carried interest rates ranging from 5.22% per annum to 8.928% per annum, with maturity periods of 6-12 months.

As at May 31, 2006, the US$399,063 and US$1,197,187 loans from CITIC Bank to STJMC were guaranteed by US dollar deposits of US$500,000 and US$1,500,000, respectively. Other loans were guaranteed by related parties and third parties, none of whom received compensation for acting as guarantors.

As at May 31, 2006, the five loans from CITIC Bank (shown on the table below initalics) to SQSS amounting to US$6,235,345 were guaranteed by pledge of SQSS steel refining equipment to a limit of RMB 50,000,000; the three loans from Zibo Commercial Bank to SQSS (also in italics ) amounting to US$8,482,597 were guaranteed by related parties and the loan from Heng Feng Bank is guaranteed by related and third parties. No related parties are receiving compensation for acting as guarantors.

|Notes Payable, Other       |  |                               |  |              |  |             
|-------------------------- |  | ----------------------------- |  | ------------ |  | ------------
|                          
|                           |  | (US$)                         |  | Amount at    |  | Amount at   
|Bank                       |  | Period                        |  | May 31, 2006 |  | May 31, 2005
|Huaxia Bank                |  | Dec 9, 2005  Jun 9, 2006     |  | 4,489,450    |  |             
|Minsheng Bank              |  | Dec 30, 2005  Jun 30, 2006   |  | 249,414      |  |             
|CITIC Bank                 |  | Feb 24, 2006  Aug 24, 2006   |  | 1,247,069    |  |             
|CITIC Bank                 |  | Mar. 9, 2006  Sep. 9, 2006   |  | 7,482,416    |  |             
|Zibo Commercial            |  | Dec. 9, 2005  Jun. 7, 2006   |  | 2,805,907    |  |             
|Zibo Commercial            |  | Apr. 19, 2006  Oct. 11, 2006 |  | 1,870,604    |  |             
|Bank of Communication      |  | Mar. 24, 2006  Sep. 24, 2006 |  | 1,247,069    |  |             
|Heng Feng Bank             |  | Mar. 30, 2006  Sep. 30, 2006 |  | 1,247,069    |  |             
|CITIC Bank                 |  | Jan 26, 2005 - Jul 26, 2005   |  |              |  | 1,147,814   
|CITIC Bank                 |  | Apr 20,2005 - Oct 20, 2005    |  |              |  | 1,208,226   
|Zibo Commercial            |  | Dec 16, 2004 - Jun 8, 2005    |  |              |  | 3,020,564   
|Zibo Commercial            |  | Apr 15, 2005 - Oct 12, 2005   |  |              |  | 1,812,338   
|                           |  |                               |  |              |  |             
|Total Notes Payable, Other |  |                               |  | 20,638,998   |  | 7,188,942   

As of May 31, 2006 and 2005, the Subsidiaries had several outstanding notes payable. The notes, which had a cumulative balance of US$20,638,998 and US$7,188,942 for each respective year, bear no interest, and all had maturity dates ranging of about 6 months. The notes owed by SQSS (shown in italics ) and STJMC were used primarily by related parties whose obligations are booked in Other Receivables  Related Parties. These notes can generally be exchanged at a discount for cash with financial institutions. Most of the notes were partially secured by the Cash  Restricted. No related party is receiving compensation for the provision of such notes.

Although lending between companies, especially related parties is a common occurrence in PRC, the practice is technically contrary to regulations, which provide that only lending institutions are permitted to extend loans to companies.



|F-19
|----

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|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005



|9. OTHER LIABILITIES
|--------------------

Other liabilities, for the most part, comprise temporary funding advances from business enterprises, credit unions, and trust companies. The advances are made as an accommodation to the Subsidiaries and are made on the basis of personal and professional relationships with Sino Partner or an affiliated company he influences. The advancing entities do not charge fees or interest and the advances are not secured by collateral or guarantees. Notwithstanding, the Company books an imputed interest expense that is equal to a prorated annual interest rate of 4.5% multiplied by the average outstanding balance in any respective accounting period.



|10. RESERVES
|------------

Pursuant to the accounting systems for business enterprises as promulgated by PRC, the profits of the Subsidiaries, which are based on their PRC statutory financial statements, are available for distribution in the form of cash dividends after they have satisfied all PRC tax liabilities, provided for losses in previous years, and made appropriations to reserve funds, as determined at the discretion of the board of directors in accordance with PRC accounting standards and regulations.

As stipulated by the relevant laws and regulations for enterprises operating in PRC, the Subsidiaries are required to make annual appropriations to two reserve funds, consisting of the statutory surplus and public welfare funds. In accordance with the relevant PRC regulations, companies are required to allocate a certain percentage of their profits after taxation, as determined in accordance with PRC accounting standards applicable to the companies, to the statutory surplus reserve until such reserve reaches 50% of the registered capital of the company.

Net income as reported in the US GAAP financial statements differs from that as reported in PRC statutory financial statements. In accordance with the relevant laws and regulations in PRC, the profits available for distribution are based on the statutory financial statements. If the Subsidiaries have foreign currency available after meeting its operational needs, they may make their profit distributions in foreign currency to the extent foreign currency is available. Otherwise, it is necessary to obtain approval through the PRCs State Administration of Foreign Exchange (SAFE) and convert such distributions at an authorized bank.



|11. SIGNIFICANT CONCENTRATION
|-----------------------------

The Subsidiaries grant credit to their customers, generally on an open account basis. Both Subsidiaries grant credit to their customers, generally on an open account basis. SQSSs five largest customers accounted for 45.4% of sales in fiscal year ended May 31, 2006. SQSS had only one customer representing in excess of 10% of sales for the year. STJMCs five largest customers accounted for 17.3% of its sales in fiscal year ended May 31, 2006. None of STJMCs customers represented more than 10% of sales for the year.



|F-20
|----

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|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005



|12. Warrants
|------------

The Company had outstanding warrants to purchase 9,528,000 and 492,846 shares of its common stock at May 31, 2006 and 2005, respectively, at prices ranging from $3.00 to $5.00 per share.

The following schedule shows the warrants outstanding and changes made during the years ending May, 2006 and 2005:

|                                                    |  |           |  | Weighted Average
|--------------------------------------------------- |  | --------- |  | ----------------
|                                                    |  | Number    |  | Exercise Price  
|                                                    |  |           |  |                 
|                                                   
|Warrants outstanding May 31, 2004                   |  | 128,652   |  | $4.50           
|                                                    |  |           |  |                 
|                                                   
|Changes during the fiscal year ending May 31, 2005: |  |           |  |                 
|Issued                                              |  | 364,194   |  | 5.00            
|Expired                                             |  | -         |  | -               
|                                                    |  |           |  |                 
|                                                   
|Warrants outstanding May 31, 2005                   |  | 492,846   |  | $4.87           
|                                                    |  |           |  |                 
|                                                   
|Changes during the fiscal year ending May 31 2006:  |  |           |  |                 
|Issued                                              |  | 9,538,000 |  | 4.08            
|Expired                                             |  | (502,846) |  | 4.87            
|                                                    |  |           |  |                 
|                                                   
|Warrants outstanding May 31, 2006                   |  | 9,528,000 |  | $4.08           

|Warrants outstanding at May 31, 2006 expire as follows: |  |                 
|------------------------------------------------------- |  | ----------------
|Year                                                    |  | Number of shares
|                                                        |  |                 
|FYE May 31, 2007                                        |  | 1,680,000       
|                                                        |  |                 
|FYE May 31, 2008                                        |  | 7,848,000       
|                                                        |  |                 

Where appropriate an allocation has been made in the consolidated statements of stockholders equity between common stock and common stock warrants to give effect to the estimated fair value of the common stock warrants.



|F-21
|----

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|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005



|13. RELATED PARTY TRANSACTIONS
|------------------------------

Related party transactions comprise funding transactions between companies that are associated through common Sino ownership. The related party transactions are summarized in the schedules below:

|Summary of balances of related party transactions (US$)        |  |              |  |             
|-------------------------------------------------------------- |  | ------------ |  | ------------
|Other Receivables - Related Party                              |  | May 31, 2006 |  | May 31, 2005
|Shandong Jinwang                                               |  | 6,213,321    |  | -           
|Zouping Regenerated Resources                                  |  | 8,032,868    |  | -           
|Zouping Regenerated Resources                                  |  | -            |  | 8,884,991   
|Zhang Ke                                                       |  | 8,061,609    |  | -           
|Zibo Jinpeng                                                   |  | 2,202,449    |  | -           
|Zibo Jinpeng                                                   |  | 419,149      |  | -           
|Zouping Jinwang                                                |  | 325,733      |  | 2,851,553   
|Shandong Jiatai                                                |  | 149,912      |  | -           
|Shandong Jiatai                                                |  | -            |  | 1,685,674   
|Zouping Huatong                                                |  | 199,303      |  | -           
|Shengming Copper                                               |  | 48,037       |  | 157,069     
|Dongying Shengli Zhongya                                       |  | 47,451       |  | -           
|Zouping Jinyuan                                                |  | 7,538        |  | -           
|Total Other Receivables - Related Party                        |  | 25,707,370   |  | 23,579,287  
|Other Liabilities - Related Party                              |  |              |  |             
|Ke Zhang                                                       |  | 21,754,960   |  | -           
|Zouping Jinwang                                                |  | 5,438,739    |  | -           
|Shandong Jinpeng                                               |  |              |  | 7,060,151   
|Shandong Jinwang                                               |  | 1,286,815    |  | -           
|Shandong Jinwang                                               |  | -            |  | 14,922,849  
|Dongying Shengli                                               |  | 1,012,558    |  | -           
|Zibo Mingtai Regenerated                                       |  | 760,907      |  | -           
|Zibo Mingtai                                                   |  | 322,546      |  | -           
|Zouping Jinwang                                                |  | 127,516      |  | -           
|Dongying Fangyuan Copper                                       |  | 121,382      |  | -           
|Zouping Huatong                                                |  | -            |  | 28,970,051  
|Sun Liu James Po                                               |  | 95,782       |  | -           
|Dongying Shengli Zhongya                                       |  | -            |  | 7,458,218   
|Zouping Jinyuan                                                |  | -            |  | 483,290     
|Zouping Regenerated Resources                                  |  | 77,213       |  | -           
|Total Other Liabilities - Related Party                        |  | 30,998,418   |  | 58,894,559  
|Prepaid Expenses - Related Party                               |  |              |  |             
|Zouping Reg. Purchase & Sale                                   |  | 1,247,069    |  | -           
|Zouping Regenerated Resources                                  |  | 162,119      |  | -           
|Zouping Reg. YX                                                |  | 43,071       |  | -           
|Total Prepaid - Related Party                                  |  | 1,452,259    |  | -           
|Accounts Payable - related party                               |  |              |  |             
|Zouping Regenerated Resources                                  |  | 74,467       |  | -           
|Construction Costs Payable                                     |  |              |  |             
|Zibo Mingtai                                                   |  | 711,535      |  | -           
|Related Party Transactions - Net Position, Asset / (Liability) |  | (4,624,791)  |  | (35,041,887)

F-22

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|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005

The related party transactions are, for the most part, temporary funding advances, which bear no contractual interest rate. A majority of Other Receivables  Related Parties correspond to bank notes issued where proceeds were drawn by related parties. The Subsidiaries impute an interest rate of 4.5% against the Other Receivables  Related Parties and Other Liabilities  Related Parties.

The liabilities to Mr. Zhang and Zouping Jinwang represent the difference between the book value of Shandong Jinpeng at the date of acquisition and the amount of their registered capital obligation.

During the year ending May 31, 2006, SQSS made purchases from Zibo Mingtai, a related party, of US$876,368. STJMC made purchases of raw materials from Zouping Regenerated Resources, a related party, during the year ending May 31, 2006 of US$4,982,429 and, during the year ending May 31, 2005, of US$6,067,372. STJMC acquired fixed assets from Shangdong Jia Tai, a related party, during the year ending May 31, 2006 of US$2,868,260.



|14. CONTINGENCIES AND COMMITMENTS
|---------------------------------



|A. Contingencies
|----------------

SQSS had the following contingent liabilities as at May 31, 2006:

i.) SQSS has granted bank guarantees equal to US$16,523,669 on behalf of a related party by pledging its land and equipment to that limit and received no collateral or compensation for acting as guarantor, and; ii.) SQSS has granted bank guarantees equal to US$16,835,437 on behalf of related parties and received no collateral or compensation for acting as guarantor.

SQSS contingencies as at May 31, 2005 were as previously reported.

STJMC had the following contingent liabilities as at May 31, 2006:

i.) STJMC has granted bank guarantees equal to US$8,230,658 on behalf of third parties and received no collateral or compensation for acting as guarantor;

ii.) STJMC has granted bank guarantees equal to US$22,447,249 on behalf of related parties and received no collateral or compensation for acting as guarantor; and

iii.) STJMC granted guarantees amounted to US$13,717,763 to banks against bank loans issued to three third parties who in return pledged their property to STJMC as collateral for acting as guarantor, the details are as follows:

|      |  | Amount of Guarantee Granted |  | Property pledged to STJMC                  
|----- |  | --------------------------- |  | -------------------------------------------
|      |  | US$9,976,555                |  | a 10,796-square-meter office building      
|      |  | US$2,494,139                |  | a 4,666-square-meter restaurant            
|      |  | US$1,247,069                |  | a 76,760-square-meter casting mill workshop
|Total |  | US$13,717,763               |  |                                            

STJMC made substantial purchases during the year ending May 31, 2006 which, though verified, were not supported by the type of VAT invoices that are mandated for such transactions in PRC. It is noted that the tax authorities of PRC have broad discretion in matters that may arise in tax audits that are conducted from time to time. There is a risk that the tax authorities could decide at their discretion that these purchases are not allowable for tax deduction purposes and, in this event, the financial impact to the Company could be material. Neither the Company, the Sino Partner, nor its auditors know of any precedent for such action in PRC; however, such risk may exist. Further, the tax code does not specifically provide for this type of action.



|B. Commitments
|--------------

SQSS has commitments to various suppliers and contractors amounting to US$10,687,441 as at May 31, 2006. These outstanding commitments are contemplated to be funded by December 31, 2006. The fulfillment of these commitments will allow for the completion of the casting mill and strip line of the stainless steel mill.

F-23

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|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005

15. SUBSEQUENT EVENTS  CONCLUDED LITIGATION

The accounts of STJMC at May 31, 2005 included its short-term investment of RMB 35,828,288 (US$4,328,866) originated in July, 2002, for an annual interest rate of 8.0% . The investment was held by three trustees, and guaranteed by Lian Da Group Co. Ltd (Lian Da Group). When the trustees and guarantor defaulted on payment, STJMC commenced litigation in the courts of Shandong province and received a judgment for the full amount of the investments. Although the litigation is concluded, legal action to enforce the judgment is ongoing, with the seizure and sale of Lian Da Group assets, and a full recovery of the investment is anticipated in the near future when enforcement of the judgment is completed.

Subsequent to May 31, 2006, on September 30, 2006, a total of 50,000 shares were sold to private investor for total proceeds of $100,000, for a price of $2.00/share, accompanied by a total of 50,000 purchase warrants entitling the holder to acquire an additional common share for a period of 2 years, for a cost of $3.00/share in year 1 and $4.00/share in year 2.



|16. RESTATEMENT
|---------------

The Form 10-KSB annual report for fiscal year ended May 31, 2006 that was issued and filed by the registrant on October 16, 2006, did not incorporate a material inter-company entry and the Form misstated a credit to additional paid in capital that should have been allocated between additional paid in capital and minority interest. There was also an immaterial reclassification made between categories in the Statement of Shareholders Equity. In addition, there was an immaterial reclassification made for adjusting over-contribution by minority shareholders. All four errors affected the balance sheet as at May 31, 2005 and did not have a Statement of Operation affect.

As at May 31, 2005, the Company had an outstanding funding obligation of US$12,566,000 to SQSS to complete its registered capital commitment. Although the obligation was paid in full during the fiscal year ended May 31, 2006, the balance sheet as at May 31, 2005 did not reflect Terra Nostras payable of US$12,566,000 nor did SQSSs accounts reflect the receivable. This omission, consequently, understated the minority interest liability by US$6,157,340, representing the 49% minority interest share of US$12,566,000.

At May 31, 2005, SQSS was a development stage company and a portion of the development funds were provided by related parties that did not charge interest. The Companys policy is to calculate an imputed interest against these advances at a rate of 4.5% per annum and book the charges to interest expense, construction in progress, or both. During fiscal year ending May 31, 2005, the Company incorrectly booked all amount of the credit entries to additional paid in capital rather than allocation between additional paid in capital and minority interest. The revised and restated Form 10-KSB makes the correction to reclassify US$1,493,889 (49% of US$3,048,754 imputed interests) from additional paid in capital to minority interest.

There was an entry in May 31, 2004 to reclassify US$283,308 from additional paid in capital to retained earnings. The Company did not carry this entry forward to 2005 and 2006, which has been corrected in the Form.

Sino partners over contributed US$273,385 in SQSS, which was not reflected in the year ended May 31, 2005. The revised and restated Form 10-KSB makes the correction to reclassify US$139,426 (51% of US$273,385 over contribution) from additional paid in capital and US$133,959 (49% of US$273,385 over contribution) to other liabilities-related party.

|                                  |  | May 31, 2006           |  |             
|--------------------------------- |  | ---------------------- |  | ------------
|                                  |  |                       
|                                  |  | As previously reported |  | As restated 
|Nets Assets                       |  | 38,455,326             |  | 38,455,326  
|Minority Interest                 |  | 26,166,000             |  | 26,166,000  
|Total Stockholders' Equity        |  | 12,289,326             |  | 12,289,326  
|Additional Paid in Capital        |  | 34,965,558             |  | 34,682,250  
|Retained Earnings                 |  | (22,980,065)           |  | (22,696,757)
|                                  |  |                        |  |             
|                                  |  | May 31, 2005          
|                                  |  | As previously reported |  | As restated 
|Nets Assets                       |  | 16,277,936             |  | 16,004,551  
|Minority Interest                 |  | 5,438,460              |  | 12,955,731  
|Total Stockholders' Equity        |  | 8,734,476              |  | 943,820     
|Additional Paid in Capital        |  | 21,714,781             |  | 13,640,818  
|Retained Earnings                 |  | (13,020,451)           |  | (12,737,144)
|Other Liabilities  Related Party |  | 58,621,174             |  | 58,894,559  

F-24

---



|TERRA NOSTRA RESOURCES CORP.
|----------------------------

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2006 AND 2005

15. SUBSEQUENT EVENTS  CONCLUDED LITIGATION

The accounts of STJMC at May 31, 2005 included its short-term investment of RMB 35,828,288 (US$4,328,866) originated in July, 2002, for an annual interest rate of 8.0% . The investment was held by three trustees, and guaranteed by Lian Da Group Co. Ltd (Lian Da Group). When the trustees and guarantor defaulted on payment, STJMC commenced litigation in the courts of Shandong province and received a judgment for the full amount of the investments. Although the litigation is concluded, legal action to enforce the judgment is ongoing, with the seizure and sale of Lian Da Group assets, and a full recovery of the investment is anticipated in the near future when enforcement of the judgment is completed.

Subsequent to May 31, 2006, on September 30, 2006, a total of 50,000 shares were sold to private investor for total proceeds of $100,000, for a price of $2.00/share, accompanied by a total of 50,000 purchase warrants entitling the holder to acquire an additional common share for a period of 2 years, for a cost of $3.00/share in year 1 and $4.00/share in year 2.



|16. RESTATEMENT
|---------------

The Form 10-KSB annual report for fiscal year ended May 31, 2006 that was issued and filed by the registrant on October 16, 2006, did not incorporate a material inter-company entry and the Form misstated a credit to additional paid in capital that should have been allocated between additional paid in capital and minority interest. There was also an immaterial reclassification made between categories in the Statement of Shareholders Equity. In addition, there was an immaterial reclassification made for adjusting over-contribution by minority shareholders. All four errors affected the balance sheet as at May 31, 2005 and did not have a Statement of Operation affect.

As at May 31, 2005, the Company had an outstanding funding obligation of US$12,566,000 to SQSS to complete its registered capital commitment. Although the obligation was paid in full during the fiscal year ended May 31, 2006, the balance sheet as at May 31, 2005 did not reflect Terra Nostras payable of US$12,566,000 nor did SQSSs accounts reflect the receivable. This omission, consequently, understated the minority interest liability by US$6,157,340, representing the 49% minority interest share of US$12,566,000.

At May 31, 2005, SQSS was a development stage company and a portion of the development funds were provided by related parties that did not charge interest. The Companys policy is to calculate an imputed interest against these advances at a rate of 4.5% per annum and book the charges to interest expense, construction in progress, or both. During fiscal year ending May 31, 2005, the Company incorrectly booked all amount of the credit entries to additional paid in capital rather than allocation between additional paid in capital and minority interest. The revised and restated Form 10-KSB makes the correction to reclassify US$1,493,889 (49% of US$3,048,754 imputed interests) from additional paid in capital to minority interest.

There was an entry in May 31, 2004 to reclassify US$283,308 from additional paid in capital to retained earnings. The Company did not carry this entry forward to 2005 and 2006, which has been corrected in the Form.

Sino partners over contributed US$273,385 in SQSS, which was not reflected in the year ended May 31, 2005. The revised and restated Form 10-KSB makes the correction to reclassify US$139,426 (51% of US$273,385 over contribution) from additional paid in capital and US$133,959 (49% of US$273,385 over contribution) from minority interest to other liabilities-related party.

|                                  |  | May 31, 2006           |  |             
|--------------------------------- |  | ---------------------- |  | ------------
|                                  |  |                       
|                                  |  | As previously reported |  | As restated 
|Nets Assets                       |  | 38,455,326             |  | 38,455,326  
|Minority Interest                 |  | 26,166,000             |  | 26,166,000  
|Total Stockholders' Equity        |  | 12,289,326             |  | 12,289,326  
|Additional Paid in Capital        |  | 34,965,558             |  | 34,682,250  
|Retained Earnings                 |  | (22,980,065)           |  | (22,696,757)
|                                  |  |                        |  |             
|                                  |  | May 31, 2005          
|                                  |  | As previously reported |  | As restated 
|Nets Assets                       |  | 16,277,936             |  | 16,004,551  
|Minority Interest                 |  | 5,438,460              |  | 12,955,731  
|Total Stockholders' Equity        |  | 8,734,476              |  | 943,820     
|Additional Paid in Capital        |  | 21,714,781             |  | 13,640,818  
|Retained Earnings                 |  | (13,020,451)           |  | (12,737,144)
|Other Liabilities  Related Party |  | 58,621,174             |  | 58,894,559  

F-24

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|SIGNATURES
|----------

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



|TERRA NOSTRA RESOURCES CORP.
|----------------------------

By: /s/ Donald Nicholson
Name: Donald NicholsonTitle: Principal Executive Officer, Member of the Board of Directors 
Date: December 19, 2006

By: /s/ Jeff Reynolds
Name: Jeff ReynoldsTitle: Principal Financial Officer and Principal Accounting Officer 
Date: December 19, 2006

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated, who constitute the majority of the board of directors:

By: /s/ Donald C. Nicholson 
Name: Donald C. NicholsonTitle: Chief Administrative Officer, Member of the Board of Directors 
Date: December 19, 2006



|By: /s/ Felix ChungName: Felix ChungTitle: Member of the Board of DirectorsDate: December 19, 2006By: /s/ Donald G. BurellName: Donald G. BurrellTitle: Member of the Board of DirectorsDate: December 19, 2006By: /s/ Crystal PoeName: Crystal PoeTitle: Member of the Board of DirectorsDate: December 19, 2006
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---