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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-KSB
  Amendment No. 2

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

For the
  fiscal years ended May 31, 2006 and 2005

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

For the transition period from ______________ to
______________

Commission File Number 049631

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.)
|                                                                     |                                     
|                                                                     |                                     
|970
      East Colorado Blvd., 9thFloor, 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 registered
|------------------- | -----------------------------------------
|None                | None                                     

Securities 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 during the past 12 months (or
  for such shorter period that the registrant was required to file such reports),
  and (2) has been subject to such filing requirements for the past 90 days. Yes
  [X]   No  [   ]

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 information statements 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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EXPLANATORY NOTE

We
are filing this Form 10-KSB/A No. 2 for the fiscal years ended May 31, 2006 and
2005 to correct certain clerical errors and to provide additional note
disclosure to the financial statements , as well as additional disclosure within
the body of the Form 10-KSB filing in order to provide readers a better
understanding of our operations. On October 16, 2006 the Company filed our Form
10-KSB for the fiscal years ended May 31, 2006 and 2005 with the Securities and
Exchange Commission (the Original Form 10-KSB). The Original Form 10-KSB (i)
did not incorporate a material inter-company entry, (ii) contained certain
immaterial classification errors, (iii) omitted a prior period adjustment which
was not carried forward to the current fiscal periods, and (iv) contained
certain clerical errors, all of which impacted the consolidated Balance Sheets,
but did not have a Statement of Operations affect. On December 29, 2006 the
Company filed Amendment No. 1 to the Original Form 10-KSB filing (the Amended
Filing) in order to correct the errors discussed above. Our financials
statements as contained in the Amended Filing present fairly our consolidated
financial position as of May 31, 2006 and 2005.

Over
the period January 2007 to May 2008, Management undertook an in depth analysis
of the Companys former disclosure and accounting treatments, and its financial
controls and procedures. In completing this review management became aware that
the note disclosure in the Original Form 10-KSB and the Amended Filing for the
fiscal years ended May 31, 2006 and 2005 was missing several important
disclosure topics including a note on Business Combinations, Income Taxes and
certain components of note disclosure regarding Stock Based Compensation.
Further, the Company became aware that the discussion of the amendments
contained in the Amended Filing did not provide sufficient information to give
readers a complete understanding of the restatements contained in the Amended
Filing. As a result this document as filed includes as Note 2, a detailed note
to the financial statements explaining the impact of those items which had been
revised in our Amended Filing and the underlying reasons for same. Note 2
provides details on the restatements both in a narrative and tabular format.

While
the financial statements contained in the Amended Filing presented fairly, in
all material respects, our consolidated financial position as of May 31, 2006
and 2005, and the consolidated results of our operations and our cash flows in
each of the fiscal years in the two year period ended May 31, 2006, in
conformity with U.S. generally accepted accounting principles, for the sake of
clarity, we are making further classification changes as discussed above to our
Consolidated Statements of Cash Flows to more closely follow the treatment
suggested in the applicable Statements of Financial Accounting Standards issued
by the Financial Accounting Standards Board. We have also augmented our note
disclosure to the financial statements in this Amendment No. 2 to the Form
10-KSB for the fiscal years ended May 31, 2006 and 2005. A summary of the
changes is provided below:

| | • | In our consolidated statements of cash flows we have made
      certain presentational changes and reclassifications as follows:
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                 
| |   | (1)                                                                                                                             
| |   | (2)                                                                                                                             
| |   | (3)                                                                                                                             
| |   | (4)                                                                                                                             

| | • | The Company has augmented the Notes to its Consolidated
      Financial Statements as follows:
| | - | ----------------------------------------------------------------------------------------------
| |   | •                                                                                             
| |   | •                                                                                             
| |   | •                                                                                             
| |   | •                                                                                             
| |   | •                                                                                             

3

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Management
  has also greatly increased the level of disclosure in the body of the Form 10-KSB
  document to assist shareholders in gaining a better understanding of our operation
  and the key factors which impact our performance.

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. 2 to its annual report on Form 10-KSB.

4

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**ITEM
1.**       **DESCRIPTION OF
BUSINESS.**

**(a)**     **Background**

Terra Nostra
  Resources Corp., a company formed under the laws of the State of Nevada on February
  7, 1994 (Terra Nostra or the Company us,
  and/or we and other similar terms as used herein refer collectively
  to the Company together with its subsidiaries) undertook a reverse merger with
  RTO Investments Corp., which was consummated in April, 2005.

The Company
  through the process of the reverse merger acquired an interest in two Joint
  Venture companies in the Peoples Republic of China (PRC) from RTO
  Investments Corp. (RTO). At the time of the reverse merger the Company
  and RTO were unrelated parties. The Company had limited operations due to the
  ongoing divestiture of certain of its assets. RTO was a holding company formed
  for the purposes of acquiring and financing the Joint Venture companies in the
  PRC. RTO held a joint venture agreement, (the RTO Joint Venture Agreement)
  to bring in the copper assets and the stainless steel assets. RTO assigned its
  rights in the joint venture agreement to the Company in exchange for the issuance
  of thirty-five million (35,000,000) shares of the common stock of the Company.

The transaction
  is reflected in our financial statements under long term investments, valued
  at $35,000 which is the 35,000,000 shares issued based on the par value of our
  common shares, $0.001 par value.

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.

In order to
  implement the terms of the RTO Joint Venture Agreement, on January 2, 2005,
  at the direction of RTO and Ke Zhang, the December 23, 2002, agreement between
  SJCC and HKHI was amended and restated (the SQSS JV). Under the
  SQSS JV, the Company 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, the Company had
  a total capital contribution commitment of $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.

In order to
  implement the terms of the RTO Joint Agreement, on January 10, 2005, at the
  direction of RTO and Ke Zhang, 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.

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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.

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.

STJMC is planning
  to phase in approximately 140,000 MT of production capacity that has been newly
  constructed, or is under construction, 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
  due to further construction and equipment requirements. 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,
  or substantially under construction, 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 peak, or maximum, 170,000 MT of production
  capacity of electrolytic copper output.

Our major
  challenge in achieving peak production levels at both the existing and new production
  facilities lies in having access to sufficient working capital to acquire the
  necessary raw materials and production supplies, as well as to complete construction
  at the 80,000 MT facility. We expect to substantially resolve this challenge
  by completing our remaining required capital contribution, as well raising additional
  sums of working capital according to our current fund-raising targets. If this
  capital is not raised, we will not be able to complete construction or ramp
  up production significantly at existing facilities. With respect to the 80,000
  MT facility, upon receipt of sufficient working capital, additional construction
  and subsequent ramp-up is required, the total time from receipt of funds estimated
  as being 6-8 months. The 60,000 MT facility is fully operational, therefore
  there are no inherent production ramp-up delays expected. With sufficient working
  capital in hand, and based on current market conditions, the remaining major
  barrier to ramping up to peak production capacities lies in ensuring stable
  and consistent supplies of raw materials, that being primarily scrap copper.
  The Company will seek to establish additional sources, as well as improve logistics
  and product handling operations, to meet this ramp up.

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.

6

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The Company is Nevada Corporation, and all dollar amounts used
herein refer to U.S. dollars unless otherwise stated.

**(b)**     **Business
  of Issuer**

Business Description

We currently
  conduct our operations through our two (2) fifty-0n percent (51%) owned Sino
  Froreign joint ventures, which operate in the stainless steel and copper industries
  in the PRC.

Overview of Current Operations

SQSS is a subsidiary of the Company, operating an integrated
  stainless steel plant in Zibo City, Shandong Province, PRC. SQSS 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 its casting mill to expand its design capacity potential
  to 230,000 MT, a more than 25% increase. 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, and 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, also a subsidiary of the Company, 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. STJMC currently sells approximately 8,500 MT per annum
of electrolytic copper, 6,000 MT per annum of low-oxygen copper rod, and 7,000
MT per annum of no-oxygen copper 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. Precious
metals sales make up less than 1% of total sales.

Stainless Steel Strip Market in the PRC

World stainless steel industry has grown rapidly over the past
20 years. Global stainless steel production reached 6.4 million MT in 1980, when
Japan and the US were the largest producers and consumers. In the last five
years, PRC stainless steel demand has driven the global markets to the point
where PRCs stainless steel apparent consumption now exceeds the total combined
demand of Japan and the US. In recent years, stainless steel
state-owned-enterprises (SOEs) and private enterprises in PRC have adopted
modern technologies and production techniques.

Due to the PRCs relatively modest growth in productivity over
time compared to its rapidly escalating demand, the PRC has grown dependent on
imports.

Besides TISCO and Baosteel (the largest stainless steel
producers in the PRC), it is notable that private enterprises, including
foreign-invested companies, are increasing their presence among the stainless
steel producers.

By the end of 2005, PRC stainless steel smelting production
reached an annualized rate of 4 million MT, and increase of 400,000 MT over
2004. After technology upgrades at their facilities, the current productivity of
TISCO reached 1 million MT and Baosteel Stainless Steel is producing 800,000 MT
per annum.

Baosteel has deferred their planned 1 million MT expansion
program until the market outlook strengthens. Besides Baosteel and TISCO, the
industry produces 2.2 million MT per annum. The largest SOEs are Nantong Special
Steel and Dongbei Special Steel. The top private producers include Ruitian,
Jiuli, and Weida.

In 2005, PRC sheet/coil production reached 3.9 million MT.
Baosteel was the largest producer of hot roll (HR) flat products, followed by
TISCO, Youte and Huaguang, respectively. Baosteel inaugurated a new 700,000 MT
facility in 2005 and produces a total of 1.4 million MT of HR flat products.
TISCO produces 800,000 MT.

Official statistics for 2005 indicate that PRC stainless steel
production has grown from 950,000 in 2002 to over 3 million MT. It is noted that
the actual production levels are higher than this because the statistics dont
fully capture the production of private mills, which make up roughly half of
total production.

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The overall steel market has been volatile in 2006 and a
consequence has been that stainless steel production has fallen. According to
the China Special Steel Enterprises Association (SSEA), stainless crude steel
produced by the PRCs 32 largest stainless steel producers reached 820,000 MT
for the first half of 2006, up 3.4% year on year. The growth by product class,
however, has been mixed: chrome stainless steel production has reached 290,000
MT, down 10.9% year on year; while chrome-nickel stainless steel was 500,000 MT,
up 9.4% year on year.

Stainless steel production in the PRC has grown by
approximately 980,000 MT over the prior year, including growth of 214,000 MT of
stainless sheet. Due to high nickel prices this year (the LME nickel price is
upwards of $25,000 per MT, three times higher than it was in 2004), stainless
mills have altered their mix of products. Accordingly, austenitic (i.e., 300
series) stainless steel production has decreased while chrome stainless steel
production has increased.

As a result of the high price of nickel and other factors, the
production of chrome-manganese (i.e., Series 200) stainless steel has grown
sharply. However, as these products fail to meet both PRC and international
product standards, the production of these products has been called into
question by many industry and government officials. It is likely that the
government will take measures to limit growth of Series 200 production.

PRC is the worlds largest importer of stainless steel. Import
volume comprises a remarkable 65% of its total consumption and represents 20% of
the total global trading volume of stainless steel. Driven by strong market
demand, PRC stainless steel production levels have increased sharply in recent
years resulting in a slowing in the growth of imports and greater export
growth.

Generally speaking, PRCs stainless steel import volume has
maintained a stable level of about 3 million MT per annum for the last few
years. Imports over the 2003-2005 year period have ranged from 2.83 million in
(2004) to 3.02 million (2005). Imports were approximately 1.4 million MT for the
first half of 2006. PRCs main imports are flat products. The import volume of
stainless strip and other flat products was 1.3 million MT for January through
July, 2006, accounting for 90% of total imports.

Exports, on the other hand, have grown significantly in recent
years. Total exports in 2003 were 150,000 MT and grew to an impressive 500,000
MT during the January-July period of 2006.

The table below reflects the PRCs consumption and production
patterns, which statistics are affected by under-reporting from private
stainless steel mills. Generally speaking, PRC stainless steel consumption
doubled during the tenth five-year plan period (2001-2005) with slower growth
during the more recent years:

PRC production, trading, and consumption of stainless steel
(000s MT) Official (under-reported) statistics

Crude Stainless Production
    Import Volume
    Export Volume
    Consumption Volume2000
    700
    1,090
    10
    1,6802001
    900
    1,670
    10
    2,5302002
    1,100
    2,400
    40
    3,3002003
    1,780
    2,960
    160
    4,5402004
    2,360
    2,890
    400
    4,4902005
    2,900
    3,020
    410
    5,0702006 (forecast)
    3,300
    2,500
    500
    4,800


Prices of stainless steel increased gradually over the past
couple of years until mid-2005 when prices fell. The price fall mirrored, but
was less severe than the price drops in carbon steel over the same period. From
2006, however, stainless prices rebounded in a cost push response to escalating
nickel prices.

The LME price of nickel has doubled since March 2006, and there
is much controversy surrounding the causes of the increases. Users maintain that
the nickel market is not under-supplied; rather, the upsurge in prices is the
result of speculation by financial investors (i.e., hedge funds and commodity
funds). The counter argument is that the price increases are due to fundamental
supply and demand factors, as supported by the fact that LME nickel stocks have
dipped to very low levels in recent months.

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Another phenomenon of the increase in nickel prices is that
there is an increasing supply of scrap being brought to market. World trade in
stainless scrap has risen more than 1 million MT over the last four years with
only a very minor dampening effect on nickel prices.

The following table shows the price trends for HR stainless
flat products, as quoted in Shanghai:

Hot roll stainless steel prices from 2004 to present
(RMB/MT)

Source: Steelhome.com.cn

In response to the positive market environment, there are
several development projects in the works in PRCs stainless steel industry.
Smelting programs include a new 1.5 million MT plant by TISCO, Baosteel with a
800,000 MT facility planned, ZPSS with 600,000 MT, and Jiuquan Steel with
500,000 MT. It is predicted that current productivity of stainless steel
smelting programs under construction has reached 3.7 million MT in 2006.

After the completion of likely construction projects, PRC crude
stainless steel productivity will reach 7.7 million MT. In 2007-2008, Tangshan
Stainless Steel plans to open two large stainless steel facilities followed by a
200,000 MT line in 2008. Chinese analysts believe that domestic stainless crude
steel production could reach 12 million MT by 2010.

Copper Processing Market in the PRC

Copper futures rose to a record US$8,800 per MT on the London
Metal Exchange in May, 2006 and have more than doubled over the past year. The
surge comes as funds have boosted investments in commodities, and as PRC, the
world's biggest consumer of the metal, has used more copper in generators and
pipes. Some analysts believe that copper may reach a new record in the next six
months and fluctuate at a high level because of tight supply.

PRC's copper demand is expected to increase 6-8 percent to just
under 4 million MT, according to analyst consensus forecasts over the summer. It
is noted that PRC relies on imports for about a one-third of its metal
needs.

Analysts state that the bull market for copper will last for
2007 and 2008, although the growth in these years will not reach the growth rate
enjoyed by copper processors in 2006. PRC used about 22 percent of the world's
refined copper last year. The country's power-generating and distribution
companies accounted for more than half of the country's consumption.
Manufacturers of air conditioners, pipes and automobiles are also major
consumers in PRC.

Chinese smelters including Jiangxi Copper, the nations
largest, boosted output 23 percent in the first half, according to the
Beijing-based Mainland Marketing Research Co. Higher output eased the nation's
copper imports, which fell more than 20 percent during the same period, from a
year earlier.

For the first half of 2006, PRC's copper cathode imports
totaled 387,275 MT, down 43.8% from the same period in 2005. Market participants
also attribute the fall in copper cathode imports to consumer de-stocking, as
well as domestic sales by PRCs State Reserve Bureau (SRB). The SRB manages
the nation's copper reserves and is under the National Development and Reform
Commission, PRC's top economic planning agency.

9

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Market participants say the SRB has released over 100,000 MT of
copper in the domestic market since November last year through a combination of
public auctions and private sales. In addition, domestic production capacity is
growing, which also reduces the need for imports. In the first half of 2006,
PRC's copper production rose 23% on year, to 1.42 million MT. The country's
import of copper concentrates, the raw material used to make copper cathode,
rose 16.2% for the month of June to 306,358 MT.

The copper processing (i.e., production of electrolytic or
commodity copper) industry has a few large players; however, the industry is
very fragmented otherwise. The top nine, ranked by volume, are shown in the
table, below:

Copper processing market leaders, in MT

|                     |  |           |  |  |           |  |  | Market |  |  |          | 
|-------------------- |  | --------- |  |  | --------- |  |  | ------ |  |  | -------- | 
|Top Producers        |  | 2004      |  |  | 2005      |  |  | Share  |  |  | Increase | 
|Jiangxi Copper       |  | 415,000   |  |  | 450,000   |  |  | 19.1%  |  |  | 3.5%     | 
|Tonglin Non-Ferrous  |  | 371,000   |  |  | 400,000   |  |  | 17.0%  |  |  | 2.9%     | 
|Yunnan Copper        |  | 225,000   |  |  | 280,000   |  |  | 11.9%  |  |  | 5.5%     | 
|Daye Copper          |  | 148,000   |  |  | 170,000   |  |  | 7.2%   |  |  | 2.2%     | 
|Jinchuan Non-Ferrous |  | 131,000   |  |  | 170,000   |  |  | 7.2%   |  |  | 3.9%     | 
|Baiying              |  | 63,000    |  |  | 77,000    |  |  | 3.3%   |  |  | 1.4%     | 
|Dachang              |  | 61,000    |  |  | 65,000    |  |  | 2.8%   |  |  | 0.4%     | 
|Jintian              |  | 42,000    |  |  | 60,000    |  |  | 2.6%   |  |  | 1.8%     | 
|Yantai               |  | 49,000    |  |  | 60,000    |  |  | 2.6%   |  |  | 1.1%     | 
|Subtotal             |  | 1,505,000 |  |  | 1,732,000 |  |  | 73.7%  |  |  | 22.7%    | 
|Other                |  | 556,000   |  |  | 618,000   |  |  | 26.3%  |  |  | 6.2%     | 
|Total PRC Market     |  | 2,061,000 |  |  | 2,350,000 |  |  | 100.0% |  |  | 28.9%    | 

The top three processors in the market comprise nearly 50% of
the PRC market. The next six listed comprise 26% of the PRC market in 2005. Each
of the remaining market participants represents less than 2.5% of the PRC
market.

Based on the
  information available as of the present time, upon the phase-in of the New Assets
  and the 80,000 MT facility, STJMC will have a scale comparable to Daye Copper
  and Jinchuan Non-Ferrous and will have production output that ranks it in the
  top six of all copper producing companies in PRC.

PRC is a large importer of copper concentrate, sourcing most of
its supplies from South America, Mongolia and Australia.

Two thirds of PRCs copper consumption in 2005 was in the wire
cable industry, which generated $30 billion of revenues, second only to that of
the automotive industry. Power grid expansion, information and telecom growth,
power equipment upgrades and energy saving needs are driving up the countrys
demand for wire cables and products. The industry has maintained good momentum
over the past five years and PRC has surpassed Japan and the United States to
become the worlds largest wire cable manufacturer. Over the last 15 years, the
PRC wire cable industry has experienced an average annual growth rate of 16%.
This level of growth, which substantially outstrips the growth in average
domestic product over the same period, is attributed primarily to PRCs
large-scale infrastructure construction over this period.

Investment in power transmission will continue to grow and that
will drive up the demand for wire cable and related products, especially copper.
Ongoing expansion of the power grid, urban and railway construction and the
nuclear power building boom will all contribute to the growth prospects for the
wire cable and, by extension, the copper processing industry.

Products, Marketing, and Customers

Copper

Electrolytic copper is a commodity and the market dynamics are
very similar to that of other commodities. Since the quality and physical
characteristics of electrolytic copper between suppliers is nearly identical,
the main differentiation is price and customer service, which is generally
viewed in terms of reliability in filling orders at the price promised. It is
equally imperative that the subsidiary maintains a reputation for consistently
meeting the chemical and physical attributes prescribed under national
standards. The actual standards to qualify for #1 status include the following:

10

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- Basic standard: GB/T467-1997
- Chemical contents: GB466-82
- Must have a clean and smooth surface as well as clear-cut corners
- Each sheet must weigh 10kg, or more, having a minimum thickness of 5 mm at
  the middle point

Other standards have been adopted for electrolytic copper
product that are intended for electrical engineering applications and threaded
materials using oxygen free rods.

The pricing of electrolytic copper and oxygen free copper rods
in PRC is generally linked to the prevailing market (spot) prices on the
Shanghai Metal Exchange, one of the major world commodity exchanges trading in
#1 commodity copper.

STJMC presently
  has an existing production capacity of 30,000 MT of electrolytic copper, and
  is planning the phasing in of approximately 140,000 MT of production capacity
  that has been newly constructed by Sino Partner, as previously described. In
  addition to electrolytic copper production, STJMC has the capability to produce
  a further 20,000 MT per annum of low oxygen copper rod using a separate production
  process, which converts high grade scrap copper into copper rod according to
  customer requirements. STJMC also has approximately 12,000 MT per annum of capacity
  to convert electrolytic copper into no oxygen copper wire and rod.

STJMC currently
  sells approximately 8,500 MT per annum of electrolytic copper, 6,000 MT per
  annum of low-oxygen copper rod, and 7,000 MT per annum of no-oxygen copper 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. Precious metals sales make up less than 1% of
  total sales. At present, all electrolytic copper utilized in the production
  of no-oxygen copper rod and wire is sourced from internal production of electrolytic
  copper.

Copper products
  are priced according to the copper prices of the Shanghai Metal Exchange,
  and marking up approximately RMB 1,000 per metric ton. Additional value added
  production processes, such as processing into copper tube or wire, provides
  for additional markups of RMB 1,000 to 3,000, depending on grades, process involved,
  and product specifications.

STJMC sells
  through an internal sales department to end users. STJMC does not use brokers
  or other middlemen and therefore does not pay broker or other commissions. All
  of the copper products are presently sold within Shandong Province, which is
  one of the largest copper consuming provinces in PRC. As a local supplier to
  surrounding industry in the Zhouping and Dongying districts, this provides STJMC
  with a significant advantage over other domestic and foreign competitors, in
  terms of being able to rapidly respond to customer requirements. Shandong province
  is amongst the most advanced of the provinces with respect to its transportation
  network, and the STJMC production facilities adjoin or are in immediate proximity
  to major highways leading to the manufacturing centers in the province. Furthermore,
  proximity to rail networks provides ready access to other markets in China,
  as well as to the major ports on the East coast of China for export opportunities
  in the future.

We purchase
  our power from the local government at market rates, costing us approximately
  $.09 to $0.10 per kwh. Power is pulled directly from the national grid to our
  own substations; therefore we are not reliant upon intermediary providers. Shandong
  province is generally power sufficient, and our production facilities do not
  experience power interruptions on any recurring basis, as compared to other
  areas of China which face routine and disruptive power supply interruptions.
  The other primary energy source is fuel oil, used for the furnaces. This is
  locally sourced, is readily available in the quantities required, and represents
  an insignificant component of the cost of production.

The majority of the electrolytic copper is sold to
manufacturers of wire cable as discussed in the previous section of this report.
Electrolytic copper is an intermediate product used for melting and casting or
extruding into copper wires, rods, ingots, or blending with other metals to form
metal alloys.

As the Company
  acquired STJMC on May 31, 2006, the final day of the most recent fiscal year,
  this discussion on copper customers is provided for comparative purposes. The
  major customers for fiscal 2006 represented average revenue of $4,769 per MT.
  The percentage of our production to those major customers is detailed below:

Zibo Baolin Copper
        Material Co., Ltd
      4.1%Qingdao Hongtai
        Copper Co., Ltd
      3.9%Jinan Liangji Ind.
        Co., Ltd.
      3.3%Zibo Hangyang Copper
        Co., Ltd.
      3.1%Tai'an Lutai Electric
        Equipment Co., Ltd
      2.9%


11

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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.

Stainless Steel

SQSS is currently producing cast billets at a low utilization
rate of approximately 20% of rated capacity. The primary output is 304 billets,
which is an intermediate product that is suitable for downstream rolling into
stainless steel strip, stainless steel narrow strip, and stainless steel rod.
Grade number 304 stainless steel is the most common stainless steel alloy blend
used in both international and PRC markets. Within certain tolerances, grade
number 304 stainless has a blend of 18% chromium and 8% nickel and is commonly
referred to as 18/8 stainless steel.

The casting mill is designed to produce the full range of
billet products, from series 200 and including series 300 and 400. The mix of
production quantities is a function of the prevailing market conditions.
Notwithstanding the production flexibility, it is likely that there will be more
series 300 sold than the other blends combined. Currently in PRC there is debate
over the adequacy of series 200, a relatively low-grade product, for
applications in the PRC market. Consequently, demand for series 200 is volatile
and most likely will be substantially phased out as PRC manufacturers and
construction industry customers of stainless steel attempt to increase their
overall standards.

The billets will have cut-off sections that equal either 160mm
square or 170mm by 210mm. The billet lengths will fall anywhere in the range of
3,000mm to 4,500mm. The weight of the billets will depend on the physical
dimensions as outlined above or on the alloy mix. Accordingly, the weight of the
billets produced will fall in the range of 600kg to 1,255kg.

SQSS recently completed construction of its strip mill and has
commenced production testing. The strip line will convert the stainless steel
billet stock produced by the casting mill into narrow stainless steel strip.
Stainless steel strip is used in many applications including the production of
welded stainless steel pipe, kitchenware, flatware, angle steel, industrial
purposes, construction, and automotive, among other industries.

SQSSs stainless steel strip mill is designed to manufacture
  narrow strip using a wide range of alloy products as feedstock. In addition
  to stainless steel series 200, 300, and 400, the mill is equipped to fabricate
  such other types of steel as mold steel, gear steel, and most types of carbon
  steel. The rolling mill can produce strip stainless steel with gauges equal
  to or greater than 2.5mm, with a width of up to 350mm. The sales mix will be
  dynamic with changes in the market. As
  a value added process, the production of stainless steel strip is intended to
  allow SQSS to access a broader market, as well as benefit from increased and
  frequently more stable margins inherent in downstream products. Figures are
  not yet available as production has not commenced, however market studies indicate
  an improvement in bottom line margins of two to three percent when using internally
  produced feedstock (billets), which is the primary intended source. Any excess
  production capacity in the rolling mill may be provided to other billet manufacturers.

Stainless steel products are not commodities like electrolytic
copper, at least not in the technical sense. Stainless steel products are not
traded on any of the global exchanges for commodities and there can be
differences in production quality and specialty alloys which can differentiate
the products in ways other than price. Nevertheless, the differences in 18/8
stainless between producers are generally not substantial and there are
commodity exchanges, such as the London Metals Exchange, which are evaluating
establishing trading markets for stainless steel.

From a marketing standpoint, SQSS stainless steel products are
sold through an internal sales department and through sales agents. Since SQSS
stainless steel strip line isnt fully operational, SQSS is focusing their
marketing on outsourcing the rolling to other mills and selling the rolled strip
products to downstream fabricators. SQSS is also selling a small amount of
billet. Although it is an option to sell a larger percentage of the stainless
steel billet to rolling mills, this would miss an opportunity to develop a
reputation and following among customers who could potentially become long term
customers. A sample of our customers and the product applications are as
follows:

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Representative customers, product application

|Customer                                           | Product Application                                    
|-------------------------------------------------- | -------------------------------------------------------
|Jiangsu Juxing, Jingsu Province                    | Strip mill                                             
|Qingdao Peiming Metal, Shandong Province           | Strip mill and decorative materials                    
|Lichong Yecheng, Guangdong Province                | Strip mill, angle steel, flat
      steel, square steel
|Shanghai Zunma, Shanghai                           | Welded pipe                                            
|Shandong Dongjing Cutlery, Shandong
      Province | Kitchen flatware and tableware                         
|Jiangsu Changshu Menglan Xinda, Jiangsu Province   | Cold roll strip for industrial applications            

The majority
  of our customers are located in Shandong Province and therefore our facilities
  are strategically located near our customer base. We are located in the middle
  of Shandong Province, adjacent to the Jiqing Highway, one mile from Jiaoji railway,
  and approximately 150 miles to the nearest major port. We presently transport
  the majority of our finished products to our customers via trucking. Infrastructure
  support is suficient and roads leading to major ports for potential shipments
  by sea, if required, are easily accessible. Further, we have ready access to
  direct loading and unloading rail facilities as the railroads runs directly
  beside our facilities.

As we only
  commenced operations in January 2006, on a trial production basis, our operations
  for the last five months of fiscal 2006 generated approximate average revenue
  of $1,716 per MT, which is not representative of future operating performance.
  This average price encompasses a range of steel grades. The percentage of our
  production to our major customers is detailed below:

|Wuxi Judai Stainless Steel Co.                              | 14.5%
|----------------------------------------------------------- | -----
|                                                            |      
|Wanzhou Yongxang Special Steel Co. Ltd.                     | 9.7% 
|                                                            |      
|Shandong Furuida Group Co. Ltd.                             | 7.7% 
|                                                            |      
|Wanzhou Juxing Special Steel Co. Ltd.                       | 6.8% 
|                                                            |      
|Shandong Furuida Stainless Steel Co. Ltd.                   | 6.7% 
|                                                            |      
|Fushan Lanshi Lichong Yecheng Stainless Steel
      Factory | 5.9% 

The remaining
  48.7% of our production is made up of customers at declining percentages of
  production.

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. SQSS will continue to develop and expand its customer base through
  the upcoming fiscal year in order to have a diversified as possible customer
  base. At the present time, our customer base is spread over a large number of
  customers, each only purchasing on a trial basis, and the loss of any one of
  our customers would not have a major impact on our expected product sales upon
  reaching regular production.

(c) Risk Factors

Risks related to operating a business in the PRC

The Joint Ventures are subject to general risks of operating in
the PRC. These include risks associated with the political and economic
environment, foreign currency exchange and the legal system in the PRC. The
economy of the PRC differs significantly from the economies of the western
industrialized nations in such respects as structure, level of development,
growth rate, capital reinvestment, resource allocation, self-sufficiency, rate
of inflation and balance of payments position, among others. The PRC government
encourages substantial private economic activities, but this has only been the
case since the early 1990s.

The Chinese economy has experienced significant growth in the
past several years, but such growth has been uneven among various sectors of the
economy and geographic regions. Actions by the PRC government to control
inflation, for example, have restrained economic expansion in the recent past
across several industrial sectors. Similar and continued actions by the PRC
government in the future could have a significant adverse effect on domestic
economic condition in PRC.

The PRC still does not have a comprehensive system of laws, and
enforcement of existing laws may be

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uncertain and sporadic. There have been many laws and
regulations promulgated in recent years dealing with economic matters in general
and foreign investment in particular.

The PRC government has been pursuing economic reforms since it
first adopted its open-door policy in 1978. There is no assurance that the PRC
government will continue to pursue economic reforms or that there will not be
any significant change in its economic or other policies, particularly in the
event of any change in the political leadership or the political, economic or
social conditions in the PRC. There is also no assurance that the Company will
not be adversely affected by any such change in governmental policies or any
unfavorable change in the political, economic or social conditions, the laws or
regulations, or the rate or method of taxation in the PRC.

The Companys financial instruments that are exposed to
concentration of credit risk consist primarily of cash and cash equivalents and
accounts receivable. Cash and cash equivalents are maintained with major banks
in the PRC. Terra Nostras target customers are primarily located in the PRC;
STJMC and SQSS periodically perform credit analysis of some of its customers and
monitor the financial condition on a case by case basis to minimize credit risk.

Any devaluation of the Renminbi (RMB) versus the US dollar
may adversely affect Terra Nostras financial performance and asset values when
measured in terms of the US dollar. Such devaluation could have a material
adverse affect on the Companys earnings expressed in US dollars. The Company
does not hedge its foreign exchange exposure. The PRC government imposes
controls on the convertibility of Renminbi into foreign currencies and, in
certain cases, the remittance of currency out of the PRC. The two PRC Joint
Venture companies, SQSS and STJMC (collectively referred to as the
Subsidiaries) receive substantially all of their revenues in Renminbi, which
is currently not a freely convertible currency. Shortages in the availability of
foreign currency may restrict the ability of the Subsidiaries to remit
sufficient foreign currency to pay dividends, or otherwise satisfy foreign
currency denominated obligations. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions
and interest payments, can be made in foreign currencies without prior approval
from the PRC State Administration of Foreign Exchange (SAFE) by complying with
certain procedural requirements. However, approval from appropriate governmental
authorities is required where Renminbi is to be converted into foreign currency
and remitted out of PRC to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies.

The PRC government may also at its discretion restrict access
in the future to foreign currencies for current account transactions. If the
foreign exchange control system prevents the Subsidiaries from obtaining
sufficient foreign currency to satisfy the Subsidiaries currency demands, the
Subsidiaries may not be able to pay certain expenses as they come due.

The PRC laws and regulations governing the Subsidiaries
business operations and contractual arrangements are uncertain, and if one of
the Subsidiaries is found to be in violation, the violating subsidiary could be
subject to sanctions. Additionally, any changes in such PRC laws and regulation
may have a material and adverse effect on one or both of the operating
businesses.

There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but not
limited to the laws and regulations governing the businesses, or the enforcement
and performance of the contractual arrangement with suppliers and customers, or
the enforcement and performance of the Subsidiaries arrangement with customers
in the event of the imposition of statutory liens, bankruptcy, or criminal
proceedings. The Company and its Subsidiaries are considered foreign persons or
foreign funded enterprises under PRC laws, and as a result, the Company and
Subsidiaries are required to comply with PRC laws and regulations. These laws
and regulations are relatively new and may be subject to future changes, and
their official interpretation and enforcement may involve substantial
uncertainty. The effectiveness of newly enacted laws, regulations or amendments
may be delayed, resulting in detrimental reliance by foreign investors. New laws
and regulations that affect existing and proposed future businesses may also be
applied retroactively. In addition, the PRC authorities retain broad discretion
in dealing with violations of laws and regulations, including levying fines,
revoking business licenses and requiring actions necessary for compliance. The
Company and Subsidiaries cannon predict what effect the interpretation of
existing or new PRC laws or regulations may have on the businesses. The Company
cannot assure that any such restructuring would be effective or would not result
in similar or other difficulties. The Subsidiaries, one or both, may be subject
to sanctions, including fines, and could be required to restructure their
operations. As a result of these substantial uncertainties, the Company cannot
assure that it or one or both Subsidiaries will not be found in violation of any
current or future PRC laws or regulations.

A slowdown or other adverse developments in the PRC economy may
materially and adversely affect the Subsidiaries customers, demand for services
and the businesses. All of the Companys operations are conducted in the PRC and
all of the Companys revenues are generated from sales to businesses operating I
the PRC. Although the PRC economy has growth significantly and consistently over
the last 28 years, there can be

14

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no assurances that such growth will continue. The Subsidiaries
have not experienced a contraction in the economy and it isnt known how well
the businesses will perform in a slowdown. A slowdown in overall economic
growth, an economic downturn or recession or other adverse economic developments
in the PRC may materially reduce the demand for the Subsidiaries products and
materially and adversely affect the businesses.

Operating and financing risks

The Company competes with both state owned enterprises,
Sino-Foreign Joint Ventures, and Sino private processors and
fabricators

While we believe that we will be able compete effectively, both
in terms of cost structure and price, many of our competitors are better
capitalized, more experienced, and have deeper ties within the Chinese
marketplace. We may be unsuccessful in our attempts to compete, which would have
a material adverse impact on our business and financial condition. No only are
there numerous competitors in PRC, but there may be competitive threats from
foreign companies. With the PRCs entry into the World Trade Organization and
the PRCs agreements to lift many of the barriers to foreign competition, the
Company anticipates that the environment in its markets will become increasingly
competitive.

The Stainless Steel Joint Venture has very limited trading
history and this may not provide a meaningful basis on which to evaluate
our business

Although our stainless steel revenues are growing, we are
operating at a low level of our design capacity. The Company cannot assure that
production will reach break-even levels or that the subsidiary will reach
profitability in the future. We expect that our operating expenses will increase
as we expand. Any significant failure to realize anticipated revenue growth
could result in significant operating losses.

SQSS and STJMC will continue to encounter risks and
difficulties frequently experienced by companies at a similar stage of
development, including our potential failure to:

- Implement our business plan and strategy and adapt and modify them as
  needed;
- Manage our expanding operations;
- Maintain adequate control of our expenses;
- Keep up with technological developments;
- Anticipate and adapt to changes among our key customer industries, namely
  wire and cable, motors, air conditioning and refrigeration, process
  industries, construction, and power plant development;
- Participate in mergers and acquisitions involving our competitors; and,
- Meet changing competitive and market dynamics.

If the Company is not successful in addressing any or all of
these risks, the underlying business may be materially and adversely affected.

The Companys continued growth and the fulfillment of its
business plan is dependent upon the ability to raise capital from outside
sources. Management believes that for the Company to meet its growth
opportunities, substantial capital infusions are required in a timely manner. In
the event that the Company and its Subsidiaries are unable to obtain the
necessary financing on acceptable terms, there may be an adverse affect on the
Companys financial position, competitive position, growth and profitability.
The ability to obtain acceptable financing at any time may depend on a number of
factors, including:

- The Companys financial condition and results of operations;
- The condition of the PRC economic, political, and legal environment; and,
- Conditions in the relevant financial and capital markets, particularly in
  the U.S.

SQSS may not achieve yields, volumes, and cost basis to
generate profits

SQSS has recently completed construction of its casting mill
and has been performing production trials for the past eight months. The
production of billet remains at a very low percentage (under 20%) of production
utilization and is behind its schedule of increasing production to a level that
will allow the subsidiary to generate positive income and positive cash flow.
The delays could be attributed to technical issues, a lack of critical
skill-sets among the engineering, managerial, production personnel know-how, or
merely a function of working capital limitations. Whichever the cause, SQSS may
not be able to remedy the situation and may not be able to successfully increase
production to a level that will generate profits for the Company. This would
potentially have a material adverse affect on the Companys financial
performance and capacity to pay dividends in the future.

15

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The second element of this issue involves the strip mill.
Although the strip mill has been constructed, it has only just recently begun
test trials, and there are risks that the mill may not have the standards of
design, engineering, mechanical function, and technical operational expertise to
produce stainless steel strip at levels of volume, quality, and pricing needed
to generate profits and positive cash flow. A failure of the subsidiary to meet
these standards, produce adequate volumes of quality stainless steel, and
command prices that cover fixed and variable costs would potentially have a
material adverse affect on the Companys financial performance and capacity to
pay dividends in the future.

The Company has never paid cash dividends and is not likely
to do so in the foreseeable future

The company currently intends to review its dividend policy as
circumstances warrant.

There is only a limited trading market for our common stock
for Terra Nostras common stock

Terra Nostras common stock is now listed on the Over The
Counter / Bulletin Board in the United States. There is currently limited
trading for its common stock and there can be no assurances that a substantially
stronger trading market will ever develop. Investors may be unable find it
difficult to sell their shares due to the thin trading volume. In addition,
broker-dealers who recommend buying in Terra Nostra must follow special sales
procedures, including get the purchasers written consent prior to the sale.
Terra Nostras common stock is also subject to the penny stock trading rules,
which require delivery of a schedule explaining the penny stock market and the
associated risks before any sale.

Terra Nostras common stock price is subject to volatility
unrelated to the operations of the Subsidiaries

The market price of the Companys common stock could fluctuate
substantially due to a variety of factors including market perception of the
ability of Terra Nostra to achieve its planned growth, quarterly operating
results of companies viewed as comparable to Terra Nostra, trading volume in the
Companys common stock, changes in general conditions in the economy,
perceptions of the market on the future of steel, copper, and other base metals
in PRC, and the financial markets or other developments affecting the Companys
competitors or the Company itself.

In addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the market
price of securities issued by many companies for reasons unrelated to their
operating performance and could have the same effect on Terra Nostras common
stock.

**ITEM 2 -**      
**DESCRIPTION OF PROPERTY**

The Company presently leases office space at 55 S. Lake Ave.,
Suite 700, Pasadena, CA 91101 from which it conducts its North American
headquarter operations. The Company occupies approximately 3,200 square feet of
Class A office space. The Company pre-paid rent of approximately US$78,000 in
February, 2006, which will cover the basic lease until expiration in
mid-January, 2007. The Company is in discussions with the landlord concerning a
multi-year renewal period. The Company is evaluating several long-term leasing
options and anticipates making a decision on permanent office space in November,
2006.

In addition, the Company leases space at 1128 Alberni Street,
Suite 302, Vancouver, British Columbia, Canada. The office area is approximately
650 square feet and is located in a prime office and commercial location in
Vancouver. The rent agreement provides for a monthly rent of US$1,100 and is
month to month subject to 30-day notice of cancellation.

The Company, through its Subsidiaries owns and leases plants in
the PRC and has long-term land use rights, which are common in PRC. SQSS has
land use certificates corresponding to 189,387 square meters of land although it
utilizing approximately 352,000 square meters in the Zibo High New Technology
Property Development Zone, in Shandong Province. SQSS was informed by the
Municipality that it will issue land use certificates covering the full occupied
area following a land survey. 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.

STJMC does not hold land use rights certificates corresponding
with the property it is occupying. 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

16

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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.

STJMC also entered into an electrolytic copper production line
leasing agreement on May 19, 2005 with Dongying Fanguan Copper Co. Ltd. The
agreement covers the period from January 1, 2006 to December 30, 2008 and
provides for an annual rental fee of RMB 5,300,000. STJMC began using the
production line during January 2006.

**ITEM
3.**       **LEGAL PROCEEDINGS.**

The Company is not a party to any legal proceedings.

**ITEM 4.**     
 **SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

No matters were submitted to our security holders for a vote
during the fourth quarter of our fiscal year ending May 31, 2006.

PART II

**ITEM 5.**   
   **MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.**

The Company's common stock trades on the OTCBB. From January 19
2005 to September 18 2006, the stock was traded under the ticker symbol TNRO.
Since that time until the date of this report, it has traded under the ticker
symbol "TNROE". Following is a report of high and low bid prices for the last
two fiscal years.

|FYE May 31, 2006          | High  | Low 
|------------------------- | ----- | ----
|4thQuarter ended 05/31/06 | 3.64  | 2.60
|3rdQuarter ended 02/28/06 | 3.07  | 2.00
|2ndQuarter ended 11/30/05 | 2.76  | 2.20
|1stQuarter ended 8/31/05  | 2.84  | 2.05
|                          |       |     
|                          |       |     
|FYE May 31, 2005          | High* | Low*
|4thQuarter ended 05/31/05 | 3.17  | 2.49
|3rdQuarter ended 02/28/05 | 5.05  | 3.70
|2ndQuarter ended 11/30/04 | 3.70  | 1.70
|1stQuarter ended 8/31/04  | 5.60  | 2.60

* Stock prices prior to January 20, 2005, are
adjusted to reflect a reverse split of the outstanding shares of common stock on
a basis of 10:1.

The stock price information above was provided by
QuoteMedia.com. The quotations provided herein may reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.

As of October 11, 2006, there were 16 market makers in the
Company's stock. The last available reported trade by the OTC/BB prior to the
filing of this report was October 13, 2006 at US$1.93.

As of May 31, 2006, there were 95 record holders of the
Companys common stock.

During the last two fiscal years, no cash dividends have been
declared on the Company's stock.

17

---

Securities Authorized for Issuance under Equity Compensation
Plans

The total number of shares authorized for issuance under equity
compensation plans is 4,000,000.

Plan Category
    Number of securities to be issued upon exercise
      of outstanding options, warrants and rights (a)
    Weighted average exercise price of outstanding
      options, warrants and rights (b)
    Number of securities remaining available for
      future issuance (c)Equity compensation plans approved by security holders
    None
    N/A
    N/AEquity compensation plans not approved by security holders
    2,652,000
    2.48
    1,348,000Total
    2,652,000
    2.48
    1,348,000


(b)      Recent sales of
unregistered securities

During the fiscal year ended May 31, 2006, the Company issued
the following unregistered securities:

Date
    Amount ofCommon Shares
    Issued To
    Amount ofConsideration
    Type ofConsideration
    Exemption6/1/2005
    5,000
    Jason Leung
    $15,000
    $US
    Regulation D6/1/2005
    5,000
    Winnie Leung
    $15,000
    $US
    Regulation D6/17/2005
    54,000
    New Equities Publishing
    $98,514
    $US
    Regulation D6/17/2005
    20,000
    Sun Liu James Po
    $36,486
    $US
    Regulation D11/1/2005
    400,000
    Sun Liu James Po
    $1,000,000
    $US
    Regulation S11/1/2005
    40,000
    Sun Liu James Po
    $100,000
    $US
    Regulation S11/17/2005
    40,000
    Jimmy T. Chang
    $100,000
    $US
    Regulation D11/17/2005
    400,000
    Tsiun-Cheng Tseng
    $1,000,000
    $US
    Regulation S11/30/2005
    1,200,000
    Charnwood Green Ltd.
    $3,000,000
    $US
    Regulation S12/15/2005
    1,000,000
    Ganqiong Li
    $2,500,000
    $US
    Regulation S12/15/2005
    40,000
    Paul Chang
    $100,000
    $US
    Regulation D12/15/2005
    100,000
    Junqing Zhang
    $250,000
    $US
    Regulation S1/15/2006
    800,000
    Kiat Hiung Lai
    $2,000,000
    $US
    Regulation S2/28/2006
    60,000
    Sun Liu James Po
    $150,000
    $US
    Regulation S2/28/2006
    1,000,000
    Kiat Hiung Lai
    $2,000,000
    $US
    Regulation S2/28/2006
    100,000
    Junqing Zhang
    $200,000
    $US
    Regulation S2/28/2006
    500,000
    Diana Tang Chung
    $1,000,000
    $US
    Regulation S5/31/2006
    1,500,000
    Charnwood Green Ltd
    $3,000,000
    $US
    Regulation S5/31/2006
    1,500,000
    Kiat Hiung Lai
    $3,000,000
    $US
    Regulation S5/31/2006
    300,000
    Junqing Zhang
    $600,000
    $US
    Regulation S


During the year ended May 31, 2006 the Company had the
following transactions:

A total of 8,990,000 shares were sold to private investors for
total proceeds of $20,030,000, for a weighted average price of $2.228/share,
accompanied by a total of 9,390,000 purchase warrants entitling the holder to
acquire an additional common share for an average period of 1.5 years, for a
weighted average cost of $4.11/share. Of the 9,390,000 purchase warrants, none
have been exercised, and 10,000 have expired, leaving a total of 9,380,000
purchase warrants. 54,000 common shares were issued in June 2005 as payment for
services rendered by unrelated third parties; these shares were returned and
cancelled in February 2006 by agreement. Also in June 2005, 20,000 shares were
issued as re-payment to a related party for costs incurred in providing payment
to an unrelated third party. In May 2006, 148,000 purchase warrants entitling
the holder to acquire an additional common share prior to June 30 2007, for a
cost of $2.50/share, as payment to an unrelated third party for financing
services provided. A further 492,846 purchase warrants issued in prior fiscal
years expired unexercised.

The shares listed in the table above shown as having been sold
under the Regulation S exemption were sold in compliance with the exemption from
the registration requirements found in Regulation S promulgated by the

18

---

Securities and Exchange Commission (the SEC) under the
Securities Act of 1933. The offer and sale to the purchasers outlined in the
Treasury Order was made in an offshore transaction as defined by Rule 902(h). No
directed selling efforts were made in the U.S. as defined in Rule 902(c). The
offer and sale to the purchasers outlined in the Treasury Order was not made to
a U.S. person or for the account or benefit of a U.S. person. The following
conditions were present in the offer and sale: a) The purchaser of the
securities certified that it is not a U.S. person and did not acquire the shares
for the account or benefit of any U.S. person; b) The purchaser has agreed to
resell the securities only in compliance with Regulation S pursuant to a
registration under the Securities Act, or pursuant to an applicable exemption
from registration; and has agreed not to engage in hedging transactions with
regard to the securities unless in compliance with the Securities Act; c) The
purchaser has acknowledged and agreed with the Company that the Company shall
refuse registration of any transfer of the securities unless made in accordance
with Regulation S, pursuant to a registration statement under the Securities
Act, or pursuant to an applicable exemption from registration, and; d) The
purchaser has represented that it is acquiring the shares for its own account,
for investment purposes only and not with a view to any resale, distribution or
other disposition of the shares in violation of the United States federal
securities laws. Neither the Company nor any person acting on its behalf offered
or sold these securities by any form of general solicitation or general
advertising. The shares sold are restricted securities and the certificates
representing these shares have been affixed with a standard restrictive legend,
which states that the securities cannot be sold without registration under the
Securities Act of 1933 or an exemption there from.

The shares listed in the table above shown as having been sold
under the Regulation D exemption were exempt from registration pursuant to Rule
506 of Regulation D, promulgated by the SEC under the Securities Act of 1933.
Neither we nor any person acting on our behalf offered or sold these securities
by any form of general solicitation or general advertising. The shares sold are
restricted securities and the certificates representing these shares have been
affixed with a standard restrictive legend, which states that the securities
cannot be sold without registration under the Securities Act of 1933 or an
exemption therefrom. Each purchaser represented to us that he was purchasing the
securities for his own account and not for the account of any other persons.
Each purchaser was provided with written disclosure that the securities have not
been registered under the Securities Act of 1933 and therefore cannot be sold
without registration under the Securities Act of 1933 or an exemption therefrom.

The Company paid commissions or finders fees in connection with
the issuance of such shares, totaling $1,325,000.

**ITEM 6 -**    
  **MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.**

Plan of Operation

The Stainless Steel Casting Line Has Been Completed and is
Undergoing Production Trials

Terra Nostra has completed the construction of a casting mill
  comprising 180,000 to 230,000 MT production capacity of continuous casting billet
  stainless steel. Major equipment of the casting mill includes three 17 MT electric
  arc furnaces, two AOD furnaces for further refinement of the stainless steel
  metal products and a continuous casting line with cut off torches. The casting
  mill began production trials in late January, 2006 and is in the process of
  increasing its production levels and generation of trading revenues. The major
  raw materials include scrap stainless steel sourced through local distributors,
  including a Sino Partner affiliate, imported scrap steel imported from North
  America and Europe, and imported nickel, chromium and other special metal alloys.
  A majority of the initial output has been outsourced to rolling mills for processing
  into stainless steel strip and then sold to downstream fabricators. In other
  cases, billet stainless steel has been sold to rolling mills.

As mentioned previously, the production of billet stainless
steel is at a low level of output. The reasons are a result of several
factors:

- The technologies require time and a large number of trial operations and
  successive approximation in order to be adjusted and settings fixed to meet
  stringent production standards;
- Employees need proper training to perform the many skilled functions that
  make up the production operation. Functions include the proper handling and
  movement of material through the production steps; setting, reading and
  interpreting instrument readings; adding the correct amount of nickel and
  other alloys at the correct time in the AOD furnaces;
- It is a learning process to maintain proper temperatures of the in-process
  stainless steel at the stages of production;

19

---

- There is a need to improve the effectiveness of the quality controls at
  the critical stages to ensure minimum defects and costly wastage; and,
- Improved working capital resources and management to ensure reliable,
  uninterrupted supply of feedstock materials.

The Stainless Steel Strip Line has been Constructed, with
Initial Production Tests Underway

The Company recently completed construction of a strip rolling
line capable of producing up to 150,000 MT per annum. For the next several
months, the subsidiary will undergo tests, production trials, and over time will
ramp up to the terminal production utilization of 80%-100% of rated capacity.
SQSS is currently in the process of hiring and training the requisite workforce.

Billet stainless steel produced in the casting mill is planned
to supply the feed stock for the strip production. The strip rolling line is
scheduled to be placed into operation in the second quarter of fiscal 2006/2007
and is expected to be capable of reaching full capacity within seven months of
operations, barring unforeseen technical difficulties and no limitations on the
availability of stainless steel billet.

As mentioned previously, SQSS is outsourcing the rolling of
stainless steel strip and selling and marketing strip to downstream customers
across PRC. The Company is selling through its internal sales department and
sales agents. As SQSS is able to increase output, it may be necessary for it to
increase its internal sales and marketing department, the external sales
network, or both.

The Company is Evaluating the Design Development of Other
Stainless Steel Production Lines

The Company is also evaluating several options for other
stainless steel production lines that will complement the existing casting mill
and strip mill. The SQSS has already completed construction of a production
building with infrastructure and utilities in place. The strip line is using
approximately a third of the available square footage within the building and
expects to develop at least two additional production lines over the next two
years, or so, depending on the availability of financial capital and market
conditions.

SQSS has developed advanced designs, engineering, and
construction plans for a stainless steel rod line and a welded pipe line. A
potential rod line would use billet for its raw material, which would be sourced
from the adjoining casting mill or, if necessary, purchased from outside
vendors. The welded pipe production line would use stainless steel strip from
the adjoining line and has the advantage of not creating a potential competing
interest for output from the casting mill. A third option would be to develop a
seamless stainless steel pipe production line. A seamless line would rely on a
source of stainless steel rod and would only be given further consideration by
management in the event that there is a final decision to proceed with the
option to construct a rod line. Similar to the welded pipe line, there is an
inherent advantage in that the seamless line would not compete with any other
production line for output from the casting mill.

The Existing Copper Operations will Continue Much as Before
with Minor Changes

The foundation and platform for the Companys PRC operations is
the STJMC Copper Processing Facility in Changshan Town, Zouping County, Shandong
Province. As mentioned above, the existing copper operation at Changshan has the
capacity to process 30,000 MT of electrolytic copper, 15,000 MT of oxygen free
copper rods, and 20,000 MT of low-oxygen copper rods. The difference between
oxygen free and low-oxygen is that oxygen free rods are extruded from melted
electrolytic copper where low-oxygen rods are produced from melted #1 copper
scrap that hasnt been processed through the electrolysis plant. This plant is
the flagship copper processing and fabrication business led by Sino Partner,
which he founded in 1994. The Company does not see material gains from altering
the current operating formula.

The main materials
  required for production of copper anode, the precursor to copper cathode or
  electrolytic copper, are raw copper, mixed copper containing 99.3% to 97.5%
  copper, and anode scrap. The Company presently produces all of the copper anode
  required for the electrolytic copper production process. All downstream production,
  that being no-oxygen copper rod and wire, is manufactured from electrolytic
  copper produced by the Company. The low oxygen copper rod production, a production
  process distinct from electrolytic copper production, utilized mixed copper
  exclusively. The mixed copper suppliers are metal recycling points in Shandong
  and Hebei provinces. The raw copper is purchased from smelting plants in Inner
  Mongolia, Gansu and Shanxi provinces, all of which provinces have substantial
  copper resources available. The Company has well-established long term relationships
  with its major suppliers, and is presently able to purchase raw materials as
  required. Contract terms are generally payment upon delivery on a per order
  basis.

20

---

140,000 MT of Additional Electrolytic Capacity Coming
On-line in the Near-Term

STJMC is planning the phasing in of approximately 140,000 MT of
production capacity that has been newly constructed by Sino Partner. There are
two parts: 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
registered capital obligation under the STJMC JV, as amended. Although the
construction of the plants is completed, these assets have not yet conveyed as
contemplated under the STJMC JV, as revised and restated. The effective dates
for conveying the assets under the STJMC JV are a function of the parties
completing additional legal, accounting and governmental obligations, which have
commenced.

The operating plan for these un-utilized assets cannot be
separated from the financing plan. The assets represent a near term potential
for the Company to embark on a tremendous growth phase. However, realizing this
potential is largely a function of the Company raising sufficient capital to
feed the plants with raw materials and support the start-up needs of these
operations. The plant at Dongying has completed production trials and is
operating intermittently. The new 80,000 MT plant has undergone trials of the
furnace and casting processes; however, the electrolytic plant will not initiate
production trials until the working capital sources are secured.

Results of Operations

Since the Company acquired STJMC on May 31, 2006, the final day
of the most recent fiscal year, this report on the results of operations will be
limited to a discussion of Terra Nostra and SQSS.

For the years ended May 31, 2006 and 2005 the Company incurred
operating losses of US$13,533,232 and US$3,051,845, respectively. Although the
Company is reporting total revenues of US$5,107,982 for fiscal year ended May
31, 2006 versus nil in the prior year, the Company experienced a loss at the
gross profit level of US$1,739,037. The cost of sales for the current year of
US$6,847,019 reflects the fact that the Company is only recently emerging from
its development stage and is experiencing high unit costs of production for the
following reasons:

- A low level of volume to spread direct labor and overhead costs;
- Relatively low yield rates during the trial phase;
- Low purchase volumes that dont qualify for volume discounts; and,
- High initial maintenance and operating costs

Management asserts that these factors are normal for a start up
stainless steel operation and will lessen or disappear over time as production
volumes increase.

In fiscal 2005, the SQSS plants were under construction and the
operating and pre-operating (i.e., start-up) costs were relatively minor. As a
result of these start-up costs, some of which are non-recurring, the general and
administrative costs in the PRC increased from US$1,238,238 in fiscal 2005 to
US$3,762,230 in fiscal year ended May 31, 2006, an increase of US$2,523,992.

The North America holding company incurred significantly
greater costs in fiscal year ended May 31, 2006 than in the prior year. Its
costs increased from US$1,603,793 in the prior year to US$ 7,275,557 in the
current year, an increase of US$5,671,764. The higher costs included those costs
associated with private placements, higher management and overhead costs, and
increases in professional services fees, such as accounting services.

Depreciate and amortization expenses increased to US$700,922 in
year ended May 31, 2006 versus US$209,814 incurred in the prior year, an
increase of US$491,108. The increase is attributed to the higher plant and
equipment costs, as the amortization associated with land use rates was held at
a constant level.

Interest expenses increased from US$769,527 in fiscal year
ended May 31, 2005 to US$3,151,492 in the current year, an increase of
US$2,381,965. Although there was a decrease in the imputed interest expense,
which is charged against related party loans, the balance of interest bearing
bank loans increased by US$39,846,653 from May 31, 2005 to May 31, 2006. The
proceeds of the bank loans were used to acquire plant, property, and equipment
and to purchase inventory associated with the start-up of operations at SQSS.

The Company reported US$254,678 in foreign currency gains in
the recent current year, attributed primarily to the slight strengthening of the
PRC RMB as compared to the US dollar.

Net losses
  for fiscal year ended May 31, 2006 an 2005 were US$11,595,942 and US$2,734,758,
  respectively.

21

---

Summary of Working Capital and Stockholders Equity

As of May
  31, 2006, the Company has negative working capital of US$29,396,325 and shareholders
  equity of US$943,820 compared with negative working capital of US$49,390,448
  and shareholders equity of US$8,734,476. The Companys negative working
  capital decreased principally because the balance sheet for May 31, 2006 included
  STJMC, which had positive working capital of US$29,658,712 on that date. The
  shareholders equity, post eliminations increased from US$943,820 on May
  31, 2005 to US$12,289,326 on May 31, 2006. The increase primarily reflects that
  the capital raised by Terra Nostra exceed the consolidated losses.

Financing Activities

At present, based on current operations, the Company does not
have sufficient cash and liquid assets to satisfy its cash requirements on a
monthly basis. The operations of the Company as at May 31, 2006 are undertaken
by the Subsidiaries, two Sino-Foreign Joint Venture Companies in which the
Company holds a 51% interest, operating under the laws of the PRC. There can be
no assurance that the Company will be able to raise the required funds to
fulfill its capital contribution commitments under the respective STJMC JV.
Should the Company be unable to provide the funds required according to a
schedule as determined by the STJMC Board of Directors, the Company could
potentially be subject to a diminished ownership percentage.

The Company has recently embarked on a new finance raising
program. The intent of the program is to arrange up to $50 million in
unregistered equity securities. In this regard, the Company has engaged the
services of a New York-based investment bank that specializes in placing
securities for small/micro cap companies and has a successful track record
assisting companies that have their primary operations in PRC. If we are able to
complete such financing, the proceeds will complete the Companys registered
capital funding obligation under the STJMC JV and recapitalize both subsidiary
joint ventures. The registered capital funding will be used by STJMC to finance
its operating needs. None of the funding that is down-streamed to the
Subsidiaries will be used to acquire equity from the Sino Partner or otherwise
be diverted from meeting the working capital and fixed asset needs of the
Subsidiaries. The Companys investment bank has not agreed to underwrite this
financing and there are no assurances at this time that the Company will be able
to complete an equity financing for $50 million or any other amount.

Compliance with Environmental Laws and Regulations

Based on the equipment, technologies and proactive measures
adopted, the Company is not considered a high-pollution factory in PRC. The
production processes use a small amount of water and this renders minimal
chemical pollution. The strip line will use a gas fired reheat furnace, which is
recommended by the State Environmental Protection Agency. The stainless steel
casting mill uses state of the art air pollution systems to extract smoke and
gaseous emissions and draw it through multi-stage filtration units.

**ITEM 7.**     
   **FINANCIAL STATEMENTS**

22

---

INDEX TO FINANCIAL STATEMENTS

TERRA NOSTRA RESOURCES CORP.

FINANCIAL STATEMENTS

With

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

|                                                              | Page             
|------------------------------------------------------------- | -----------------
|                                                              |                  
|Report
      of Independent Registered Public Accounting Firm | F-2              
|Financial Statements:                                         |                  
|Consolidated
      Balance Sheets                             | F-3
      to F-4 
|Consolidated
      Statements of Operations                   | F-5              
|Consolidated
      Statements of Cash Flows                   | F-6              
|Consolidated
      Statement of Stockholders Equity          | F-7              
|Notes
      to Financial Statements                           | F-8
      to F-35

F-1

---

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 Stockholders Terra Nostra
Resources Corporation and Subsidiaries Pasadena, 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 2 ,
  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 York 
  September 5, 2006 (Except
  for Note 2 as to which the date is August 1, 2008)

F-2

---

TERRA NOSTRA RESOURCES CORP. CONSOLIDATED BALANCE SHEETSAS OF MAY 31, 2006 AND 2005 US$

|                                        |  | 2006        |   |  | 2005       |  
|--------------------------------------- |  | ----------- | - |  | ---------- | -
|                                        |  | (Restated)  |   |  | (Restated) |  
|Current Assets                          |  |             |   |  |            |  
|Cash                                    |  | 19,348,547  |   |  | 122,552    |  
|Cash - Restricted                       |  | 11,433,207  |   |  | 4,926,735  |  
|Notes Receivable                        |  | 62,353      |   |  | -          |  
|Accounts Receivable                     |  | 7,862,083   |   |  | -          |  
|Other Receivables,
      Net            |  | 7,136,603   |   |  | 4,910,629  |  
|Other Receivables - Related party       |  | 25,707,370  |   |  | 23,579,287 |  
|Short Term
      Investment             |  | 24,941      |   |  | -          |  
|Inventory                               |  | 25,505,079  |   |  | -          |  
|Prepaid Expenses                        |  | 3,537,389   |   |  | 18,004     |  
|Prepaid Expenses - Related party        |  | 1,452,259   |   |  | -          |  
|Total Current
      Assets              |  | 102,069,831 |   |  | 33,557,207 |  
|                                        |  |             |   |  |            |  
|Long-Term Assets                        |  |             |   |  |            |  
|Investment                              |  | 3,864,895   |   |  | -          |  
|PP&E                                    |  | 46,081,421  |   |  | 1,927,382  |  
|Less
      Accumulated Depreciation     |  | (4,710,997  | ) |  | (154,420   | )
|Construction
      Materials            |  | 40,623      |   |  | 57,056     |  
|Construction in Progress                |  | 17,192,511  |   |  | 58,880,411 |  
|Land Use Rights                         |  | 5,025,487   |   |  | 4,563,792  |  
|Total
      Long-Term Assets            |  | 67,493,940  |   |  | 65,274,221 |  
|                                        |  |             |   |  |            |  
|Other Assets                            |  |             |   |  |            |  
|Deferred and Other
      Assets         |  | 357,711     |   |  | 394,163    |  
|Total
      Deferred and Other Assets   |  | 357,711     |   |  | 394,163    |  
|                                        |  |             |   |  |            |  
|Total Assets                            |  | 169,921,482 |   |  | 99,225,591 |  
|                                        |  |             |   |  |            |  
|Liabilities and Shareholders' Equity    |  |             |   |  |            |  
|Current Liabilities                     |  |             |   |  |            |  
|Accounts Payable                        |  | 1,865,500   |   |  | 239,742    |  
|Bank Loans, Short
      Term            |  | 50,406,545  |   |  | 10,559,892 |  
|Notes Payable, Other                    |  | 20,638,998  |   |  | 7,188,942  |  
|Land Use Rights
      Payable           |  | 2,714,268   |   |  | 590,291    |  
|Construction Costs Payable              |  | 9,989,247   |   |  | 3,748,328  |  
|Tax Payable                             |  | 9,024,169   |   |  | -          |  
|Other Liabilities                       |  | 5,829,011   |   |  | 1,999,286  |  
|Other Liabilities
      - Related Party |  | 30,998,418  |   |  | 58,894,559 |  
|Total
      Current Liabilities         |  | 131,466,156 |   |  | 83,221,040 |  
|                                        |  |             |   |  |            |  
|Long Term Liabilities                   |  |             |   |  |            |  
|Land Use Rights
      Payable           |  | -           |   |  | 2,105,000  |  
|Total
      Long Term Liabilities       |  | -           |   |  | 2,105,000  |  
|Minority interest                       |  | 26,166,000  |   |  | 12,955,731 |  

F-3

---

TERRA NOSTRA RESOURCES CORP. CONSOLIDATED BALANCE SHEETSAS OF MAY 31, 2006 AND 2005 US$

|Shareholders' Equity                                               |  | 2006        |   |  | 2005        |  
|------------------------------------------------------------------ |  | ----------- | - |  | ----------- | -
|                                                                   |  | (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

---

TERRA NOSTRA RESOURCES CORP. CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE YEARS ENDED MAY 31, 2006 AND 2005 US$

|                                                 |   | 2006        |   |   | 2005       |  
|------------------------------------------------ | - | ----------- | - | - | ---------- | -
|                                                 |   |             |   |   |            |  
|Revenues                                         |   | 5,107,982   |   |   | -          |  
|                                                 |   |             |   |   |            |  
|Cost of Sales                                    |   | 6,847,019   |   |   | -          |  
|                                                 |   |             |   |   |            |  
|Gross Profit                                     |   | (1,739,037  | ) |   | -          |  
|                                                 |   |             |   |   |            |  
|Expenses:                                        |   |             |   |   |            |  
|Selling                                          |   | 55,486      |   |   | -          |  
|General and Administrative -
      North America |   | 7,275,557   |   |   | 1,603,793  |  
|General and Administrative - PRC                 |   | 3,762,230   |   |   | 1,238,238  |  
|Depreciation and Amortization                    |   | 700,922     |   |   | 209,814    |  
|                                                 |   |             |   |   |            |  
|Total Expenses                                   |   | 11,794,195  |   |   | 3,051,845  |  
|                                                 |   |             |   |   |            |  
|Operating Profit / (Loss)                        |   | (13,533,232 | ) |   | (3,051,845 | )
|                                                 |   |             |   |   |            |  
|Interest (Expense)                               |   | (3,151,492  | ) |   | (769,527   | )
|                                                 |   |             |   |   |            |  
|Other Income / (Expense)                         |   |             |   |   |            |  
|Other Income                                     |   | 41,594      |   |   | -          |  
|Non-operating Expense                            |   | (27,121     | ) |   | -          |  
|                                                 |   |             |   |   |            |  
|Income / (Loss) Before Income Tax                |   | (16,670,251 | ) |   | (3,821,372 | )
|                                                 |   |             |   |   |            |  
|Provision for Income Tax                         |   | -           |   |   | -          |  
|                                                 |   |             |   |   |            |  
|Income / (Loss) Before Minority Interest         |   | (16,670,251 | ) |   | (3,821,372 | )
|Minority Interest                                |   | 5,074,309   |   |   | 1,086,614  |  
|                                                 |   |             |   |   |            |  
|Net Income (Loss)                                |   | (11,595,942 | ) |   | (2,734,758 | )
|                                                 |   |             |   |   |            |  
|Other Comprehensive Income:                      |   |             |   |   |            |  
|Foreign Currency Translation
      Adjustment    |   | 254,678     |   |   | -          |  
|                                                 |   |             |   |   |            |  
|Comprehensive Income (Loss)                      |   | (11,341,264 | ) |   | (2,734,758 | )
|                                                 |   |             |   |   |            |  
|(Loss) Per Share - weighted average              | $ | (0.27       | ) | $ | (0.09      | )
|(Loss) Per Share - fully diluted                 | $ | (0.21       | ) | $ | (0.09      | )
|                                                 |   |             |   |   |            |  
|Weighted Average Number of Shares                |   | 42,925,833  |   |   | 30,358,253 |  
|Fully Diluted Number of Shares                   |   | 55,105,833  |   |   | 30,861,099 |  

F-5

---

TERRA NOSTRA RESOURCES CORP. CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE YEARS ENDED MAY 31, 2006 AND 2005 US$

|                                                                |  | 2006        |   |  | 2005        |  
|--------------------------------------------------------------- |  | ----------- | - |  | ----------- | -
|Net Income (Loss)                                               |  | (11,595,942 | ) |  | (2,734,758  | )
|Adj. to Reconcile Net Income to Net Cash from Operating         |  |             |   |  |             |  
|Depreciation                                                    |  | 1,432,795   |   |  | 114,728     |  
|Amortization                                                    |  | 14,788      |   |  | 95,086      |  
|Imputed
      Interest                                          |  | 3,151,492   |   |  | 1,839,957   |  
|Minority Interest                                               |  | (5,074,309  | ) |  | (1,086,614  | )
|Management
      Options and Investor Warrants                  |  | 2,519,066   |   |  | -           |  
|Changes in Assets and Liabilities:                              |  |             |   |  |             |  
|Accounts
      Receivable                                       |  | (7,862,083  | ) |  | -           |  
|Notes Receivable                                                |  | (62,353     | ) |  | -           |  
|Inventory                                                       |  | (25,505,079 | ) |  | -           |  
|Prepaid Expenses                                                |  | (3,519,385  | ) |  | 44,521      |  
|Prepaid
      Expenses - Related Party                          |  | (1,452,259  | ) |  | -           |  
|Accounts Payable                                                |  | 10,822,565  |   |  | (304,661    | )
|Tax
      Payable                                               |  | 9,024,169   |   |  | -           |  
|Net Cash Flows from Operating Activities                        |  | (28,106,535 | ) |  | (2,031,741  | )
|Cash Flows from Investing Activities:                           |  |             |   |  |             |  
|Acquisition of Property,
      Plant and Equipment              |  | (3,972,799  | ) |  | (8,625,508  | )
|Short
      Term Investment                                     |  | (24,941     | ) |  | -           |  
|Land Use Right Payable                                          |  | 18,977      |   |  | -           |  
|Investment
      in Intangible Assets                           |  | -           |   |  | (98,790     | )
|Deferred Assets                                                 |  | 36,452      |   |  | 290,820     |  
|Other
      Receivables                                         |  | ( 2,225,974 | ) |  | (3,053,209  | )
|Other Receivables
      - Related Party                         |  | (2,128,083  | ) |  | (16,881,640 | )
|Investment                                                      |  | (3,864,895  | ) |  | -           |  
|Net Cash Flows from Investing Activities                        |  | (12,161,263 | ) |  | (28,368,327 | )
|Cash Flows from Financing Activities:                           |  |             |   |  |             |  
|Proceeds from Borrowings                                        |  | 39,846,653  |   |  | 6,935,216   |  
|Cash
      Pledged to Bank                                      |  | (6,506,472  | ) |  | (1,302,045  | )
|Notes Payable                                                   |  | 13,450,056  |   |  | 3,564,265   |  
|Addition
      of Minority Interest                             |  | 18,284,578  |   |  | 14,527,890  |  
|Other Liabilities                                               |  | 3,829,725   |   |  | 260,844     |  
|Other
      Liabilities - Related Party                         |  | (27,896,141 | ) |  | 4,254,143   |  
|Capital Contributions                                           |  | 18,230,716  |   |  | 2,191,674   |  
|Net Cash Flows from Financing
      Activities                  |  | 59,239,115  |   |  | 30,431,987  |  
|Net Increase (Decrease) in Cash                                 |  | 18,971,317  |   |  | 31,919      |  
|Effect of Exchange Rates on Foreign Currency
      Transactions |  | 254,678     |   |  | -           |  
|Cash - Beginning of Period                                      |  | 122,552     |   |  | 90,633      |  
|Cash - End of Period                                            |  | 19,348,547  |   |  | 122,552     |  
|                                                                |  |             |   |  |             |  
|Supplemental Cash Flow Disclosures:                             |  |             |   |  |             |  
|Interest Paid                                                   |  | 2,029,634   |   |  | 431,283     |  
|Income
      Tax Paid                                           |  | -           |   |  | -           |  

F-6

---

TERRANOSTRARESOURCESCORP.CONSOLIDATEDSTATEMENTSOFSHAREHOLDERSEQUITYFOR THEYEARSENDEDMAY 31, 2006 AND 2005

|                                                       |  |            |  |  |        |  |  |            |   |  | Accumulated   |  |  |                   |   |  |                     |   |  |            |  
|------------------------------------------------------ |  | ---------- |  |  | ------ |  |  | ---------- | - |  | ------------- |  |  | ----------------- | - |  | ------------------- | - |  | ---------- | -
|                                                       |  | Common     |  |  | Common |  |  | Additional |   |  | Other         |  |  | Retained Earnings |   |  | Total Stockholders' |   |  | Minority   |  
|                                                       |  | Stock      |  |  | Stock  |  |  | Paid  in   |   |  | Comprehensive |  |  | (Deficit)         |   |  | Equity              |   |  | Interest   |  
|                                                       |  | Shares     |  |  |        |  |  | Capital    |   |  | Income        |  |  |                   |   |  |                     |   |  |            |  
|Balance at December 31, 2004                           |  | 3,082,254  |  |  | 3,082  |  |  | 9,415,336  |   |  |               |  |  | (10,002,386       | ) |  | (583,968            | ) |  | (485,545   | )
|Stock issuance to settle debt                          |  | 1,700,000  |  |  | 1,700  |  |  | 1,578,398  |   |  |               |  |  |                   |   |  | 1,580,098           |   |  |            |  
|Stock issuance per
      acquisition agreement         |  | 35,000,000 |  |  | 35,000 |  |  |            |   |  |               |  |  |                   |   |  | 35,000              |   |  |            |  
|Issuance of common stock for private
      placement   |  | 364,194    |  |  | 364    |  |  | 1,092,219  |   |  |               |  |  |                   |   |  | 1,092,583           |   |  | -          |  
|Net Income (Loss)                                      |  |            |  |  |        |  |  |            |   |  |               |  |  | (2,734,758        | ) |  | (2,734,758          | ) |  | (1,086,614 | )
|Imputed Interest - SQSS                                |  |            |  |  |        |  |  | 1,554,865  |   |  |               |  |  |                   |   |  | 1,554,865           |   |  | 1,493,890  |  
|Capital Contributed by
      Minority Shareholder      |  |            |  |  |        |  |  |            |   |  |               |  |  |                   |   |  | -                   |   |  | 13,034,000 |  
|Balance at May 31, 2005                                |  | 40,146,448 |  |  | 40,146 |  |  | 13,640,818 |   |  | -             |  |  | (12,737,144       | ) |  | 943,820             |   |  | 12,955,731 |  
|Issuance of common stock for
      private placement   |  | 9,010,000  |  |  | 9,010  |  |  | 20,057,476 |   |  |               |  |  |                   |   |  | 20,066,486          |   |  |            |  
|Net Income (Loss)                                      |  |            |  |  |        |  |  |            |   |  |               |  |  | (11,595,942       | ) |  | (11,595,942         | ) |  | (5,074,309 | )
|Issuance of management
      options                   |  |            |  |  |        |  |  | 2,422,026  |   |  |               |  |  |                   |   |  | 2,422,026           |   |  |            |  
|Warrants issued to investors and arrangers             |  |            |  |  |        |  |  | 97,040     |   |  |               |  |  |                   |   |  | 97,040              |   |  |            |  
|Imputed Interest - Terra
      Nostra level            |  |            |  |  |        |  |  | 19,755     |   |  |               |  |  |                   |   |  | 19,755              |   |  |            |  
|Foreign Currency translation adjustments               |  |            |  |  |        |  |  |            |   |  | 254,677       |  |  |                   |   |  | 254,677             |   |  | 250,194    |  
|Elimination SQSS due to
      consolidation with STJMC |  |            |  |  |        |  |  | (1,554,865 | ) |  |               |  |  | 1,636,329         |   |  | 81,464              |   |  | (8,131,616 | )
|Capital Contributed by Minority Shareholder            |  |            |  |  |        |  |  |            |   |  |               |  |  |                   |   |  | -                   |   |  | 26,166,000 |  
|Balance at May 31, 2006                                |  | 49,156,448 |  |  | 49,156 |  |  | 34,682,250 |   |  | 254,677       |  |  | (22,696,757       | ) |  | 12,289,326          |   |  | 26,166,000 |  

F-7

---

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., a company formed under the laws of the State of Nevada on February
  7, 1994 (Terra Nostra or the Company us,
  and/or we and other similar terms as used herein refer collectively
  to the Company together with its subsidiaries), then named Terra Nostra Technology
  Ltd., undertook a reverse merger with RTO Investments Corp., which was consummated
  in April, 2005.

The Company,
  through the process of the reverse merger acquired an interest in two Joint
  Venture companies in the Peoples Republic of China (PRC) from RTO
  Investments Corp. (RTO). At the time of the reverse merger the Company
  and RTO were unrelated parties. The Company had limited operations due to the
  ongoing divestiture of certain of its assets. RTO was a holding company formed
  for the purposes of acquiring and financing the Joint Venture companies in the
  PRC. RTO held a joint venture agreement, (the RTO Joint Venture Agreement)
  to bring in the copper assets and the stainless steel assets. RTO assigned its
  rights in the joint venture agreement to the Company in exchange for the issuance
  of thirty-five million (35,000,000) shares of the common stock of the Company.

The transaction
  is reflected in our financial statements under long term investments, valued
  at $35,000 which is the 35,000,000 shares issued based on the par value of our
  common shares, $0.001 par value.

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 was 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 collective obligations from each
  party to contribute equally for total registered capital of $26,600,000.

In order to
  implement the terms of the RTO Joint Venture Agreement, on January 2, 2005,
  at the direction of RTO and Ke Zhang, the December 23, 2002, agreement between
  SJCC and HKHI was amended and restated (the SQSS JV). Under the
  SQSS JV, the Company 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, the Company had
  a total capital contribution commitment of $13,566,000.

Under the
  laws of the 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 but not
  limited to, satisfactory duediligence by the Company. Both parties have
  fulfilled their registered capital obligations under the SQSS joint venture
  agreement.

In order to
  implement the terms of the RTO Joint Venture Agreement, on January 10, 2005,
  at the direction of RTO and Ke Zhang, 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. The Company, with
  a total capital contribution commitment of $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

F-8

---

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 (CONTD)

was subject
  to the fulfillment of certain conditions precedent, including but not limited
  to, satisfactory due diligence by the Company.

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

On August
  17, 2005, Terra Nostra reported that 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.

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 metric tons (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.

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 approximately 60,000 MT; and, a new 80,000 MT capacity facility
  that is among the Existing Assets, but due to additional construction requirements
  the 80,000 MT facility is 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.

The required
  capital contribution by Terra Nostra to STJMC is unchanged at $27,234,000. As
  of the date of this report, Terra Nostra has contributed $2,000,000 towards
  this obligation. Terra Nostra holds a 51% shareholding in STJMC and has treated
  the transaction, for accounting purposes, as an

F-9

---

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 (CONTD)

acquisition.
  Moreover, under the terms of the Second Amended and Restated Joint Venture Contract,
  Sino Partners capital obligation to STJMC remains as $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 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.

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 has completed the process of retrofitting the casting mill to expand its
  design capacity to up to 230,000 MT. The downstream strip rolling mill has been
  phased in during the 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.

2.RESTATEMENT
  OF FINANCIAL STATEMENTS

As at the
  fiscal years ended May 31, 2006 and 2005 the Company restated certain figures
  included in prior fiscal periods as detailed below in Notes 2(i) through (iv).
  None of the errors affected the Statements of Operations for the years ended
  May 31, 2006 or 2005. A tabular representation of the impact of these adjustments
  to the Balance Sheets, Statements of Stockholders Equity and Statements
  of Cash Flows for the fiscal years ended May 31, 2006 and 2005 is included at
  the end of this Note. Further, the Company has augmented the disclosure in the
  Notes to its Consolidated Financial Statements for the fiscal years ending May
  31, 2006 and 2005 as detailed in 2(v) below:

(i) Misstatement to minority interest: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. (Refer to
Adjustment Column (b) to Consolidated Balance Sheets at May 31, 2006 and 2005
below)

(ii) Reallocation and correction to imputed
interest: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 the total amount of the
credit entries to additional paid in capital rather than an 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. .(Refer
to Adjustment Column (b) to Consolidated Balance Sheets at May 31, 2006 and 2005
below)

F-10

---

TERRA NOSTRA RESOURCES CORP.

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

2. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)

(iii) Reclassification from prior period: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. (Refer to
Adjustment Columns (a) and (b) to Consolidated Balance Sheets at May 31, 2006
and 2005 below)

(iv) Reclassification and correction resulting from
over-contribution by Sino partner: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. (Refer to Adjustment Column (b) to
Consolidated Balance Sheets at May 31, 2006 and 2005 below).

(v) Augmented disclosure

The Company has augmented its Note disclosure as follows:

- Note 1  Organization and Principal Activities has been revised in order to
  provide a more concise description of the organizational history of the
  Company and its subsidiaries and the underlying transactions;
- Note 4  Summary of Principal Accounting Policies has been expanded to
  correct the disclosure previously provided in Notes 4(D), and Note 4 (L) and
  to augment the disclosure contained in Note 4(U) to add discussion surrounding
  FASB 151 and 123r;
- Note 5  Business Combinations was not formerly included in the Notes to
  the Consolidated Financial Statements;
- Note 15  Stock Based Compensation was not formerly included in the Notes
  to the Consolidated Financial Statements; and,
- Note 18 - Income Taxes was not formerly included in the Notes to the
  Consolidated Financial Statements.

F-11

---

TERRA NOSTRA RESOURCES CORP.

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

2. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)

Consolidated
  Balance Sheets May 31, 2006 and 2005 (Adjustments):

Original May 31,
      
      
      Adjustment
      
      
      May 31, 2006
      
      
      Original May 31,
      
      
      Adjustment
      
      
      May 31, 20052006
      
      
      see note (a)
      
      
      (Restated,
      
      
      2005
      
      
      see note (b)
      
      
      (Restated,(Audited)
      
      
      below
      
      
      Audited)
      
      
      (Audited)
      
      
      below
      
      
      Audited)Current Assets:Cash
      
      19,348,547
      
      
      
      
      
      19,348,547
      
      
      122,552
      
      
      
      
      
      122,552Cash-Restricted
      
      11,433,207
      
      
      
      
      
      11,433,207
      
      
      4,926,735
      
      
      
      
      
      4,926,735Notes Receivable
      
      62,353
      
      
      
      
      
      62,353
      
      
      
      
      
      
      
      
      -Accounts Receivable
      
      7,862,083
      
      
      
      
      
      7,862,083
      
      
      
      
      
      
      
      
      -Other Receivables, Net
      
      7,136,603
      
      
      
      
      
      7,136,603
      
      
      4,910,629
      
      
      
      
      
      4,910,629Other Receivables - Related Party
      
      25,707,370
      
      
      
      
      
      25,707,370
      
      
      23,579,287
      
      
      
      
      
      23,579,287Short Term Investment
      
      24,941
      
      
      
      
      
      24,941
      
      
      
      
      
      
      
      
      -Inventory
      
      25,505,079
      
      
      
      
      
      25,505,079
      
      
      
      
      
      
      
      
      -Prepaid Expenses
      
      3,537,389
      
      
      
      
      
      3,537,389
      
      
      18,004
      
      
      
      
      
      18,004Prepaid Expenses - Related Party
      
      1,452,259
      
      
      
      
      
      1,452,259102,069,831
      
      
      -
      
      
      102,069,831
      
      
      33,557,207
      
      
      -
      
      
      33,557,207Long-Term Assets:Investment
      
      3,864,895
      
      
      
      
      
      3,864,895
      
      
      
      
      
      
      
      
      -PP&E
      
      46,081,421
      
      
      
      
      
      46,081,421
      
      
      1,927,382
      
      
      
      
      
      1,927,382Less: Accumulated Depreciation
      
      (4,710,997
      )
      
      
      
      
      (4,710,997
      )
      
      (154,420
      )
      
      
      
      
      (154,420
      )Constructions Materials
      
      40,623
      
      
      
      
      
      40,623
      
      
      57,056
      
      
      
      
      
      57,056Constructions in Progress
      
      17,192,511
      
      
      
      
      
      17,192,511
      
      
      58,880,411
      
      
      
      
      
      58,880,411Land Use Rights
      
      5,025,487
      
      
      
      
      
      5,025,487
      
      
      4,563,792
      
      
      
      
      
      4,563,79267,493,940
      
      
      -
      
      
      67,493,940
      
      
      65,274,221
      
      
      -
      
      
      65,274,221Other Assets:Deferred and other Assets
      
      357,711
      
      
      
      
      
      357,711
      
      
      394,163
      
      
      
      
      
      394,163357,711
      
      
      -
      
      
      357,711
      
      
      394,163
      
      
      -
      
      
      394,163Total Asets:
      
      169,921,482
      
      
      -
      
      
      169,921,482
      
      
      99,225,591
      
      
      -
      
      
      99,225,591Liabilities and Shareholders' EquityCurrent LiabilitiesAccounts Payable
      
      1,865,500
      
      
      
      
      
      1,865,500
      
      
      239,742
      
      
      
      
      
      239,742Bank Loans, Short Term
      
      50,406,545
      
      
      
      
      
      50,406,545
      
      
      10,559,892
      
      
      
      
      
      10,559,892Notes Payable, Other
      
      20,638,998
      
      
      
      
      
      20,638,998
      
      
      7,188,942
      
      
      
      
      
      7,188,942Land Use Rights Payable
      
      2,714,268
      
      
      
      
      
      2,714,268
      
      
      590,291
      
      
      
      
      
      590,291Constrution Costs Payable
      
      9,989,247
      
      
      
      
      
      9,989,247
      
      
      3,748,328
      
      
      
      
      
      3,748,328Tax Payable
      
      9,024,169
      
      
      
      
      
      9,024,169
      
      
      
      
      
      
      
      
      -Other Liabilities
      
      5,829,011
      
      
      
      
      
      5,829,011
      
      
      1,999,286
      
      
      
      
      
      1,999,286Other Liabilities -
        Related Party
      
      30,998,418
      
      
      
      
      
      30,998,418
      
      
      58,621,174
      
      
      273,385
      
      
      58,894,559131,466,156
      
      
      -
      
      
      131,466,156
      
      
      82,947,655
      
      
      273,385
      
      
      83,221,040Long Term LiabilitiesLand Use Rights Payable
      
      
      
      
      
      
      
      
      
      
      2,105,000
      
      
      
      
      
      2,105,000Minority Interest
      
      26,166,000
      
      
      
      
      
      26,166,000
      
      
      5,438,460
      
      
      7,517,270
      
      
      12,955,73126,166,000
      
      
      -
      
      
      26,166,000
      
      
      7,543,460
      
      
      7,517,270
      
      
      15,060,731Shareholders' EquityClass A Common Stock-authorized 100,000,000
        shares with apar value of $0.001:
        49,156,448 issued and outstanding as atMay 31, 2006; 40,146,448 shares issued
        and outstanding as atMay 31, 2005
      
      49,156
      
      
      
      
      
      49,156
      
      
      40,146
      
      
      
      
      
      40,146Additional Paid in Capital
      
      33,805,004
      
      
      283,308
      
      
      34,682,250
      
      
      12,369,261
      
      
      (8,073,962
      )
      
      13,640,818Paid In Capital
      
      1,160,554
      
      
      
      
      
      
      
      
      9,345,520Accumulated Other Comprehesive Income
      
      254,677
      
      
      
      
      
      254,677Reserves
      
      2,028,858
      
      
      
      
      
      
      
      
      5,314,498Retained Earnings
      
      (25,008,923
      )
      
      (283,308
      )
      
      (22,696,757
      )
      
      (18,334,949
      )
      
      283,307
      
      
      (12,737,144
      )12,289,326
      
      
      -
      
      
      12,289,326
      
      
      8,734,476
      
      
      (7,790,655
      )
      
      943,820Total Liabilities and
        Shareholders' Equity
      
      169,921,482
      
      
      -
      
      
      169,921,482
      
      
      99,225,591
      
      
      -
      
      
      99,225,591


F-12

---

TERRA NOSTRA RESOURCES CORP.

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

2. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)

Adjustments
  to Consolidated Balance Sheets (refer to table above):

Notes:

(a) Adjustments
  in this column represent the error correction discussed above in Note 2 (iii)
  totaling $283,308 from prior periods which was not previously carried forward
  to fiscal 2005 and 2006.;

(b) Adjustments
  in this column represent the restatements and error corrections discussed above
  in Note 2 (i) through 2(iv). An adjustment totaling $283,308 from prior periods
  which was not previously carried forward to fiscal 2005 and 2006; an adjustment
  to correct the omission of US$6,157,340 from minority interest and additional
  paid in capital; an adjustment to reclassify US$1,493,889 (the minority share
  of imputed interest in fiscal 2005) from additional paid in capital to minority
  interest; and, an adjustment to record US$139,426 from additional paid in capital
  and US$133,959 from minority interest (totaling US $273,385) to other liabilities-related
  party.

F-13

---

TERRA NOSTRA RESOURCES CORP.

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

2. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)

Consolidated
  Statements of Cash Flows May 31, 2006 and 2005 (Adjustments):

Original May 31,
      
      
      
      
      
      May 31, 2006
      
      
      Original May
      
      
      
      
      
      May 31, 20052006
      
      
      
      
      
      (Restated,
      
      
      31, 2005
      
      
      
      
      
      (Restated,(Audited)
      
      
      Adjustments
      
      
      Audited)
      
      
      (Audited)
      
      
      Adjustments
      
      
      Audited)Net Income (Loss)
      
      (11,595,942
      )
      
      
      
      
      (11,595,942
      )
      
      (2,734,758
      )
      
      
      
      
      (2,734,758
      )Adjustments to Reconcile Net Income to Net Cash
        from Operating Activities:
      
      
      
      
      
      -Depreciation
      
      1,432,795
      
      
      
      
      
      1,432,795
      
      
      114,728
      
      
      
      
      
      114,728Amortization
      
      14,788
      
      
      
      
      
      14,788
      
      
      95,086
      
      
      
      
      
      95,086Imputed Interest
      
      3,131,738
      
      
      19,754
      
      
      3,151,492
      
      
      1,839,957
      
      
      
      
      
      1,839,957Minority Interest
      
      (5,074,309
      )
      
      
      
      
      (5,074,309
      )
      
      (1,086,614
      )
      
      
      
      
      (1,086,614
      )Management Options and
        Investor Warants
      
      2,519,066
      
      
      
      
      
      2,519,066
      
      
      -
      
      
      
      
      
      --Changes in Assets and Liabilities:
      
      
      
      
      
      
      
      -Accounts Receivable
      
      (7,862,083
      )
      
      
      
      
      (7,862,083
      )
      
      -
      
      
      
      
      
      -Other receivables
      
      (2,225,974
      )
      
      2,225,974
      
      
      -
      
      
      (3,053,209
      )
      
      3,053,209
      
      
      -Other receivables - Related Party
      
      (2,128,083
      )
      
      2,128,083
      
      
      -
      
      
      (16,881,640
      )
      
      16,881,640
      
      
      -Notes Receivable
      
      (62,353
      )
      
      
      
      
      (62,353
      )
      
      -
      
      
      
      
      
      -Inventory
      
      (25,505,079
      )
      
      
      
      
      (25,505,079
      )
      
      -
      
      
      
      
      
      -Prepaid Expenses
      
      (3,519,385
      )
      
      
      
      
      (3,519,385
      )
      
      44,521
      
      
      
      
      
      44,521Prepaid Expenses - Related Party
      
      (1,452,259
      )
      
      
      
      
      (1,452,259
      )
      
      -
      
      
      
      
      
      -Accounts Payable
      
      1,662,210
      
      
      9,160,355
      
      
      10,822,565
      
      
      (304,661
      )
      
      
      
      
      (304,661
      )Tax Payable
      
      9,024,169
      
      
      
      
      
      9,024,169
      
      
      -
      
      
      
      
      
      -Other Liabilities
      
      3,829,725
      
      
      (3,829,725
      )
      
      -
      
      
      260,844
      
      
      (260,844
      )
      
      -Other Liabilities - Related Party
      
      (27,622,756
      )
      
      27,622,756
      
      
      -
      
      
      5,189,555
      
      
      (5,189,555
      )
      
      -Net Cash Flows from Operating Activities
      
      (65,433,732
      )
      
      37,327,197
      
      
      (28,106,535
      )
      
      (16,516,191
      )
      
      14,484,450
      
      
      (2,031,741
      )Cash Flows from Investing Activities:Acquisitions of Property, Plant and
        Equipment
      
      (44,154,039
      )
      
      40,181,240
      
      
      (3,972,799
      )
      
      (265,285
      )
      
      (8,360,223
      )
      
      (8,625,508
      )Construction Materials
      
      16,433
      
      
      (16,433
      )
      
      -
      
      
      (10,657
      )
      
      10,657
      
      
      -Construction in Progress
      
      41,687,900
      
      
      (41,687,900
      )
      
      -
      
      
      (8,349,566
      )
      
      8,349,566
      
      
      -Construction Costs Payable
      
      6,240,919
      
      
      (6,240,919
      )
      
      -
      
      
      -
      
      
      
      
      
      -Short Term Investment
      
      (24,941
      )
      
      
      
      
      (24,941
      )
      
      -
      
      
      
      
      
      -Land Use Right Payable
      
      (442,718
      )
      
      461,695
      
      
      18,977
      
      
      -
      
      
      
      
      
      -Investment in Intangible Assets
      
      -
      
      
      
      
      
      -
      
      
      (98,790
      )
      
      
      
      
      (98,790
      )Deferred Assets
      
      36,452
      
      
      
      
      
      36,452
      
      
      290,820
      
      
      
      
      
      290,820Other receivables
      
      -
      
      
      (2,225,974
      )
      
      (2,225,974
      )
      
      -
      
      
      (3,053,209
      )
      
      (3,053,209
      )Other receivables -
        Related Party
      
      -
      
      
      (2,128,083
      )
      
      (2,128,083
      )
      
      -
      
      
      (16,881,640
      )
      
      (16,881,640
      )Investment
      
      (3,864,895
      )
      
      
      
      
      (3,864,895
      )
      
      -
      
      
      
      
      
      -Net Cash Flows from Investing Activities
      
      (504,889
      )
      
      (11,656,374
      )
      
      (12,161,263
      )
      
      (8,433,478
      )
      
      (19,934,849
      )
      
      (28,368,327
      )Cash Flows from Financing Activities:Proceeds from Borrowings
      
      39,846,653
      
      
      
      
      
      39,846,653
      
      
      6,935,216
      
      
      
      
      
      6,935,216Cash Pledge to Bank
      
      (6,506,472
      )
      
      
      
      
      (6,506,472
      )
      
      (1,302,045
      )
      
      
      
      
      (1,302,045
      )Notes Payable
      
      13,450,056
      
      
      
      
      
      13,450,056
      
      
      3,564,265
      
      
      
      
      
      3,564,265Other Liabilities
      
      -
      
      
      3,829,725
      
      
      3,829,725
      
      
      -
      
      
      260,844
      
      
      260,844Other Liabilities - Related Party
      
      -
      
      
      (27,896,141
      )
      
      (27,896,141
      )
      
      -
      
      
      4,254,143
      
      
      4,254,143Addition of Minority
        Interest
      
      25,801,849
      
      
      (7,517,271
      )
      
      18,284,578
      
      
      -
      
      
      14,527,890
      
      
      14,527,890Capital Contributions
      
      12,317,852
      
      
      5,912,864
      
      
      18,230,716
      
      
      15,784,152
      
      
      (13,592,478
      )
      
      2,191,674Net Cash Flows from Financing Activities
      
      84,909,938
      
      
      (25,670,823
      )
      
      59,239,115
      
      
      24,981,588
      
      
      5,450,399
      
      
      30,431,987Net Increase (Decrease) in Cash
      
      18,971,317
      
      
      -
      
      
      18,971,317
      
      
      31,919
      
      
      -
      
      
      31,919effect of Exchange Rates on Foreign Currency Transactions
      
      254,678
      
      
      
      
      
      254,678
      
      
      -
      
      
      
      
      
      -Cash - Beginning of Period
      
      122,552
      
      
      
      
      
      122,552
      
      
      90,633
      
      
      
      
      
      90,633Cash - End of Period
      
      19,348,547
      
      
      -
      
      
      19,348,547
      
      
      122,552
      
      
      -
      
      
      122,552Supplemental Cash Flow Disclosures:Interest Paid
      
      2,029,634
      
      
      
      
      
      2,029,634
      
      
      431,283
      
      
      
      
      
      431,283Income Tax paid
      
      -
      
      
      
      
      
      -
      
      
      -
      
      
      
      
      
      -


F-14

---

TERRA NOSTRA RESOURCES CORP.

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

2. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)

Consolidated
  Statements of Cash Flows May 31, 2006 and 2005 (Adjustments)(Continued)

The restated
  Statements of Cash Flows (see table above) reflect the adjustments resulting
  from the following:

- Correction of errors noted in Item 2(1) through (iv) above;
- Presentational changes to Other Receivables and Other Receivables -
  Related Party in order to relocate from Changes in Assets and Liabilities to
  Cash Flows from Investing activities;
- Presentational changes to Cash Flows from Investing Activities to merge
  the following categories: Acquisitions of Property, Plant and Equipment,
  Construction Materials, Construction in Progress and Construction Costs
  payable to reduce these categories to one line item: Property, Plant and
  Equipment.
- Presentational changes to Other Liabilities and Other Liabilities 
  Related Party in order to relocate from Changes in Assets and Liabilities to
  Cash Flows from Financing Activities;
- Reclassification of certain amounts from Capital Contributions to Addition
  of Minority Interest.

F-15

---

TERRANOSTRARESOURCESCORP.

NOTESTO THECONSOLIDATEDFINANCIALSTATEMENTSFOR THEYEARSENDEDMAY 31, 2006 AND 2005

2.RESTATEMENTOFFINANCIALSTATEMENTS(Continued)

ConsolidatedStatementsofStockholdersEquity:

Common Stock Shares
      
      
      Par Value Common Stock
      
      
      Additional Paid in Capital
      
      
      Accumulated Other Comprehensive Income
      
      
      Retained Earnings (Deficit)
      
      
      Total Stockholders' Equity
      
      
      Minority InterestOriginal
      
      
      Adjustment
      
      
      Restated
      
      
      Original
      
      
      Adjustment
      
      
      Restated
      
      
      Original
      
      
      Adjustment
      
      
      Restated
      
      
      Original
      
      
      Adjustment
      
      
      Restated
      
      
      Original
      
      
      Adjustment
      
      
      Restated
      
      
      Original
      
      
      Adjustment
      
      
      Restated
      
      
      Original
      
      
      Adjustment
      
      
      RestatedBalance at
        December 31, 2004
      
      -
      
      
      3,082,254
      
      
      3,082,254
      
      
      -
      
      
      3,082
      
      
      3,082
      
      
      -
      
      
      9,415,336
      
      
      9,415,336
      
      
      -
      
      
      
      
      
      
      
      
      -
      
      
      (10,002,386
      )
      
      (10,002,386
      )
      
      -
      
      
      (583,968
      )
      
      (583,968
      )
      
      
      
      
      (485,545
      )
      
      (485,545
      )Stock issuance to settle debt
      
      
      
      
      1,700,000
      
      
      1,700,000
      
      
      
      
      
      1,700
      
      
      1,700
      
      
      
      
      
      1,578,398
      
      
      1,578,398
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      1,580,098
      
      
      1,580,098Stock issuance per acquisition agreement
      
      
      
      
      35,000,000
      
      
      35,000,000
      
      
      
      
      
      35,000
      
      
      35,000
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      35,000
      
      
      35,000Issuance of common stock for private placement
      
      -
      
      
      364,194
      
      
      364,194
      
      
      
      
      
      364
      
      
      364
      
      
      -
      
      
      1,092,219
      
      
      1,092,219
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      -
      
      
      1,092,583
      
      
      1,092,583
      
      
      
      
      
      
      
      
      -Net Income (Loss)
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      -
      
      
      (2,734,758
      )
      
      (2,734,758
      )
      
      -
      
      
      (2,734,758
      )
      
      (2,734,758
      )
      
      
      
      
      
      
      
      (1,086,614
      )Imputed Interest - SQSS
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      -
      
      
      1,554,865
      
      
      1,554,865
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      -
      
      
      1,554,865
      
      
      1,554,865
      
      
      
      
      
      
      
      
      1,493,890Capital Contributed
        by Minority Shareholder
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      -
      
      
      -
      
      
      -
      
      
      
      
      
      
      
      
      13,034,000Balance at
        May 31, 2005
      
      40,146,448
      
      
      -
      
      
      40,146,448
      
      
      40,146
      
      
      -
      
      
      40,146
      
      
      18,382,720
      
      
      (4,741,902
      )
      
      13,640,818
      
      
      -
      
      
      -
      
      
      -
      
      
      (12,737,144
      )
      
      -
      
      
      (12,737,144
      )
      
      5,685,722
      
      
      943,820
      
      
      943,820
      
      
      
      
      
      (485,545
      )
      
      12,955,731Issuance of common stock for private placement
      
      9,010,000
      
      
      
      
      
      9,010,000
      
      
      9,010
      
      
      
      
      
      9,010
      
      
      20,057,476
      
      
      
      
      
      20,057,476
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      20,066,486
      
      
      -
      
      
      20,066,486Net Income (Loss)
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (11,595,942
      )
      
      
      
      
      (11,595,942
      )
      
      (11,595,942
      )
      
      -
      
      
      (11,595,942
      )
      
      
      
      
      
      
      
      (5,074,309
      )Issuance of management options
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      2,422,026
      
      
      
      
      
      2,422,026
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      2,422,026
      
      
      -
      
      
      2,422,026Warrants issued to investors and arrangers
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      97,040
      
      
      
      
      
      97,040
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      97,040
      
      
      -
      
      
      97,040Imputed Interest - Terra Nostra level
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      19,755
      
      
      
      
      
      19,755
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      19,755
      
      
      -
      
      
      19,755Foreign Currency translation adjustments
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      254,677
      
      
      
      
      
      254,677
      
      
      
      
      
      
      
      
      
      
      
      254,677
      
      
      -
      
      
      254,677
      
      
      
      
      
      
      
      
      250,194Elimination SQSS due to consolidation with STJMC
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (6,296,765
      )
      
      4,741,900
      
      
      (1,554,865
      )
      
      
      
      
      
      
      
      
      
      
      1,636,329
      
      
      
      
      
      1,636,329
      
      
      (4,660,436
      )
      
      4,741,900
      
      
      81,464
      
      
      
      
      
      
      
      
      (8,131,616
      )Capital Contributed
        by Minority Shareholder
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      -
      
      
      -
      
      
      -
      
      
      
      
      
      
      
      
      26,166,000Balance
        at May 31, 2006
      
      49,156,448
      
      
      -
      
      
      49,156,448
      
      
      49,156
      
      
      -
      
      
      49,156
      
      
      34,965,558
      
      
      283,308
      
      
      34,682,250
      
      
      254,677
      
      
      -
      
      
      254,677
      
      
      (22,980,065
      )
      
      (283,308
      )
      
      (22,696,757
      )
      
      12,289,326
      
      
      
      
      
      12,289,326
      
      
      
      
      
      (485,545
      )
      
      26,166,000


The
  adjustments to the Consolidated Statements of Stockholders Equity reflect the
  following:

- The Consolidated Statements of Stockholders Equity as filed in the
  original submission on Form 10-KSB for the fiscal years ended May 31, 2006 and
  2005 were limited in disclosure to the fiscal year ended May 31 2005 and
  details of those transactions which occurred during the fiscal year ended May
  31, 2006. The above restated Consolidated Statements of Stockholders Equity
  incorporate a presentational change to reflect the opening balance as at the
  fiscal year ended December 31, 2004 (the Companys former year end prior to
  adopting a May 31 fiscal year end) including the impact of a reverse-split on
  a 10 for 1 basis concluded on January 11, 2005.
- Certain columns did not foot in the originally filed Consolidated
  Statements of Stockholders Equity;
- The Consolidated Statements of Stockholders Equity reflect the impact of
  an error correction between retained earnings and additional paid in capital
  discussed in detail in Note 2 (iii) above;
- The Consolidated Statements of Stockholders Equity have been restated to
  reclassify certain fiscal 2005 entries relating to the Companys share of
  imputed interest and the impact of the elimination of SQSS as a result of the
  consolidation of STJMC as at the fiscal year ended May 31, 2006.;
- The Consolidated Statements of Stockholders Equity have been restated to
  include a column representing the Minority interest.

F-16

---

TERRA NOSTRA RESOURCES CORP.

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

3 .
  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.

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.

4 .
  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-17

---

TERRA NOSTRA RESOURCES CORP.

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

4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)

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 fair value being the lower of cost and market
  value at the report date. 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.

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.

F-18

---

TERRA NOSTRA RESOURCES CORP.

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

4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)

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.

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 the determination of net income for the period in which the exchange
  rate changes. Translation adjustments resulting from the process of translating
  the Companys subsidiary operations from RMB to the Companys functional
  currency, United States dollars, are reported separately as accumulated other
  comprehensive income.

F-19

---

TERRA NOSTRA RESOURCES CORP.

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

4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)

L. Foreign
  currency translation - Continued

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.

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.

F-20

---

TERRA NOSTRA RESOURCES CORP.

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

4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)

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.

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      

F-21

---

TERRA NOSTRA RESOURCES CORP.

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

4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)

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.

FASB 151 -
  This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing,"
  to clarify the accounting for abnormal amounts of idle facility expense, freight,
  handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter
  4, previously stated that ". . . under some circumstances, items such as idle
  facility expense, excessive spoilage, double freight, and re-handling costs
  may be so abnormal as to require treatment as current period charges. " This
  Statement requires that those items be recognized as current-period charges
  regardless of whether they meet the criterion of "so abnormal." In addition,
  this Statement requires that allocation of fixed production overheads to the
  costs of conversion be based on the normal capacity of the production facilities.
  The Company has adopted a policy of allocating fixed production overheads that
  is consistent with this Statement.

FASB 123r
  - This Statement is a revision of FASB Statement No. 123, Accounting for
  Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
  Accounting for Stock Issued to Employees, and its related implementation
  guidance. This Statement establishes standards for the accounting for transactions
  in which an entity exchanges its equity instruments for goods or services. It
  also addresses transactions in which an entity incurs liabilities in exchange
  for goods or services that are based on the fair value of the entitys
  equity instruments or that may be settled by the issuance of those equity instruments.
  This Statement focuses primarily

F-22

---

TERRA NOSTRA RESOURCES CORP.

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

4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)

U. New Accounting Pronouncements (Continued)

on accounting
  for transactions in which an entity obtains employee services in share-based
  payment transactions. This Statement does not change the accounting guidance
  for share-based payment transactions with parties other than employees provided
  in Statement 123 as originally issued and EITF Issue No. 96-18, Accounting
  for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
  or in Conjunction with Selling, Goods or Services. This Statement does
  not address the accounting for employee share ownership plans, which are subject
  to AICPA Statement of Position 93-6, Employers Accounting for Employee
  Stock Ownership Plans.The Company expects to use stock-based compensation
  to a limited extent. It will follow the guidelines of this Statement as a matter
  of policy.

5. BUSINESS
  COMBINATION

In April of
  2005, pursuant to agreements originally executed in December 2004, the Company
  issued 35,000,000 shares with a par value of $0.001 to RTO Investments for the
  right to acquire RTOs interest in a Joint Venture agreement between RTO
  and another party with respect to certain Copper and Stainless operations in
  the Peoples Republic of China. It was contemplated under this joint venture
  agreement that each of the Company and the existing holder of the Copper and
  Stainless assets would contribute to a new entity being the SINO Foreign Joint
  Venture to complete the respective requirements of the joint venture. Under
  terms of the agreement, the Company needed to make cash contributions of $13,566,000
  and $27,234,000 to the Stainless and Copper ventures respectively, while the
  existing party would contribute the required assets to achieve certain production
  capacity for both the Stainless and Copper ventures with a value of approximately
  $40,000,000. For its capital contribution, the Company would acquire 51% of
  the joint venture. Subsequent to the transaction, the joint venture was split
  into two ventures being the STJMC for the copper venture and SQSS for the stainless
  venture.

The net assets
  purchased in the STJMC transaction, for an amount of $27,234,000 are allocated
  as follows:

Current assets
      $
      50,695,412Long-term assets
      
      12,104,098Other assets
      
      3,959$
      62,803,469Current liabilities
      $
      35,569,469Net assets
      $
      27,234,000


The net assets
  purchased in the SQSS transaction, for an amount of $13,566,000 are allocated
  as follows:

Current assets
      $
      18,224,471Long-term assets
      
      37,052,589$
      55,277,060Current liabilities
      $
      48,893,654Long-term liabilities
      
      1,073,550$
      49,967,204Net assets
      $
      5,309,856


With respect
  to the completion of the acquisition of the two ventures being the STJMC for
  the copper venture and SQSS for the stainless venture, the Company concluded
  the acquisition and transfer of such assets for the respective joint ventures
  on May 31, 2006 (STJMC) and August 17, 2005 (SQSS). The consolidated financial
  statements as presented for the fiscal year ended May 31, 2005 therefore reflect
  the impact of the acquisition of SQSS as if it had taken effect during the year
  presented. As a result no pro-forma results of operations are summarized in
  the body of this note with respect to the operations of SQSS.

F-23

---

TERRA NOSTRA RESOURCES CORP.

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

5. BUSINESS COMBINATION (Continued)

While capital
  contributions totaling $25,234,000 remained payable from the Company at May
  31, 2006, the parties to the agreement with respect to the 51% interest in STJMC
  determined May 31, 2006, to be the effective date of the transaction as a result
  of the following cumulative events: (i) Required governmental approvals from
  the Peoples Republic of China for the above noted transaction had been
  received as at May 31, 2006; (ii) the 2005 calendar year tax audit had been
  filed for STJMC immediately prior to May 31, 2006 with the Chinese government,
  demonstrating Terra Nostra's 51% equity position in the company; and (iii) the
  majority of positions on the board of directors of STJMC, including the position
  of Chairman, had as at May 31, 2006 been assumed by Terra Nostra appointees.
  As a result of these events which clearly confirmed Terra Nostras effective
  control of STJMC the parties agreed upon May 31, 2006 as the effective date
  of the acquisition. Therefore,the balance sheet of STJMC as at that date is
  included in the consolidated Balance Sheet and the Statement of Shareholders
  Equity for the Year Ended May 31, 2006 as presented in this report. However,
  the accounts of STJMC are not included in the Consolidated Statements of Operations
  or the Consolidated Statements of Cash Flows. Presented below are the proforma
  results of operations including STJMC for the period ended May 31, 2006, as
  though the business combination had been completed effective June 1, 2005:

Terra Nostra
      
      
      
      
      
      
      
      
      
      
      
      Terra Nostraand SQSS
      
      
      
      
      
      
      
      
      
      
      
      SQSS & STJMC(as
        reported)
      
      
      STJMC
      
      
      Adjustments
      
      
      Note
      
      
      (Proforma)Revenues
      
      5,107,982
      
      
      101,658,347
      
      
      -
      
      
      
      
      
      106,766,329Cost of Sales
      
      6,847,019
      
      
      81,844,259
      
      
      -
      
      
      
      
      
      88,691,278Gross Profit
      
      (1,739,037
      )
      
      19,814,088
      
      
      -
      
      
      
      
      
      18,075,051Expenses:Selling
      
      55,486
      
      
      67,453
      
      
      -
      
      
      
      
      
      122,939General and Admin. 
        North America
      
      7,275,557
      
      
      -
      
      
      -
      
      
      
      
      
      7,275,557General and Administrative
        - China
      
      3,762,230
      
      
      833,000
      
      
      -
      
      
      
      
      
      4,595,230Depreciation and Amortization
      
      700,922
      
      
      742,271
      
      
      -
      
      
      
      
      
      1,443,193Total Expenses
      
      11,794,195
      
      
      1,642,724
      
      
      -
      
      
      
      
      
      13,436,919Operating Profit / (Loss)
      
      (13,533,232
      )
      
      18,171,364
      
      
      -
      
      
      
      
      
      4,638,132Investment Income / (Loss)
      
      -
      
      
      (2,556,034
      )
      
      4,187,809
      
      
      (1
      )
      
      1,631,775Interest (Expense)
      
      (3,151,492
      )
      
      (365,529
      )
      
      -
      
      
      
      
      
      (3,517,021
      )Other Income / (Expense)Other Income
      
      41,594
      
      
      15,825
      
      
      -
      
      
      
      
      
      57,419Non-operating Expense
      
      (27,121
      )
      
      (16,992
      )
      
      -
      
      
      
      
      
      (44,113
      )Income / (Loss) Before Income Tax
      
      (16,670,251
      )
      
      15,248,634
      
      
      4,187,809
      
      
      
      
      
      2,766,192


F-24

---

TERRA NOSTRA RESOURCES CORP.

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

5. BUSINESS COMBINATION (Continued)

Terra Nostra
      
      
      
      
      
      
      
      
      
      
      
      Terra Nostraand SQSS
      
      
      
      
      
      
      
      
      
      
      
      SQSS & STJMC(as
        reported)
      
      
      STJMC
      
      
      Adjustments
      
      
      Note
      
      
      (Proforma)Provision for Income Tax
      
      -
      
      
      5,863,077
      
      
      -
      
      
      
      
      
      5,863,077Net Income / (Loss) Before Minority Interest
      
      (16,670,251
      )
      
      9,385,557
      
      
      4,187,809
      
      
      
      
      
      (3,096,885
      )Minority Interest
      
      5,074,309
      
      
      -
      
      
      (9,673,232
      )
      
      (2
      )
      
      (4,598,923
      )Net Income / (Loss)
      
      (11,595,942
      )
      
      9,385,557
      
      
      (5,485,423
      )
      
      
      
      
      (7,695,808
      )Other Comprehensive Income:Foreign Currency Translation
        Adjustment
      
      254,678
      
      
      1,389,108
      
      
      (680,663
      )
      
      (3
      )
      
      963,123Comprehensive Income
      
      (11,341,264
      )
      
      10,774,665
      
      
      (6,166,086
      )
      
      
      
      
      (6,732,685
      )(Loss) Per Share - weighted average
      
      ($0.27
      )
      
      
      
      
      
      
      
      
      
      
      ($0.18
      )(Loss) Per Share - fully diluted
      
      ($0.21
      )
      
      
      
      
      
      
      
      
      
      
      ($0.14
      )Weighted Average Number of Shares
      
      42,925,833
      
      
      
      
      
      
      
      
      
      
      
      42,925,833Fully Diluted Number of Shares
      
      55,105,833
      
      
      
      
      
      
      
      
      
      
      
      55,105,833


|Notes: |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------ | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | (1) | The adjustment is equal to STJMCs share (i.e.,
        49%) of losses in Shandong Quanxin Stainless Steel Co. Ltd. (SQSS).                                                                                                                                                                                                                                                                                                                                                                                                                 
|       | (2) | The minority adjustment in the first column, in the
        amount of US$5,074,309, represents the adjustment for the 49% ownership
        of SQSS, which is owned by STJMC. However, since STJMC is part of the
        group under the pro forma scenario, there would not be a need for this
        minority interest adjustment in the pro forma. Secondly, since Terra Nostra
        owns 51% of STJMC, a minority interest adjustment of US$4,598,923 was
        made, representing the share of income attributed to the 49% owner.
|       | (3) | This adjustment represents the minority interest share
        of STJMCs Other Comprehensive Income.                                                                                                                                                                                                                                                                                                                                                                                                                                         

6. OTHER
  RECEIVABLES

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

|                                      |  | May
      31, 2006 |  |  | May
      31, 2005 | 
|------------------------------------- |  | ------------------ |  |  | ------------------ | 
|Current Assets                        |  | (US$)              |  |  | (US$)              | 
|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.

7.
  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         |  |  | --                 | 

F-25

---

TERRA NOSTRA RESOURCES CORP.

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

7. INVENTORIES (Continued)

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.

8 .
  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 15 , herein, RELATED
  PARTY TRANSACTIONS).

9. 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.

F-26

---

TERRA NOSTRA RESOURCES CORP.

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

9. PROPERTY, PLANT AND EQUIPMENT (Continued)

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.

Land use rights
  are amortized using the straight-line method over a 50 year period which period
  reflects the term of the land use certificate issued by the applicable government
  agency. 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.

F-27

---

TERRA NOSTRA RESOURCES CORP.

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

10.
  BANK INDEBTEDNESS AND NOTES PAYABLE

Bank Loans & Short Term Loans

(US$)
    Annual
    Amount at
    
    Amount atPeriod
    Int.
    May
      31, 2006
    
    May
      31, 2005Huaxia Bank
    Dec 1, 2005  Dec 1, 2006
    5.58%
    5,611,812Agricultural
    Jul 31, 2005  Jul 31, 2006
    8.928%
    299,297Agricultural
    Aug 29, 2005  Aug 29, 2006
    8.928%
    311,767Agricultural
    Nov 18, 2005  Nov 18, 2006
    8.928%
    187,060CITIC Bank
    Jan 16, 2006  Jul 13, 2006
    4.698%
    399,063CITIC Bank
    Jan 18, 2006  Jul 17, 2006
    4.698%
    1,197,187CITIC Bank
    Feb 23, 2006  Oct 15, 2006
    6.696%
    1,247,069CITIC Bank
    Oct. 8, 2005  Jul. 15, 2006
    6.138%
    1,247,069CITIC Bank
    Oct. 20, 2005  Jun. 19,
      2006
    6.138%
    1,247,069CITIC Bank
    Apr. 5, 2006  Nov. 4, 2006
    6.138%
    1,247,069CITIC Bank
    Apr. 13, 2006  Oct. 20,
      2006
    6.138%
    1,247,069CITIC Bank
    Apr. 20, 2006  Nov.14,
    6.138%
    1,247,069Zibo
    Aug. 5, 2005  Jul. 24,
      2006
    8.37%
    2,494,139Zibo
    Sep. 30, 2005  Sep.5, 2006
    5.58%
    22,447,249Zibo
    Jan. 17, 2006  Jan.9,
      2007
    8.37%
    3,741,209Heng Feng
    Apr. 5, 2006  Apr. 5, 2007
    6.138%
    6,235,348CITIC Bank
    Jan 27,2005 - Nov 27,
      2005
    6.138%
    
    
    1,208,226CITIC Bank
    Mar 2, 2005 - Oct 18, 2005
    6.138%
    
    
    1,208,226CITIC Bank
    Mar 23, 2005 - Sep 26,
      2005
    6.138%
    
    
    1,208,226CITIC Bank
    Apr 14, 2005 - Oct 14, 2005
    5.22%
    
    
    894,086Zibo
    Feb 5, 2005 - Jan 10,
      2006
    8.37%
    
    
    3,624,677Zibo
    Aug 17, 2004 - Aug 3, 2005
    7.65%
    
    
    2,416,451Total Bank Loans
      Outstanding
    
    50,406,545
    
    10,559,892


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 initalics ) 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.

F-28

---

TERRA NOSTRA RESOURCES CORP.

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

10. BANK INDEBTEDNESS AND NOTES PAYABLE (Continued)

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,            |  |  | 249,414            |  |  |                    | 
|CITIC Bank                 |  | Feb 24, 2006  Aug 24,            |  |  | 1,247,069          |  |  |                    | 
|CITIC Bank                 |  | Mar. 9, 2006  Sep. 9,            |  |  | 7,482,416          |  |  |                    | 
|Zibo Commercial            |  | Dec. 9, 2005  Jun. 7,
      2006 |  |  | 2,805,907          |  |  |                    | 
|Zibo Commercial            |  | Apr. 19, 2006  Oct. 11,          |  |  | 1,870,604          |  |  |                    | 
|Bank of Communication      |  | Mar. 24, 2006  Sep. 24,          |  |  | 1,247,069          |  |  |                    | 
|Heng Feng Bank             |  | Mar. 30, 2006  Sep. 30,          |  |  | 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,            |  |  |                    |  |  | 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
initalics ) 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.

11.
  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.

12. 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.

F-29

---

TERRA NOSTRA RESOURCES CORP.

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

12. RESERVES
  (Continued)

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.

13. 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.

14. 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-30

---

TERRA NOSTRA RESOURCES CORP.

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

15. STOCK
  BASED COMPENSATION

Issuance
  of stock options

During the
  year ended May 31, 2005, the Company adopted the 2005 stock option and stock
  award plan allowing for a total of 4,000,000 common shares to be granted to
  directors, officers, employees and consultants (the Plan). Characteristics
  of the options, including vesting, execution price, and expiration, are determined
  by the Plan Administrators who are appointed by the Board of Directors. There
  were no options granted under the Plan in fiscal 2005.

During fiscal
  2006, the Administrators granted a total of 3,752,000 options with a weighted
  average exercise price of $2.33 per share to certain consultants, officers and
  directors. The grant prices for each of the options represent 100% of the closing
  price of the Company's shares on the respective dates of grant.

On May 31,
  2006, a total of 1,100,000 options granted under the Companys 2005 stock
  option plan extinguished unexercised.

The following
  is a table of outstanding options and changes during the fiscal year ending
  May 31, 2007. All options are immediately vested.

|                                  |  | Employee |  |  | Non-employee |  |  | Weighted Average | 
|--------------------------------- |  | -------- |  |  | ------------ |  |  | ---------------- | 
|                                  |  | Options  |  |  | Options      |  |  | Exercise Price   | 
|Options outstanding, May 31 2005  |  | -        |  |  | -            |  |  | -                | 
|Options granted:                  |  |          |  |  |              |  |  |                  | 
|Employees                         |  | -        |  |  | 2,550,000    |  |  | 2.25             | 
|Non-employees                     |  | -        |  |  | 1,202,000    |  |  | 2.50             | 
|Options exercised                 |  | -        |  |  | -            |  |  | -                | 
|Options canceled                  |  | -        |  |  | -            |  |  | -                | 
|Options expired                   |  | -        |  |  | 1,100,000    |  |  | 2.00             | 
|Options Outstanding, May 31, 2006 |  | -        |  |  | 2,652,000    |  |  | 2.48             | 

Options granted
  consist of:

WeightedYear and Exercise price relative
      average fair
      Weightedto fair value of underlying stock
      value at grant
      average exercisedate
      priceYear ending May 31, 2005:Exercise price exceeds fair value:Year ending May 31, 2006:Exercise price exceeds fair value:
      0.38
      2.48


If not previously
  exercised or canceled, options outstanding at May 31, 2006 will expire as follows:

Range of Exercise
      
      Weighted AveragePrices
      
      ExerciseHigh
      Low
      
      Shares
      PriceYear Ending May 31, 2007
      2.50
      2.00
      
      2,652,000
      2.482,652,000


The fair value
  of each option granted was computed using the Black-Scholes method using the
  following weighted-average assumptions:

F-31

---

TERRA NOSTRA RESOURCES CORP.

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

15. STOCK BASED COMPENSATION (Continued)

Years Ended May 312007
      2006Expected Volatility:
      25.05
      42.01Risk-free interest rate:
      4.36%
      4.52%Expected Dividends:
      0
      0Expected Term in Years:
      3
      1


The fair value
  of 2,550,000 options granted during the year ended May 31, 2007 totals $1,232,270
  which amount has been expensed and recorded in the Company's Statement of Shareholder's
  Equity. Under the terms of the 2005 stock option and stock award plan the Company
  was required to obtain shareholder approval for the plan within twelve months
  from the date of establishment of the plan, which was May 13, 2005. The Company
  did not hold an annual general meeting or any shareholder meetings in fiscal
  2005 or 2006 and therefore the shareholders did not have an opportunity to vote
  on the 2005 stock option and stock award plan. Therefore, subsequent to the
  fiscal year ended May 31, 2006, any options granted under the 2005 plan expired
  due to the fact they did not receive shareholder approval.

16 .
  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                       |  |                    |  |  |                    | 
|Zhang Ke                                                |  | 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         | 

F-32

---

TERRA NOSTRA RESOURCES CORP.

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

16. RELATED PARTY TRANSACTIONS (Continued)

|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 | )

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.

17 .
  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   
|Total | US$13,717,763               |                                            

F-33

---

TERRA NOSTRA RESOURCES CORP.

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

17. CONTINGENCIES AND COMMITMENTS (CONTD)

A.Contingencies
  (Contd)

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 PRC based tax 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.

18. INCOME
  TAXES

The Company
  did not incur income tax expense for the years ended May 31, 2006 and 2005.
  The difference between the expected tax benefit computed at the federal statutory
  income tax rate of 34% and the effective tax rate for the years ended May 31,
  2006 and 2005 was due primarily to the tax effect of the change in the valuation
  allowance.

The Company
  recognizes deferred tax liabilities and assets for the expected future tax consequences
  of events that have been recognized in the financial statements or tax returns.
  Under this method, deferred tax liabilities and assets are determined based
  on the difference between the financial statement carrying amounts and tax bases
  of assets and liabilities using enacted tax rates in effect in the years in
  which the differences are expected to reverse.

The following
  is a summary of the Companys deferred tax assets and liabilities arising
  from differences in financial statement and income tax bases for the following
  assets as of May 31, 2006:

Net operating loss carry forward:
      $
      3,019,200Deferred tax asset valuation allowance :
      
      (3,019,200
      )$
      -


At May 31,
  2006 the Company has approximately $8,880,000 of unused federal net operating
  loss carry forwards, which expire from 2025 through 2026. A valuation allowance
  has been provided to reduce the deferred tax assets to zero, as realization
  is not likely. The Company may have tax filing obligations in Canada which is
  currently being evaluated.

The Company
  experienced a change in its business operations in the year ended May 31, 2005
  and considers that net operating losses for years prior to that may not be allowed.
  Accordingly, those losses from years prior to May 31, 2005 are not included
  in the calculation of deferred tax assets. The increase in valuation allowance
  for the year ended May 31, 2006 was approximately $2,474,000.

2006
      
      
      2005Expected tax benefit on United States losses
      $
      2,474,000
      
      $
      545,000Increase in valuation allowance
      
      (2,474,000
      )
      
      (545,000
      )$
      -
      
      $
      -


F-34

---

TERRA NOSTRA RESOURCES CORP.

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

19 .
  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.

F-35

---

**ITEM
8.**       **CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

Not applicable.

ITEM 8A.      CONTROLS
  AND PROCEDURES

Evaluation
  of Disclosure Controls and Procedures

We
  conducted an evaluation, under the supervision and with the participation of
  our management including our principal executive officer and principal financial
  officer, of the effectiveness of our disclosure controls and procedures, as
  defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
  1934, as of May 31, 2006 and 2005. Based upon that evaluation, our principal
  executive officer and principal financial officer have concluded that our disclosure
  controls and procedures were not effective as of May 31, 2006 and 2005 because
  of the material weaknesses discussed below.

Managements
  Report on Internal Control over Financial Reporting

Our
  management is responsible for establishing and maintaining adequate internal
  control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
  under the Securities Exchange Act of 1934. Our internal control over financial
  reporting is a process designed to provide reasonable assurance regarding the
  reliability of financial reporting and the preparation of financial statements
  for external purposes in accordance with generally accepted accounting principles
  in the United States (U.S. GAAP). Internal control over financial
  reporting includes those policies and procedures that: (i) pertain to the maintenance
  of records that, in reasonable detail, accurately and fairly reflect our transactions
  and dispositions of assets; (ii) provide reasonable assurance that transactions
  are recorded as necessary to permit preparation of financial statements in accordance
  with U.S. GAAP, and that our receipts and expenditures are being made only in
  accordance with authorizations of our management and directors; and (iii) provide
  reasonable assurance regarding prevention or timely detection of unauthorized
  acquisition, use or disposition of our assets that could have a material effect
  on the financial statements.

All
  internal control systems, no matter how well designed, have inherent limitations.
  Therefore, even those systems determined to be effective can provide only reasonable
  assurance with respect to financial statement preparation and presentation and
  may not prevent or detect misstatements. Projections of any evaluation of effectiveness
  of internal control over financial reporting to future periods are subject to
  the risk that controls may become inadequate because of changes in conditions,
  or that the degree of compliance with the policies or procedures may deteriorate.

Our
  management, including our principal executive officer and principal financial
  officer, assessed the effectiveness of our internal control over financial reporting
  as of May 31, 2006 and 2005. In making this assessment, management used the
  criteria set forth in Internal Control-Integrated Framework issued by
  the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
  A material weakness is a control deficiency or combination of control deficiencies
  that results in more than a remote likelihood that a material misstatement of
  the annual or interim financial statements will not be prevented or detected.
  Managements assessment identified the following control deficiencies or
  combination of control deficiencies that constitute material weaknesses:

Company-level
  controls. We did not maintain effective company-level controls as defined in
  the Internal ControlIntegrated Framework published by COSO. These deficiencies
  related to each of the five components of internal control as defined by COSO
  (control environment, risk assessment, control activities, information and communication,
  and monitoring). These deficiencies resulted in more than a remote likelihood
  that a material misstatement of our annual or interim financial statements would
  not be prevented or detected. Specifically,

- Our control environment did not sufficiently promote effective internal
  control over financial reporting throughout our organizational structure, and
  this material weakness was a contributing factor to the other material
  weaknesses described in this Item 8a;
- We had inadequate risk assessment controls, including inadequate mechanisms
  for anticipating and identifying financial reporting risks; and for reacting
  to changes in the operating environment that could have a material effect on
  financial reporting;

23

---

- There was inadequate communication from management to employees regarding
  the general importance of controls and employees duties and control
  responsibilities at both the parent and subsidiary levels. There was
  inadequate oversight of our two operating Joint Venture operations in order to
  ensure the application of internal controls was being effectively applied, and
  the necessity for such controls had been adequately explained and understood;
- We had inadequate monitoring controls, including inadequate staffing and
  procedures to ensure periodic evaluations of internal controls to ensure that
  appropriate personnel regularly obtain evidence that controls are functioning
  effectively and that identified control deficiencies are remediated timely;
- We had an inadequate number of trained finance and accounting personnel
  with appropriate expertise in U.S. generally accepted accounting principles.
  Accordingly, in certain circumstances, an effective secondary review of
  technical accounting matters was not performed. Further in certain
  circumstances an understanding of application of US GAAP to certain
  transactions was not complete and therefore our financial statements omitted
  certain important footnote disclosures to help readers better understand our
  business operations;
- We had inadequate controls over our management information systems related
  to program changes, segregation of duties, and access controls;
- We had inadequate access and change controls over end-user computing
  spreadsheets. Specifically, our controls over the completeness, accuracy,
  validity and restricted access and review of certain spreadsheets used in the
  period-end financial statement preparation and reporting process were not
  designed appropriately or did not operate as designed.
- We had inadequate and untimely information flow between the Company and its
  subsidiaries and inadequate personal to manage the information.

Financial statement preparation and review
procedures.We had inadequate policies, procedures and personnel to ensure
that accurate, reliable interim and annual consolidated financial statements
were prepared and reviewed on a timely basis. Specifically, we had insufficient:
a) levels of supporting documentation; b) review and supervision within the
accounting and finance departments; c) preparation and review of footnote
disclosures accompanying our financial statements; and d) technical accounting
resources. These deficiencies resulted in errors in the financial statements and
more than a remote likelihood that a material misstatement of our annual or
interim financial statements would not be prevented or detected.

Inadequate reviews of adjusting journal
entries, inter-corporate accounts, and consolidating entries. We had
inadequate review procedures over consolidation work papers and adjusting
journal entries as well as inter-corporate account transactions. Specifically,
deficiencies were noted in the following areas: a) management review of
supporting documentation, calculations and assumptions used to prepare the
financial statements, including consolidation spreadsheets and inter-corporate
account analyses; b) management review of adjusting journal entries recorded
during the financial statement preparation process and carry forward of such
adjustments. These deficiencies resulted in the omission of a material
inter-corporate entry, incorrect classification of certain accounts, the
omission of a prior period adjusting entry and certain other clerical errors.
These deficiencies resulted in a more than a remote likelihood that a material
misstatement of our annual or interim financial statements would not be
prevented or detected.

Because
of the weaknesses described above, management has concluded that our internal
control over financial reporting was not effective as of the fiscal years ended
May 31, 2006 and 2005.

We are
addressing the outstanding material weaknesses described above, as well as our
control environment. We are seeking a qualified CFO in the first quarter of
fiscal 2009. We also expect to undertake the following remediation efforts:

- Hire additional qualified personnel and other resources to strengthen the
  accounting, finance, and information technology components of our
  organization, including a Compliance officer, Information technology officer,
  and SEC reporting manager and an internal audit manager.
- Adopt administration, supervision, and review controls over inter-corporate
  entries and fiscal year end adjusting entries;

24

---

- Implement controls to ensure the periodic review of and changes to our
  end-user computing spreadsheets used in the period-end financial statement
  preparation and reporting process; and
- Implement a new system of internal controls at both the Company and
  subsidiary levels to include improved management information systems, risk
  assessment policies and financial statement closing processes.

These
specific actions are part of an overall program that we are currently developing
in an effort to remediate the material weaknesses described above. We may not
have sufficient time to implement our remediation plan before testing our
internal control over financial reporting for the fiscal year ended 2007 or
2008.

Changes in Internal Control over Financial Reporting During
the Fiscal Quarter Ended May 31, 2006

****During the fiscal quarter ended May 31, 2006, there were no changes in
our internal control over financial reporting that have materially affected, or
are reasonable likely to materially affect, our internal control over financial
reporting, other than those noted above.

Internal Control Enhancements Implemented During the Fiscal
Year Ended May 31, 2006

During
the fiscal year ended May 31, 2006, there were no enhancements implemented to
our internal control over financial reporting.

ITEM 8B.    OTHER INFORMATION

Not applicable

PART III

ITEM 9.        DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.

The following table sets forth the names and ages of all
directors and executive officers of Terra Nostra as of the date of this report,
indicating all positions and offices with Terra Nostra and its Subsidiaries held
by each such person:

|NAME                | AGE        | POSITION                                                                     
|------------------- | ---------- | -----------------------------------------------------------------------------
|Donald C. Nicholson | 40         | CEO and Member of the Board of
      Directors of Terra Nostra               
|Jeff Reynolds       | 49         | CFO of Terra Nostra                                                          
|George Chua         | 49         | COO of Terra Nostra, Member of
      the Board of Directors of SQSS and STJMC
|Felix Chung         | 48         | Member, Board of Directors of Terra Nostra                                   
|Clarence Foo        | Not avail. | Member, Board of Directors of
      Terra Nostra                             
|Donald G. Burrell   | 52         | Member, Board of Directors of Terra Nostra                                   
|Crystal Poe         | 25         | Member, Board of Directors of
      Terra Nostra                             

25

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The Companys directors are appointed by the consent of a
majority of the holders of Terra Nostras common stock.

Mr. Donald C. Nicholson,B.Comm.

Mr. Nicholson has over 15 years of international project and
business management experience. Mr. Nicholsons comprehensive experience in
project management includes concept development up through and including
post-implementation support. Mr. Nicholson is responsible for public filings,
human resources, insurance, and interfacing with the board of directors, and his
background covers several business sectors including manufacturing, education,
construction, real estate, and high-technology. Prior to joining Terra Nostra,
Mr. Nicholson was Vice President of Operations for a large European bicycle
manufacturer, B-Tech SA, where he was responsible for administration and
production management, business process re-engineering to further the
technological evolution of the company, ISO implementation, and arranging
corporate financing.

Mr. Nicholson graduated from the University of British Columbia
in 1991 with a Bachelor of Commerce degree.

Jeff Reynolds, MBA

Mr. Reynolds has over 20 years experience in U.S. and
international structured finance, with direct experience in over 30 countries,
including PRC. Mr. Reynolds is experienced in advising, arranging, and
underwriting of project financings and corporate finance acquisitions. Mr.
Reynolds is responsible for directing the finance, accounting, and treasury
activities of the Company. Prior to joining Terra Nostra, Mr. Reynolds was
Managing Director/CFO and co-founder of Global Capital Enterprises, a
cross-border financial advisory firm serving private and state-owned companies
in PRC. Mr. Reynolds was co-founder and Director of a unit in
PricewaterhouseCoopers Securities that had a global mandate for advising public
and private sponsors in project finance, privatization, and M&A in the
airport sector. Additionally, Mr. Reynolds was Director, Project and Corporate
Finance for Airport Group International, the airport investment and management
platform for Lockheed Martin, George Soros, GE Capital, and Bechtel Enterprises.
Mr. Reynolds was responsible for structuring and arranging limited recourse debt
and equity for numerous projects and corporate acquisitions. Before that, Mr.
Reynolds was with Citibanks Structured Finance Group in London, where he was
responsible for all corporate due diligence across Europe and later assumed
responsibilities in underwriting, relationship management, and work-outs.

Mr. Reynolds received his MBA from the University of Southern
California and BA (Economics) from U.C.L.A.

George Chua, B.Sc.

Mr. Chua has 27 years of experience in manufacturing,
recycling, sales and marketing of scrap lead, zinc, metal fabrication, paper,
and machinery. Mr. Chua is responsible for oversight and strategic direction of
the Subsidiaries, including procurement, manufacturing, sales and marketing.
From 1988 to 2001, Mr. Chua held various management positions including serving
as Philippines country manager for DaiEi Papers International Corporation, a
leading paper sourcing and distribution network with annual revenues exceeding
US$2 billion; Mr. Chua had profit and loss responsibility and he reported to
that companys ASEAN headquarters in Singapore. Mr. Chua also has experience in
the commodities futures markets holding executive positions at Queensland
Commodities, Kingly Commodities Futures and Master Commodities Futures in the
Philippines.

Mr. Chua received a Bachelor of Science degree in Industrial
Management Engineering from De La Salle University, Philippines, in1980.

26

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Felix Chung, BBA

Mr. Chung is presently the CFO and Treasurer of La Suerte Cigar
& Cigarette Factory, Philippines, which has a licensing agreement with
British American Tobacco to manufacture premium-branded cigarettes in the
Philippines. Mr. Chung has over twenty years of experience in the financial
management of manufacturing concerns, including expertise in capital management,
short and long term borrowings, and risk assessments in connection with capital
investments. Mr. Chung is also a board member of various corporations, trusts,
and charitable organizations based in the Philippines.

Mr. Chung holds a Bachelor of Business Administration degree
from University of Southern California (USC).

Donald G. Burrell, B.Comm, LLB

Mr. Burrell is presently an associate with Lindsay Kenney, a
Canadian west coast law firm providing legal services to local, regional, and
international clients, with a current complement of over 50 lawyers. Mr.
Burrells law practice areas include corporate and business law, commercial
lending, commercial leasing, and real estate. Additional professional experience
includes senior management positions with the Real Estate Division of the
Faculty of Commerce and Business Administration at the University of British
Columbia. Mr. Burrell attended the University of British Columbia earning a
Bachelor of Commerce degree in 1980 and a Bachelor of Laws degree in 1981. He
was admitted to the British Columbia Bar in 1982. Mr. Burrell has also earned a
Diploma in Urban Land Economics from the Faculty of Commerce and Business
Administration at the University of British Columbia.

Crystal Poe, M.A.

Ms. Poe recently graduated with honors from the University of
Edinburgh, receiving her MA in Economics. Ms. Poe's dissertation was on the
economic impact of the copper industry in PRC, and the effects of governmental
macroeconomic policy on the development and future of the industry. Of
particular research interest was the comparative cost and environmental benefits
of the processing of scrap copper over that of copper concentrate. During her
two most recent academic breaks, Ms. Poe has worked for the Pan Asia Group of
Companies in PRC, as an assistant at a scrap refining facility and also at
various mining facilities.

27

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Section 16(a) Beneficial Ownership Reporting
Compliance

The following table sets forth the names and ages of all
directors and executive officers of Terra Nostra as of the date of this report,
indicating all positions and offices with Terra Nostra and its Subsidiaries held
by each such person:

Name
    Age
    Position
    CommenceServiceDonald C. Nicholson
    40
    CEO and Member of the Board of Directors of
      Terra Nostra
    2005/04/05Jeff
      Reynolds
    49
    CFO and Treasurer of Terra Nostra
    2005/06/22George Chua
    49
    COO of Terra
      Nostra, Member of the Boards of Directors of SQSS and SJCC
    2005/05/04Don
      Burrell
    52
    Member of the Board of Directors of Terra Nostra
    2005/04/05Crystal Poe
    25
    Member of the Board of Directors of Terra Nostra
    2005/05/04Clarence Foo
    Unk.
    Member of the Board of Directors of Terra Nostra
    2005/05/24Felix Chung
    48
    Member of the Board of Directors of Terra Nostra
    2006/04/04


The following represents each officer, director and beneficial
owner of more than 10% of the Companys securities who did not file on a timely
basis reports required by Section 16(a) of the Securities Exchange Act of 1934
during the most recent fiscal year or prior fiscal years.

Name
    Reporting Person
    Form 3/# oftransactions
    Form 4/# oftransactions
    Form 5/# oftransactionsDonald C Nicholson
    CEO, Member of
      the Board of Directors
    N/A
    N/A
    N/AJeff
      Reynolds
    CFO
    1/0
    N/A
    N/AGeorge Chua
    COO
    1/0
    N/A
    N/ADon
      Burrell
    Member of the Board of Directors
    1/0
    N/A
    N/ACrystal Poe
    Member of the Board of Directors
    1/0
    N/A
    N/AClarence Foo
    Member of the Board of Directors
    1/0
    N/A
    N/AFelix Chung
    Member of the Board of Directors
    1/1
    N/A
    N/ARTO
      Investments Corp
    Over 10% b/o
    1/1
    N/A
    N/A


Audit Committee

The Board of Directors presently does not have an audit
committee. Since there is only one independent member of the Board, it is not
feasible at this time to have an audit committee. Moreover, the board does not
have an audit committee financial expert.

Code of Ethics

As of the date of this report, the Company has not adopted a
code of ethics that applies to its principal executive officer, principal
financial officer, principal accounting officer or controller or persons
performing similar functions. The Company is targeting the third quarter
(November 2006 through February, 2007) to review, finalize, and adopt a code of
ethics. Upon adoption, the Company will file a copy of its code of ethics with
the Securities and Exchange Commission as an exhibit to its annual report for
period during which the code of ethics is adopted.

ITEM 9.        COMMON
STOCK

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

28

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ITEM 10.      EXECUTIVE
COMPENSATION.

The following table sets forth information on executive
compensation for the fiscal year ended May 31, 2006 for individuals serving as
senior executive officers and whose total annual salaries and bonuses exceeded
US$100,000 for the last completed fiscal year.

ANNUAL COMPENSATION
      LONG
        TERM COMPENSATIONAWARDS
      PAYOUTSName and Principal 
        Position
      Year
      Fee
      Bonus
      Other 
        Annual 
        Compens 
        ation
      Restricted 
        Stock 
        Awards
      Securities 
        Under-lying 
        Options/ 
        SARS
      LTIP 
        Pay- 
        outs
      All Other 
        Compensa-
        tionDonald C. 
        Nicholson, CEO and 
        Director
      2005/06
      $120,000
      -0-
      -0-
      -0-
      300,000
      -0-
      -0-William Melvin, 
        CEO and Director
      2005/06
      $55,000
      -0-
      -0-
      -0-
      -0-
      -0-
      -0-William Melvin, 
        CEO and Director
      2004/05
      $20,000
      -0-
      -0-
      -0-
      -0-
      -0-
      -0-Regis Bosse, 
        President and 
        Director
      2004/05
      $50,000
      -0-
      -0-
      -0-
      -0-
      -0-
      -0-Regis Bosse, 
        President and 
        Director
      2003/04
      $60,000
      -0-
      -0-
      -0-
      -0-
      -0-
      -0-Jeff Reynolds,
        CFO
      2005/06
      $120,000
      -0-
      -0-
      -0-
      300,000
      -0-
      -0-George Chua, COO
      2005/06
      $120,000
      -0-
      -0-
      -0-
      300,000
      -0-
      -0-


Subsequent to May 31, 2006, on June 30, 2006, the stock options
issued to Donald C. Nicholson and Jeff Reynolds expired unexercised.

Options

Stock Options and Stock Award Plans

On May 9, 2005, the Company filed an S-8 registration statement
pursuant to the Companys stock option and stock award plan approved by the
Board of Directors registering a total of 4,000,000 common shares under the
plan. As of May 31, 2006, a total of 3,752,000 options have been granted, of
which 1,100,000 expired un-exercised. Of the remaining 2,652,000 options issued,
the average strike price is $2.48, and none have been exercised. Subsequent to
the fiscal year end, up to the date of the filing of this report, a further
850,000 options expired unexercised, leaving a total of 1,802,000; of these,
none have been exercised.

Compensation of Directors

The Company has made no arrangements for the remuneration of
its directors, except that they will be entitled to receive reimbursement for
actual, demonstrable out-of-pocket expenses, including travel expenses, if any,
made on the Companys behalf. No remuneration has been paid to the Companys
directors for services to date, except for the provision of 50,000 options to
Don Burrell and 200,000 options to Crystal Poe, both on June 30, 2005. 500,000
options were provided to Felix Chung on 31 May 2006, expiring 31 June 2007.
Subsequent to May 31 2006, on June 30, 2006, the stock options issued to Don
Burrell and Crystal Poe expired unexercised.

29

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Employment Contracts and Termination of Employment and
Change-in-Control Arrangements

The Company does not have any employments contracts with any of
its executive officers and has no termination of employment or change in control
arrangements with any of its executive officers.

ITEM 11.      SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth information, as of October 11,
2006 (total issued and outstanding: 49,206,448) with respect to the beneficial
ownership of Terra Nostra's common stock by each person known by Terra Nostra to
be the beneficial owner of more than 5% of the outstanding common stock, by each
of Terra Nostra's officers and directors, and by the officers and directors of
Terra Nostra as a group. Information is also provided regarding beneficial
ownership of common stock if all outstanding options, warrants, rights and
conversion privileges (to which the applicable officers and directors have the
right to exercise in the next 60 days) are exercised and additional shares of
common stock are issued.

|Title of       | Beneficial Owner                                                                                                                           |  | Amount and Nature of
      Beneficial                                                                                                                                                                                                                                                                                                                                                                    | % of Class
|-------------- | ------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------
|Class          |                                                                                                                                            |  | Owner                                                                                                                                                                                                                                                                                                                                                                                                    |           
|Class A Common | George Chua,
      Chief Operating Officer of Terra Nostra, and member of the Boards of
      Directors of the Joint Venture Subsidiaries. |  | 40,000 Class A
      common shares held directly, 300,000 options at $2.50 issued 31 May 2006
      expiring 31 May 2007.                                                                                                                                                                                                                                                                                | .69%      
|               |                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                          |           
|Class A Common | Felix Chung,
      Director of Terra Nostra                                                                                                |  | 950,000 Class A
      common shares directly and 500,000 shares indirectly in the name of Diana
      Chung, 500,000 options directly at $2.50 issued 31 May 2006 expiring 31
      May 2007, 500,000 warrants directly expiring Oct 31 2007 avg cost $3.50,
      and 500,000 warrants indirectly in the name of Diana Chung expiring 27 Feb
      2008 avg cost $4.50.                                 | 5.82%     
|               |                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                          |           
|Class A Common | Clarence Foo, Director of Terra Nostra                                                                                                     |  | 8,000 Class A common shares held directly                                                                                                                                                                                                                                                                                                                                                                | 0.01%     
|               |                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                          |           
|Class A Common | All Officers and Directors as a
      group                                                                                                |  | 3,298,000 Class A Common shares,
      warrants, options                                                                                                                                                                                                                                                                                                                                                 | 6.52%     
|               |                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                          |           
|Class A Common | RTO Investments
      Corp                                                                                                                 |  | 25,000,000 Class
      A common shares held directly                                                                                                                                                                                                                                                                                                                                                     | 50.8%     
|               |                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                          |           
|Class A Common | Crowborough
      Investments Ltd.                                                                                                         |  | 4,500,000 Class A
      common shares held directly                                                                                                                                                                                                                                                                                                                                                      | 9.15%     
|               |                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                          |           
|Class A Common | Charnwood Green
      Ltd.                                                                                                                 |  | 3,500,000 Class A
      common shares directly, 1,500,000 warrants directly expiring 27 Nov 2007
      avg cost $3.50, 1,500,000 warrants directly expiring 30 May 2008 avg cost
      $3.50.                                                                                                                                                                                                            | 14.36%    
|               |                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                          |           
|Class A Common | Lai Kiat Hiung                                                                                                                             |  | 3,550,000 Class A
      common shares directly, 800,000 warrants directly expiring 14 Jan 2008 avg
      cost $5.50, 1,000,000 warrants directly expiring 27 Feb 2008 avg cost
      $4.50, 1,500,000 warrants directly expiring 30 May 2008 avg cost $3.50,
      50,000 warrants directly expiring 30 Sep 2008 avg cost $3.50, 300,000
      options at $3.00 issued 31 Mar 2006 expiring 31 Mar 2007. | 13.95%    

30

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Changes in Control

Not applicable

ITEM 12.      CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS

Clarence Foo, Director of Terra Nostra, during the fiscal year
ending May 31 2006, received a total of $270,000.00, attributable towards
payment of commission for the raising of funds through private placement. At May
31, 2006, a further $140,000 had been accrued but not paid. This entire amount
was paid subsequently, prior to September 30th, 2006.

ITEM 13.      EXHIBITS.

|3.3  | Articles of Incorporation                                                                            |  | Incorporated by reference to the Exhibits attached to the
      Corporation's Registration Statement on Form 10-SB filed with the SEC on
      February 19, 2002, file number 000- 49631.
|---- | ---------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                      |  |                                                                                                                                                                                          
|3.4  | Amendment to Articles of Incorporation                                                               |  | Incorporated by reference to the Exhibits attached to the
      Corporation's Registration Statement on Form 10-SB filed with the SEC on
      February 19, 2002, file number 000- 49631.
|     |                                                                                                      |  |                                                                                                                                                                                          
|3.5  | Certificate of Amendment                                                                             |  | Incorporated by reference to the Exhibits attached to the
      Corporation's Registration Statement on Form 10-SB filed with the SEC on
      February 19, 2002, file number 000- 49631.
|     |                                                                                                      |  |                                                                                                                                                                                          
|3.6  | Bylaws                                                                                               |  | Incorporated by reference to the Exhibits attached to the
      Corporation's Registration Statement on Form 10-SB filed with the SEC on
      February 19, 2002, file number 000- 49631.
|     |                                                                                                      |  |                                                                                                                                                                                          
|4.7  | Form of Common Stock Specimen                                                                        |  | Incorporated by reference to the Exhibits attached to the
      Corporation's Registration Statement on Form 10-SB filed with the SEC on
      February 19, 2002, file number 000- 49631.
|     |                                                                                                      |  |                                                                                                                                                                                          
|10.1 | Amendment to the Share Exchange Agreement between the
      Corporation and 9126 2238 Quebec Inc.    |  | Incorporated by reference to the Exhibits attached to the
      Corporations 10QSB filed with the SEC on August 19, 2004.                                                               
|     |                                                                                                      |  |                                                                                                                                                                                          
|10.2 | Acquisition Agreement Between RTO Investments Ltd., a
      Bahamas company and the Corporation      |  | Incorporated by reference to the Exhibits attached to the
      Corporations 8K filed with the SEC on December 10, 2004.                                                                
|     |                                                                                                      |  |                                                                                                                                                                                          
|10.3 | Disposition Agreement between the Corporation, Quattro
      Investments Limited and Biointegra Inc. |  | Incorporated by reference to the Exhibits attached to the
      Corporations 10QSB filed with the SEC on May 15, 2005                                                                   
|     |                                                                                                      |  |                                                                                                                                                                                          
|10.4 | Shandong Terra Nostra  Jinpeng Metallurgical Co., Ltd.-
      Joint Venture Contract                |  | Incorporated by reference to the Exhibits attached to the
      Corporations 8K filed with the SEC on August 17, 2005.                                                                  
|     |                                                                                                      |  |                                                                                                                                                                                          
|10.5 | Shandong Quanxin Stainless Steel Co.  Joint Venture
      Contract                                  |  | Incorporated by reference to the Exhibits attached to the
      Corporations 8K filed with the SEC on August 17, 2005.                                                                  

31

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|10.6  | Shandong Terra
        Nostra  Jinpeng Metallurgical Co., Ltd.- Joint Venture Contract
        Amendment                                                                      |  | Incorporated
        by reference to the Exhibits attached to the Corporations 8K filed
        with the SEC on August 17, 2005.    
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                |  |                                                                                                                                      
|10.7  | Shandong Quanxin
        Stainless Steel Co.  Joint Venture Contract Amendment                                                                                                |  | Incorporated
        by reference to the Exhibits attached to the Corporations 8K filed
        with the SEC on August 17, 2005.    
|      |                                                                                                                                                                                |  |                                                                                                                                      
|10.8  | Shandong Terra-Nostra
        Jinpeng Metallurgical Co. Ltd  Amended and Restated Joint Venture
        Agreement                                                             |  | Incorporated
        by reference to the Exhibits attached to the Corporations 8K filed
        with the SEC on October 10, 2005.   
|      |                                                                                                                                                                                |  |                                                                                                                                      
|10.9  | Shandong Terra-Nostra
        Jinpeng Metallurgical Co. Ltd.  Amended and Restated Joint Venture
        Agreement, including Articles of Association dated December 16, 2005 |  | Incorporated
        by reference to the Exhibits attached to the Corporations 10QSB
        filed with the SEC on January 23, 2006.
|      |                                                                                                                                                                                |  |                                                                                                                                      
|10.10 | Shandong Quanxin
        Stainless Steel Co. Ltd.  Amended and Restated Joint Venture Agreement,
        including Articles of Association dated March 26, 2006               |  | Incorporated
        by reference to the Exhibits attached to the Corporations 10QSB
        filed with the SEC on April 20, 2006.  
|      |                                                                                                                                                                                |  |                                                                                                                                      
|31.1  | Section 302 Certification- Principal
        Executive Officer                                                                                                                 |  | Filed herewith.                                                                                                                      
|      |                                                                                                                                                                                |  |                                                                                                                                      
|31.2  | Section 302 Certification- Principal
        Accounting Officer and Principal Financial Officer                                                                                |  | Filed herewith.                                                                                                                      
|      |                                                                                                                                                                                |  |                                                                                                                                      
|32.1  | Certification for CEO Pursuant
        to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
        Act of 2002                                  |  | Filed herewith.                                                                                                                      
|      |                                                                                                                                                                                |  |                                                                                                                                      
|32.2  | Certification or CFO Pursuant
        to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
        Act of 2002                                   |  | Filed herewith.                                                                                                                      

32

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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: _________________________________________Name: Sun Liu
James Po Title: Principal Executive Officer, Member of the Board of
Directors Date: August 1, 2008

By: _________________________________________Name: Donald
Nicholson Title: Principal Financial Officer and Principal Accounting
Officer Date: August 1, 2008

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: _________________________________________Name: Donald
C. Nicholson Title: Principal Financial Officer and Principal Accounting
Officer, Member of the Board of Directors Date: August 1, 2008

By: _________________________________________Name: Felix
Chung Title: Member of the Board of Directors Date: August 1, 2008

By: _________________________________________Name: Donald
G. Burrell Title: Member of the Board of Directors Date: August 1, 2008

By: _________________________________________Name: Michel
Plante Title: Member of the Board of Directors Date: August 1, 2008

By: _________________________________________Name: Sun Liu
James Po Title: Principal Executive Officer, Member of the Board of
Directors Date: August 1, 2008

33

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