---

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C. 20549

FORM 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended **June 30, 2006**

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From __________ to __________

COMMISSION FILE NUMBER **000-16283**

CATHAY MERCHANT GROUP, INC.(Name of Small Business Issuer in Its Charter)

|DELAWARE                                                             | 04-2608713                          
|-------------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or
      organization) | (I.R.S. Employer Identification No.)

Unit 803, Dina House, Ruttonjee Centre, 11 Duddell Street,
Central, Hong Kong SAR, China 200070(Address of principal
executive offices)

3604 Tower 1, Kerry Everbright City, 218 Tian Mu Road
West, Shanghai, P.R. China(Former name, former address and former
fiscal year, if changed since last report)

Issuer's telephone number, including area code:(85)
2537-3161

Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities 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. [X] YES [   ] NO

Indicate by check mark whether the registrant is a shell company
(as defined in Role 12b-2 of the Exchange Act). [   ] YES [X] NO

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of the issuer's common stock as
at August 8, 2006 was 18,890,579.

Transitional Small Business Disclosure Format (check one):
[   ] YES [X] NO

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES QUARTERLY
REPORT - FORM 10-QSB SIX MONTHS ENDED JUNE 30, 2006

TABLE OF CONTENTS

|        | **PART I**                                                        | Page 
|------- | ----------------------------------------------------------------- | -----
|        |                                                                   |      
|Item 1. | Consolidated Financial Statements                                 | 3-10 
|Item 2. | Management's Discussion and Analysis or
      Plan of Operation   | 11-14
|Item 3. | Controls and Procedures                                           | 14   
|        |                                                                   |      
|        | **PART II**                                                       |      
|        |                                                                   |      
|Item 1. | Legal Proceedings                                                 | 14   
|Item 2. | Unregistered Sales of Equity Securities
      and Use of Proceeds | 14   
|Item 3. | Defaults Upon Senior Securities                                   | 14   
|Item 4. | Submission of Matters to a Vote of Security
      Holders         | 14   
|Item 5. | Other Information                                                 | 15   
|Item 6. | Exhibits and Reports on Form 8-K                                  | 15-17
|        | Signatures                                                        | 18   

Forward Looking Statements

Certain
statements contained in this quarterly report and other written material and
oral statements made from time to time by us do not relate strictly to
historical or current facts. As such, they are considered "forward-looking
statements" that provide current expectations or forecasts of future events.
Such statements are typically characterized by terminology such as "believe",
"anticipate", "should", "intend", "plan", "will", "expect", "estimate",
"project", "strategy" and similar expressions. Our forward-looking statements
generally relate to the prospects for our ability to identify new business
opportunities, develop new business strategies and execute such business
strategies. These statements are based upon assumptions and assessments made by
our management in light of its experience and its perception of historical
trends, current conditions, expected future developments and other factors our
management believes to be appropriate. These forward-looking statements are
subject to a number of risks and uncertainties, including the following: our
ability to identify and evaluate business opportunities that will achieve
profitable operations while maintaining sufficient cash to operate our business
and meet our liquidity requirements: our ability to obtain financing, if
required, on terms acceptable to us, if at all; our ability to successfully
attract strategic partners and to market both new and existing products and
services domestically and internationally; exposure to lawsuits and regulatory
proceedings; governmental laws and regulations affecting domestic and foreign
operations; our ability to identify and complete diversification opportunities;
and the impact of acquisitions, divestitures, restructurings, product
withdrawals and other unusual items. Except as required by applicable law, our
company undertakes no obligation to update any forward-looking statements,
whether as a result of new information, future events or otherwise.

2

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PART I - FINANCIAL INFORMATION

ITEM 1.      FINANCIAL STATEMENTS.

CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED
BALANCE SHEETS (DOLLARS IN THOUSANDS)

|                                                 |   | JUNE 30,    |   |   | DECEMBER 31, |  
|------------------------------------------------ | - | ----------- | - | - | ------------ | -
|                                                 |   | 2006        |   |   | 2005         |  
|                                                 |   | (UNAUDITED) |  
|ASSETS                                           |   |             |   |   |              |  
|Current Assets:                                  |   |             |   |   |              |  
|Cash and cash equivalents                        | $ | 4,472       |   | $ | 3,843        |  
|Restricted cash                                  |   | 70          |   |   | 65           |  
|Receivables                                      |   | 2,065       |   |   | 1,391        |  
|Due from affiliates                              |   | 1,280       |   |   | 67           |  
|Inventories                                      |   | 10,690      |   |   | 9,554        |  
|Prepaid expenses and other                       |   | 46          |   |   | 41           |  
|Deferred tax benefits                            |   | 602         |   |   | 558          |  
|Total current assets                             |   | 19,225      |   |   | 15,519       |  
|Non-current Assets:                              |   |             |   |   |              |  
|Deferred credit facility costs                   |   | 224         |   |   | 264          |  
|Property, plant and equipment                    |   | 1,137       |   |   | 1,011        |  
|Purchase option agreements                       |   | 15,688      |   |   | 14,540       |  
|Goodwill                                         |   | 5,340       |   |   | 5,244        |  
|Deferred tax benefits                            |   | 63          |   |   | 58           |  
|Total
      non-current assets                   |   | 22,452      |   |   | 21,117       |  
|Total assets                                     | $ | 41,677      |   | $ | 36,636       |  
|                                                 |   |             |   |   |              |  
|LIABILITIES & STOCKHOLDERS' EQUITY               |   |             |   |   |              |  
|Current Liabilities:                             |   |             |   |   |              |  
|Accounts payable and accrued expenses            | $ | 12,375      |   | $ | 13,672       |  
|Due to affiliates                                |   | 8,120       |   |   | 2,453        |  
|Debt                                             |   | -           |   |   | 237          |  
|Total current
      liabilities                  |   | 20,495      |   |   | 16,362       |  
|Long-term Liabilities:                           |   |             |   |   |              |  
|Debt                                             |   | 10,687      |   |   | 9,904        |  
|Other liabilities                                |   | 51          |   |   | 38           |  
|Total long-term
      liabilities                |   | 10,738      |   |   | 9,942        |  
|Total liabilities                                |   | 31,233      |   |   | 26,304       |  
|Stockholders' Equity:                            |   |             |   |   |              |  
|Common stock                                     |   | 2,039       |   |   | 2,029        |  
|Additional paid-in capital                       |   | 28,031      |   |   | 28,008       |  
|Accumulated deficit                              |   | (15,096     | ) |   | (14,098      | )
|Treasury stock, at cost                          |   | (5,313      | ) |   | (5,313       | )
|Cumulative translation adjustment                |   | 783         |   |   | (294         | )
|Total
      stockholders' equity                 |   | 10,444      |   |   | 10,332       |  
|Total liabilities and
      stockholders' equity | $ | 41,677      |   | $ | 36,636       |  

See accompanying notes.

3

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)

|                                                   |   | SIX MONTHS ENDED |  
|-------------------------------------------------- | - | ---------------- | -
|                                                   |   | JUNE 30,         |  
|                                                   |   | 2006             |  
|                                                   |   | (UNAUDITED)      |  
|Product sales, net                                 | $ | 45,590           |  
|Cost of goods sold                                 |   | 43,554           |  
|                                                   |   | 2,036            |  
|General and administrative expenses                |   | 2,805            |  
|Operating loss                                     |   | (769             | )
|Other income (expense):                            |   |                  |  
|Interest and
      financing charges, net          |   | (317             | )
|Miscellaneous                                      |   | 98               |  
|                                                   |   | (219             | )
|Loss before income tax                             |   | (988             | )
|Income tax                                         |   | 10               |  
|Net loss                                           | $ | (998             | )
|Net loss per common share, basic and
      diluted | $ | (0.05            | )

See accompanying notes.

4

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)

|                                                   |   | THREE MONTHS ENDED |  
|-------------------------------------------------- | - | ------------------ | -
|                                                   |   | JUNE 30,           |  
|                                                   |   | 2006               |  
|                                                   |   | (UNAUDITED)        |  
|Product sales, net                                 | $ | 24,678             |  
|Cost of goods sold                                 |   | 23,541             |  
|                                                   |   | 1,137              |  
|General and administrative expenses                |   | 1,379              |  
|Operating loss                                     |   | (242               | )
|Other income (expense):                            |   |                    |  
|Interest and
      financing charges, net          |   | (263               | )
|Miscellaneous                                      |   | 57                 |  
|                                                   |   | (206               | )
|Loss before income tax                             |   | (448               | )
|Income tax                                         |   | 6                  |  
|Net loss                                           | $ | (454               | )
|Net loss per common share, basic and
      diluted | $ | (0.02              | )

See accompanying notes.

5

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES UNAUDITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (DOLLARS IN
THOUSANDS)

|                                                                        |   | SIX MONTHS ENDED |  
|----------------------------------------------------------------------- | - | ---------------- | -
|                                                                        |   | JUNE 30,         |  
|                                                                        |   | 2006             |  
|                                                                        |   | (UNAUDITED)      |  
|Net loss                                                                | $ | (998             | )
|Other comprehensive gain, foreign currency translation
      adjustment |   | 1,077            |  
|Comprehensive income (loss)                                             | $ | 79               |  

See accompanying notes.

6

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES UNAUDITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (DOLLARS IN
THOUSANDS)

|                                                                        |   | THREE MONTHS ENDED |  
|----------------------------------------------------------------------- | - | ------------------ | -
|                                                                        |   | JUNE 30,           |  
|                                                                        |   | 2006               |  
|                                                                        |   | (UNAUDITED)        |  
|Net loss                                                                | $ | (454               | )
|Other comprehensive gain, foreign currency translation
      adjustment |   | 733                |  
|Comprehensive income (loss)                                             | $ | 279                |  

See accompanying notes.

7

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)

|                                                               |   | SIX MONTHS ENDED |  
|-------------------------------------------------------------- | - | ---------------- | -
|                                                               |   | JUNE 30,         |  
|                                                               |   | 2006             |  
|                                                               |   | (UNAUDITED)      |  
|OPERATING ACTIVITIES:                                          |   |                  |  
|Net loss                                                       | $ | (998             | )
|Adjustments to reconcile net loss to net
      cash            |   |                  |  
|provided by (used in) operating activities:                    |   |                  |  
|Depreciation and amortization                                  |   | 170              |  
|Foreign exchange                                               |   | 669              |  
|Changes in operating assets
      and liabilities:             |   |                  |  
|Receivables                                                    |   | (841             | )
|Due from affiliates                                            |   | (855             | )
|Inventories                                                    |   | (367             | )
|Prepaid expenses and
      other current assets                |   | (2               | )
|Accounts payable and accrued expenses                          |   | (2,858           | )
|Due to affiliates                                              |   | 5,766            |  
|Net cash provided by
      (used in) operating activities      |   | 684              |  
|                                                               |   |                  |  
|INVESTING ACTIVITIES:                                          |   |                  |  
|Purchase of subsidiaries, net of cash
      acquired           |   | -                |  
|Purchase of fixed assets                                       |   | (175             | )
|Net
      cash used in investing activities                    |   | (175             | )
|                                                               |   |                  |  
|FINANCING ACTIVITIES:                                          |   |                  |  
|Proceeds from exercise of stock options                        |   | 32               |  
|Net cash
      provided by financing activities                |   | 32               |  
|                                                               |   |                  |  
|Effects of foreign exchange on cash and
      cash equivalents |   | 88               |  
|Changes in cash and cash equivalents                           |   | 629              |  
|Cash and cash equivalents, beginning of
      period           |   | 3,843            |  
|Cash and cash equivalents, end of period                       | $ | 4,472            |  
|                                                               |   |                  |  
|SUPPLEMENTAL CASH FLOW INFORMATION:                            |   |                  |  
|Income taxes paid                                              | $ | --               |  
|Interest expenses paid                                         | $ | --               |  

See accompanying notes.

8

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

The
notes to these consolidated financial statements are presented in United States
Dollars, unless otherwise indicated. Euro is a legal tender used by the majority
of the member states of the European Union. With the exception of per share
amounts, amounts are presented in thousands.

Description of Business

Cathay
Merchant Group, Inc. (the Company or Cathay) is primarily an aluminium
manufacturing and trading company.

On
June 30, 2005, the Company, acting through its wholly-owned subsidiary, Cathay
Merchant Group Limited (CMG), acquired all of the shares of AWP Aluminium
Walzprodukte GmbH (AWP) and AFM Aluminiumfolie Merseburg GmbH (AFM). AWP and
AFM are incorporated under the laws of Germany.

Basis of Presentation

The
unaudited interim period consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosure
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such SEC rules and regulations. The interim period
consolidated financial statements should be read together with the audited
consolidated financial statements and accompanying notes included in the
Company's latest annual report on Form 10-KSB for the five months ended December
31, 2005. In the opinion of the Company, the unaudited consolidated financial
statements contained herein contain all adjustments (which are of a normal
recurring nature) necessary to present a fair statement of the results of the
interim periods presented. The results for the periods presented herein may not
be indicative of the results for any subsequent period or the entire year.

2. LOSS PER SHARE

Basic
loss per share is based upon the weighted average number of common shares
outstanding during the period. Diluted loss per share reflects the effect of
dilutive securities, if any, principally stock options and warrants. Dilutive
securities were not included in the calculation of diluted weighted average
shares for the six and three months ended June 30, 2006 and 2005, due to their
anti-dilutive effect.

The
following table sets forth the computation of basic and diluted loss per share:

| |                                       |   | SIX MONTHS ENDED |   |   | THREE MONTHS ENDED |  
| | ------------------------------------- | - | ---------------- | - | - | ------------------ | -
| |                                       |   | JUNE 30,         |   |   | JUNE
      30,     |  
| |                                       |   | 2006             |   |   | 2005               |  
| |                                       |   | (UNAUDITED)      |   |   |                    |  
| | Net loss                              | $ | (998             | ) | $ | (2,451             | )
| | Weighted-average shares               |   | 18,862           |   |   | 18,797             |  
| | Net loss per share, basic and diluted | $ | (0.05            | ) | $ | (0.13              | )

9

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3. INVENTORIES

Inventories
consist of raw materials, work-in-process, and finished goods. Inventories are
recorded at the lower of cost (specific identification and first-in first out
methods) or market and consist of the following at June 30, 2006:

Raw materials
    $
    3,832Work in progress
    
    4,555Finished goods
    
    2,303$
    10,690


4. BUSINESS SEGMENT INFORMATION

During
the six and three months ended June 30, 2006, the Company operated in one
reportable business segment: manufacturing and trading of aluminium products,
and all sales revenues were derived from Europe.

The
following tables disclose the Companys sales by product types for the six and
three months ended June 30, 2006:

| |                        |   | SIX MONTHS ENDED |  |   | THREE MONTHS ENDED | 
| | ---------------------- | - | ---------------- |  | - | ------------------ | 
| |                        |   | JUNE 30,2006     |  |   | JUNE 30,2006       | 
| | By product
      types |   |                  |  |   |                    | 
| |                        |   |                  |  |   |                    | 
| | Sheets                 | $ | 4,788            |  | $ | 2,334              | 
| | Strips                 |   | 12,672           |  |   | 7,181              | 
| | Blanks                 |   | 6,488            |  |   | 3,530              | 
| | Foils                  |   | 20,590           |  |   | 10,985             | 
| | Other                  |   | 1,052            |  |   | 648                | 
| |                        | $ | 45,590           |  | $ | 24,678             | 

As
of June 30, 2006, there was no material change in total assets from December 31,
2005.

5. RELATED PARTIES TRANSACTIONS

During
the six months ended June 30, 2006, the Company had the following transactions
with MFC Merchant Bank S.A.(MFC Bank), MFC Commodities GmbH and its parent
company Mass Financial Corp. (Mass). MFC Bank is a wholly-owned subsidiary of
KHD Humboldt Wedag International Ltd. (KHD). Mass was a wholly-owned
subsidiary of KHD until January 31, 2006 when KHD distributed its common shares
in Mass to the shareholders of KHD. KHD was a former significant shareholder of
the Company until KHD transferred its shareholding in the Company to Mass in
January 2006. Currently, there are common directors among Cathay, KHD and Mass.

a)      Accrued or Paid fee of $335
to MFC Bank.

b)      Deposited its cash and cash
equivalents with MFC Bank. Interest income on the deposit was $12. Such deposit
amounted to $3,095 as at June 30, 2006.

c)      Sold
$35,603 (representing 78% of total sales of products) and paid marketing fee of
$742 to MFC Commodities GmbH.

d)      Accrued or Paid interest of
$184 to Mass.

6. RECENT ACCOUNTING PRONOUNCEMENTS

Management
has analyzed all recent accounting pronouncements and believes there are no new
pronouncements that have been approved (but are not yet effective) that, when
adopted, will have a significant impact on the Companys financial statements.

10

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

Overview

Our
primary business involves the manufacturing and trading of aluminium
products.

On
June 30, 2005, we acquired all of the shares of AWP Aluminium Walzprodukte GmbH
and AFM Alumiumfolie Merseburg GmbH.

AWP
Aluminium Walzprodukte is based in Hettstedt, Germany, and operates an aluminium
rolling mill through its wholly-owned subsidiary MAW Mansfelder Aluminiumwerke.
Its products include aluminium sheets, foils, strips and blanks for use by
industrial and commercial fabricators of aluminium products, principally for the
European market.

AFM
Alumiumfolie Merseburg is based in Merseburg, Germany, and also operates an
aluminium rolling mill. It produces aluminium foil for flexible (food and
beverage) packaging, pharmaceutical packaging and technical applications. AFM
Alumiumfolie Merseburgs principal market is also Europe.

All
of our revenues to date have been generated by our two aluminium rolling
mills.

The
following discussion and analysis of the results of operations and financial
condition of our company for the six and three months ended June 30, 2006 should
be read in conjunction with the consolidated financial statements and related
notes included in this quarterly report, as well as our most recent annual
report on Form 10-KSB for the five months ended December 31, 2005 filed with the
United States Securities and Exchange Commission.

Results Of Operations  Six Months Ended June 30,
2006

Net
product sales and costs of goods sold for the six months ended June 30, 2006,
were $45.6 million and $43.6 million, respectively. The product sales were from
our two aluminium mills which were acquired on June 30, 2005. There were no
sales for the six months ended June 30, 2005.

General
and administrative expenses for the six months ended June 30, 2006 were $2.8
million, compared to $2.4 million for the same period in 2005. We paid $0.3
million for reimbursement of expenses and administrative and management fees to
MFC Merchant Bank S.A.(MFC Bank) for the six months ended June 30, 2006,
compared to $0.5 million for the same period in 2005. This agreement was
terminated in the current quarter because of the continuing losses and cost
reduction measures.

We
reported a net loss of $1.0 million, or $0.05 per common share, for the six
months ended June 30, 2006, compared to $2.5 million, or $0.13 per common share,
in the same period in 2005.

The
primary driver of our gross profit margin is the price of aluminum. We are
unable to effectively hedge the gross margin in an upward or downward market.
This has caused our margins to be reduced to a point where profitability is
difficult to obtain. We are unable to predict when the price of aluminum will
stay in the range where our margins may allow for profitability.

Results Of Operations  Three Months Ended June 30,
2006

Net
product sales and costs of goods sold for the three months ended June 30, 2006,
were $24.7 million and $23.5 million, respectively. The product sales were from
our two aluminium mills which were acquired on June 30, 2005. There were no
sales for the three months ended June 30, 2005.

General
and administrative expenses for the three months ended June 30, 2006 were $1.4
million, compared to $1.8 million for the same period in 2005. We paid $0.1
million for reimbursement of expenses and administrative and management fees to
MFC Bank for the three months ended June 30, 2006, compared to $0.2 million for
the same period in 2005. This agreement was terminated in the current quarter
because of the continuing losses and cost reduction measures.

We
reported a net loss of $0.5 million, or $0.02 per common share, for the three
months ended June 30, 2006, compared to $1.9 million, or $0.10 per common share,
in the same period in 2005.

11

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LIQUIDITY AND CAPITAL RESOURCES

At
June 30, 2006, the Company had a working capital deficiency of $1.3 million,
compared to $0.8 million at December 31, 2005.

We
entered into a five-year $20 million revolving credit facility dated April 26,
2004 with MFC Bank, which is to mature in March 2009. In August 2004, MFC Bank
converted $1,575,000 of the principal that we have drawn under the credit
facility into 3,150,000 shares of our common stock at the exercise price of
$0.50 per share. As of June 30, 2006, we have an unused portion of a credit
facility of $18,425,000. We are required to pay interest on any outstanding
principal amount that we have drawn down under the credit facility on the first
banking day of each calendar month, at an annual rate of Libor (being the one
month London Inter-Bank Offered Rate fixed daily by the British Bankers
Association) plus 3.5%, based on a 360 day year. The credit facility is secured
by a first fixed and specific charge and security interest on all of our
property, assets and undertakings imposed under our promissory note in the
aggregate principal amount of $20,000,000, and a floating charge on all of our
companys other property, assets and undertakings not specifically mortgaged and
charged under the promissory note, including after-acquired assets or the
proceeds of any and all assets. Our obligations under the credit facility are
also secured by a pledge agreement in the aggregate principal amount of
$20,000,000, pursuant to which we have pledged to MFC Bank all or our existing
and future pecuniary claims against third parties.

As
a result of our revenues from our aluminium rolling mills combined with the
funds available for use under the MFC Bank credit facility, we believe that we
have sufficient liquidity to meet operating expenses during the next twelve
months. Should the need arise, we will consider financing alternatives in
addition to the possibility of further draws under our credit facility with MFC
Bank, including the possibility of effecting private placements of our
securities.

We
are moving to reduce all expenses during this period of eroding margins and have
an agreement with MFC Bank to cancel the management fees payable to MFC Bank for
the balance of the 2006 year.

There
is no assurance that management will find suitable opportunities or effect the
necessary financial arrangements for such investments or provide the capital
needed for the acquired activities.

Operating Activities

Operating
activities provided cash of $0.7 million for the six months ended June 30, 2006,
whereas operating activities used cash of $2.0 million in the same period in
2005.

Investing Activities

Investing
activities used cash of $0.2 million for the six months ended June 30, 2006,
compared to $8.2 million in the same period in 2005, primarily due to the
purchase of two subsidiaries in 2005.

Financing Activities

Financing
activities provided cash of $32,000 for the six months ended June 30, 2006,
compared to $Nil in the same period in 2005.

12

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Off-Balance Sheet Arrangements

The
  following table sets forth our best estimates for material long-term obligations
  as at December 31, 2005. Operating leases include commitments for office space,
  computers and office equipment. The table excludes commitments such as open
  purchase orders under long-term agreements with customers and suppliers. We
  have no minimum purchase or supply arrangements in place. Our contractual obligations
  as of December 31, 2005 were:

Payments Due by Period(in $000s)Contractual
      
      
      
      
      Less Than
      
      
      
      
      
      4-5
      
      
      AfterObligations(1)
      
      Total
      
      
      One
        Year
      
      
      2-3
        Years
      
      
      Years
      
      
      5
        YearsCapital Lease Obligations
      $
      82
      
      $
      46
      
      $
      35
      
      $
      1
      
      $
      -Operating Leases
      
      2,760
      
      
      569
      
      
      1,128
      
      
      827
      
      
      236Total Contractual Obligations
      $
      2,842
      
      $
      615
      
      $
      1,163
      
      $
      828
      
      $
      236


|(1) | There have been no material changes to the contractual
      obligations (summarized in the above table of contractual obligations at
      December 31, 2005) during the six months ended June 30, 2006 that are
      outside the ordinary course of our business.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The
preparation of financial statements in conformity with generally accepted
accounting principles requires management of our company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods.

Our
management routinely makes judgments and estimates about the effects of matters
that are inherently uncertain. As the number of variables and assumptions
affecting the probable future resolution of the uncertainties increase, these
judgments become even more subjective and complex. We are currently in the
aluminium manufacturing and trading business and have identified certain
accounting policies, described below, that are the most important to the
portrayal of our current financial condition and results of operations.

Revenue Recognition

The
revenue in current business primarily comes from the sales of aluminium products
produced and sold, and when the amounts of the revenues are fixed, agreed or
determinable and collectibility is reasonably assured.

Goodwill Impairment

A
goodwill impairment loss should be recognized when the carrying amount of the
goodwill exceeds the fair value of the goodwill. An impairment loss should not
be reversed if the fair value subsequently increases. We consider, but such
consideration is not limited to, the following factors to determine the goodwill
impairment:

- a significant adverse change in legal factors or in the business climate;
- unanticipated competition;
- loss of key personnel;
- a more-likely-than-not expectation that a significant portion or all of a
  reporting unit will be sold or otherwise disposed of;
- the testing for write-down or impairment of a significant asset group
  within a reporting unit; or

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- the recognition of a goodwill impairment loss in its separate financial
  statements by a subsidiary that is a component of the reporting unit.

Impairment of Long-Lived Assets

We
periodically evaluate long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review of recoverability, we estimate future cash
flows expected to result from the use of the asset and its eventual disposition.
The estimates of future cash flows, based on reasonable and supportable
assumptions and projections, require our management to make subjective
judgements. In addition, the time periods for estimating future cash flows is
often lengthy, which increases the sensitivity of the assumptions made.
Depending on the assumptions and estimates used, the estimated future cash flows
projected in the evaluation of long-lived assets can vary within a wide range of
outcomes. Our management considers the likelihood of possible outcomes in
determining the best estimate of future cash flows.

ITEM 3. CONTROLS AND PROCEDURES.

We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer to allow for timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and
procedures, our management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and our management is required to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.

As
of June 30, 2006, the end of the quarter covered by this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.

There
have been no significant changes in our internal controls over financial
reporting that occurred during our most recent quarter that have materially or
are reasonably likely to materially affect, our internal controls over financial
reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

In
the ordinary course of conducting our business, we may become subject to
litigation and claims regarding various matters. There was no outstanding
litigation as of June 30, 2006.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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

None.

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ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

Exhibits Required by Item 601 of Regulation SB

Exhibit Number
    Exhibit Title
    Filed Herewith
      Form
      Filing Date(3)(i)
    Articles of Incorporation3.1.1
    Certificate of Incorporation of
      Cathay Merchant Group, Inc., a Delaware corporation
    
    S-1
    April 13, 19813.1.2
    Certificate of Amendment to
      Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware
      corporation
    
    10-Q
    January 31, 19873.1.3
    Certificate of Amendment to
      Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware
      corporation
    
    10-K
    July 28, 19903.1.4
    Certificate of Amendment to
      Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware
      corporation
    
    10-KSB
    July 31, 19973.1.5
    Certificate of Amendment to
      Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware
      corporation
    
    8-K
    June 5, 19983.1.6
    Certificate of Designations of
      Series A Convertible Preferred Stock of Cathay Merchant Group, Inc., a
      Delaware Corporation
    
    8-K
    June 5, 19983.1.7
    Certificate of Designations of
      Series B 5% Convertible Preferred Stock of Cathay Merchant Group, Inc., a
      Delaware Corporation
    
    8-K
    February 9, 19993.1.8
    Certificate of Amendment to
      Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware
      corporation
    
    8-K
    January 10, 20003.1.9
    Certificate of Amendment to
      Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware
      corporation
    
    8-K
    October 7, 2004


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Exhibit Number
    Exhibit Title
    Filed Herewith
    Form
    Filing Date3(ii)
    By-laws3.2.1
    Amended Bylaws of Cathay Merchant
      Group, Inc., a Delaware corporation
    
    8-K
    May 17, 2000(10)
    Material contracts10.1
    Asset Purchase Agreement dated
      December 8, 2003, between Equidyne Systems, Inc. and HNS International
      Inc.
    
    8-K
    December 19, 200310.2
    Amendment Agreement dated
      December 12, 2003, between Equidyne Systems, Inc. and HNS International
      Inc.
    
    8-K
    December 19, 200310.3
    Patent Purchase Agreement dated
      December 8, 2003, between Equidyne Systems, Inc. and HNS International
      Inc.
    
    8-K
    December 19, 200310.4
    Stock Purchase Agreement dated
      April 26, 2004, between Cathay Merchant Group, Inc. and Raj Kumar.
    
    8-K
    April 30, 200410.5
    Credit Facility Agreement dated
      as of April 26, 2004, between Cathay Merchant Group, Inc. and MFC Merchant
      Bank S.A.
    
    8-K
    April 30, 200410.6
    Financial Advisory Agreement
      dated January 1, 2004, between Cathay Merchant Group, Inc. and MFC
      Merchant Bank S.A.
    
    10-KSB
    October 29, 200410.7
    Memorandum of Understanding dated
      September 16, 2004, among KHD Humboldt Wedag International Ltd., Weichang
      Manchu Mongolia Autonomous County Government of Hebei Province, Yudaokou
      County Government and Laowopu County Government.
    
    10-QSB
    December 15, 2004


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Exhibit Number
      Exhibit Title
      Filed Herewith
      Form
      Filing Date10.8
      Addendum of Memorandum of Understanding dated
        September 26, 2004, among KHD Humboldt Wedag International Ltd., Weichang
        Manchu Mongolia Autonomous County Government of Hebei Province, Yudaokou
        County Government and Laowopu County Government.
      
      10-QSB
      December 15, 200410.11
      Memorandum of Understanding dated January 28,
        2005, between Cathay Merchant Group (Shanghai) Wind Energy Co., Ltd. and
        Kangbao County Government of Hebei Province and Chuzhangdi Town Government.
      
      10-KSB
      October 31, 200510.12
      Wind Park Project Land Use Rights Agreement
        dated February 23, 2005, between Cathay Merchant Group (Shanghai) Wind
        Energy Co., Ltd. and Kangbao County Government.
      
      10-KSB
      October 31, 200510.13
      Share Purchase Agreement dated June 30, 2005,
        between Cathay Merchant Group Limited and Blake International Limited.
      
      8-K
      June 30, 200510.14
      Promissory Note dated June 30, 2005, between
        Cathay Merchant Group Limited and Cathay Merchant Group, Inc.
      
      8-K
      June 30, 200510.15
      Share Purchase Agreement dated June 30, 2005,
        between Cathay Merchant Group Limited and Universal Metals Limited.
      
      8-K
      June 30, 200510.16
      Promissory Note dated June 30, 2005, between
        Cathay Merchant Group Limited and Cathay Merchant Group, Inc.
      
      8-K
      June 30, 2005(31)
      Section 302 Certifications31.1
      Chief Executive Officer
        and Chief Financial Officer
      X(32)
      Section 906 Certifications32.1
      Chief Executive Officer
        and Chief Financial Officer
      X


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**SIGNATURES**

In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

|Dated: August 14, 2006 | **CATHAY MERCHANT GROUP, INC.**
|---------------------- | -------------------------------
|                       |                                
|                       |                                
|                       | By:                            
|                       |                                
|                       |                                
|                       |                                

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