---

****UNITED
STATES**SECURITIES 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 **September 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**                                                                          
|(State or other jurisdiction of incorporation or organization)                        

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

Issuer's telephone number, including area code:(852)
2537-3613

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 November 8, 2006 was 18,890,579.

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

---

|CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES
|--------------------------------------------
|QUARTERLY REPORT - FORM 10-QSB              
|NINE MONTHS ENDED SEPTEMBER 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", "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.                                     
|                                            
|CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES
|CONSOLIDATED BALANCE SHEETS                 
|(DOLLARS IN THOUSANDS)                      

|                                                 |   | SEPTEMBER 30, |   |   | DECEMBER 31, |  
|------------------------------------------------ | - | ------------- | - | - | ------------ | -
|                                                 |   | 2006          |   |   | 2005         |  
|                                                 |   | (UNAUDITED)   |   |   |              |  
|ASSETS                                           |   |               |   |   |              |  
|Current Assets:                                  |   |               |   |   |              |  
|Cash and cash equivalents                        | $ | 5,211         |   | $ | 3,843        |  
|Restricted cash                                  |   | 70            |   |   | 65           |  
|Receivables                                      |   | 1,732         |   |   | 1,391        |  
|Due from affiliates                              |   | 1,635         |   |   | 67           |  
|Inventories                                      |   | 12,813        |   |   | 9,554        |  
|Prepaid expenses and other                       |   | 62            |   |   | 41           |  
|Deferred tax benefits                            |   | 598           |   |   | 558          |  
|Total current assets                             |   | 22,121        |   |   | 15,519       |  
|Non-current Assets:                              |   |               |   |   |              |  
|Deferred credit facility costs                   |   | 203           |   |   | 264          |  
|Property, plant and equipment                    |   | 1,294         |   |   | 1,011        |  
|Purchase option agreements                       |   | 15,579        |   |   | 14,540       |  
|Goodwill                                         |   | 5,331         |   |   | 5,244        |  
|Deferred tax benefits                            |   | 62            |   |   | 58           |  
|Total
      non-current assets                   |   | 22,469        |   |   | 21,117       |  
|Total assets                                     | $ | 44,590        |   | $ | 36,636       |  
|                                                 |   |               |   |   |              |  
|LIABILITIES & STOCKHOLDERS' EQUITY               |   |               |   |   |              |  
|Current Liabilities:                             |   |               |   |   |              |  
|Accounts payable and accrued expenses            | $ | 12,967        |   | $ | 13,672       |  
|Due to affiliates                                |   | 10,294        |   |   | 2,453        |  
|Debt                                             |   | -             |   |   | 237          |  
|Total current
      liabilities                  |   | 23,261        |   |   | 16,362       |  
|Long-term Liabilities:                           |   |               |   |   |              |  
|Debt                                             |   | 10,611        |   |   | 9,904        |  
|Other liabilities                                |   | 44            |   |   | 38           |  
|Total long-term
      liabilities                |   | 10,655        |   |   | 9,942        |  
|Total liabilities                                |   | 33,916        |   |   | 26,304       |  
|Stockholders' Equity:                            |   |               |   |   |              |  
|Common stock                                     |   | 2,039         |   |   | 2,029        |  
|Additional paid-in capital                       |   | 28,031        |   |   | 28,008       |  
|Accumulated deficit                              |   | (14,763       | ) |   | (14,098      | )
|Treasury stock, at cost                          |   | (5,313        | ) |   | (5,313       | )
|Cumulative translation adjustment                |   | 680           |   |   | (294         | )
|Total
      stockholders' equity                 |   | 10,674        |   |   | 10,332       |  
|Total liabilities and
      stockholders' equity | $ | 44,590        |   | $ | 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)

|                                         |   | NINE MONTHS ENDED |  
|---------------------------------------- | - | ----------------- | -
|                                         |   | September 30,     |  
|                                         |   | 2006              |  
|                                         |   | (UNAUDITED)       |  
|Product sales, net                       | $ | 72,997            |  
|Cost of goods sold                       |   | 69,482            |  
|                                         |   | 3,515             |  
|General and administrative expenses      |   | 3,866             |  
|Operating loss                           |   | (351              | )
|Other income (expense):                  |   |                   |  
|Interest and financing charges, net      |   | (455              | )
|Miscellaneous                            |   | 147               |  
|                                         |   | (308              | )
|Loss before income tax                   |   | (659              | )
|Income tax benefit (expenses)            |   | (6                | )
|Net loss                                 | $ | (665              | )
|Loss per common share, basic and diluted | $ | (0.04             | )

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 |  
|-------------------------------------------------- | - | ------------------ | -
|                                                   |   | September 30, 2006 |  
|                                                   |   | (UNAUDITED)        |  
|Product sales, net                                 | $ | 27,407             |  
|Cost of goods sold                                 |   | 25,928             |  
|                                                   |   | 1,479              |  
|General and administrative expenses                |   | 1,061              |  
|Operating income (loss)                            |   | 418                |  
|Other income (expense):                            |   |                    |  
|Interest and financing charges, net                |   | (138               | )
|Miscellaneous                                      |   | 49                 |  
|                                                   |   | (89                | )
|Income (loss) before income tax                    |   | 329                |  
|Income tax benefit                                 |   | 4                  |  
|Net income                                         | $ | 333                |  
|Earnings 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)                                                

|                                                                              |   | NINE MONTHS ENDED  |  
|----------------------------------------------------------------------------- | - | ------------------ | -
|                                                                              |   |                    |  
|                                                                              |   | September 30, 2006 |  
|                                                                              |   | (UNAUDITED)        |  
|                                                                              |   |                    |  
|Net loss                                                                      | $ | (665               | )
|                                                                              |   |                    |  
|Other comprehensive gain(loss), foreign
      currency translation adjustment |   | 974                |  
|                                                                              |   |                    |  
|Comprehensive income (loss)                                                   | $ | 309                |  

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** |  
|----------------------------------------------------------------------- | - | ---------------------- | -
|                                                                        |   |                        |  
|                                                                        |   | September 30, 2006     |  
|                                                                        |   | (UNAUDITED)            |  
|                                                                        |   |                        |  
|Net loss                                                                | $ | 333                    |  
|                                                                        |   |                        |  
|Other comprehensive loss, foreign currency
      translation adjustment |   | (103                   | )
|                                                                        |   |                        |  
|Comprehensive income                                                    | $ | 230                    |  

7

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

|                                                               |   | NINE MONTHS ENDED |  
|-------------------------------------------------------------- | - | ----------------- | -
|                                                               |   | SEPTEMBER 30,     |  
|                                                               |   | 2006              |  
|                                                               |   | (UNAUDITED)       |  
|OPERATING ACTIVITIES:                                          |   |                   |  
|Net loss                                                       | $ | (665              | )
|Adjustments to reconcile net loss to net cash                  |   |                   |  
|provided by (used in)
      operating activities:              |   |                   |  
|Depreciation and amortization                                  |   | 274               |  
|Foreign exchange                                               |   | 599               |  
|Income tax benefit                                             |   | -                 |  
|Changes in operating assets
      and liabilities:             |   |                   |  
|Receivables                                                    |   | (538              | )
|Due from affiliates                                            |   | (1,241            | )
|Inventories                                                    |   | (2,527            | )
|Prepaid expenses and
      other current assets                |   | (18               | )
|Accounts payable and accrued expenses                          |   | (1,964            | )
|Due to affiliates                                              |   | 7,745             |  
|Net cash provided by (used in)
      operating activities      |   | 1,665             |  
|                                                               |   |                   |  
|INVESTING ACTIVITIES:                                          |   |                   |  
|Purchase of subsidiaries, net of cash
      acquired           |   | -                 |  
|Purchase of fixed assets                                       |   | (421              | )
|Net cash used in
      investing activities                    |   | (421              | )
|                                                               |   |                   |  
|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 |   | 92                |  
|Changes in cash and cash equivalents                           |   | 1,368             |  
|Cash and cash equivalents, beginning
      of period           |   | 3,843             |  
|Cash and cash equivalents, end of period                       | $ | 5,211             |  
|                                                               |   |                   |  
|SUPPLEMENTAL CASH FLOW INFORMATION:                            |   |                   |  
|Income taxes paid                                              | $ | ---               |  
|Interest expenses paid                                         | $ | 392               |  

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 aluminum 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 MAW Mansfelder Aluminiumwerk GmbH (MAW  formerly
  AWP Aluminium Walzprodukte GmbH) and AFM Aluminiumfolie Merseburg GmbH (AFM).
  MAW 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. EARNINGS (LOSS) PER SHARE

Basic
  earnings (loss) per share is based upon the weighted average number of common
  shares outstanding during the period. Diluted earnings (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 nine months ended September 30, 2006 and 2005, due to
  their anti-dilutive effect. Diluted weighted average shares for the three months
  ended September 30, 2006 and 2005 were 18,895 and 18,797, respectively.

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

|                                                   |   | NINE MONTHS ENDED |   |   | THREE MONTHS ENDED |  
|-------------------------------------------------- | - | ----------------- | - | - | ------------------ | -
|                                                   |   | SEPTEMBER 30,     |   |   | SEPTEMBER 30,      |  
|                                                   |   | 2006              |   |   | 2005               |  
|                                                   |   | (UNAUDITED)       |   |   | (UNAUDITED)        |  
|                                                   |   |                   |   |   |                    |  
|Net income (loss)                                  | $ | (665              | ) | $ | (337               | )
|                                                   |   |                   |   |   |                    |  
|Weighted-average shares                            |   | 18,872            |   |   | 18,797             |  
|                                                   |   |                   |   |   |                    |  
|Earnings (loss) per share, basic and
      diluted | $ | (0.04             | ) | $ | (0.02              | )

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 September 30, 2006:

Raw materials
    $
      5,080Work in progress
    
      5,301Finished goods
    
      2,432$
      12,813


4. BUSINESS SEGMENT INFORMATION

During
  the nine and three months ended September 30, 2006, the Company operated in
  one reportable business segment: manufacturing and trading of aluminum products.

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

NINE MONTHS ENDED
    
    
      THREE MONTHS ENDEDSEPTEMBER 30,2006
    
    
      SEPTEMBER 30,2006By product typesSheets
    $
      8,122
    
    $
      3,334Strips
    
      18,749
    
    
      6,077Blanks
    
      10,885
    
    
      4,397Foils
    
      32,241
    
    
      11,651Other
    
      3,000
    
    
      1,948$
      72,997
    
    $
      27,407


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

5. RELATED PARTIES TRANSACTIONS

During
  the nine months ended September 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 $29. Such deposit amounted to $2,964 as
      at September 30, 2006.
| |    |                                                                                                                                                                     
| | c) | Sold products $56,791 (representing 78% of total sales of
      products) and paid marketing fee of $1,206 to MFC Commodities
  GmbH.                               
| |    |                                                                                                                                                                     
| | d) | Accrued or Paid interest of $320 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 aluminum products.

On
  June 30, 2005, we acquired all of the shares of MAW Mansfelder Aluminiumwerk
  GmbH (formerly AWP Aluminium Walzprodukte GmbH) and AFM Alumiumfolie Merseburg
  GmbH.

MAW
  Mansfelder Aluminiumwerk is based in Hettstedt, Germany, and operates an aluminum
  rolling mill. Its products include aluminum sheets, strips and blanks for use
  by industrial and commercial fabricators of aluminum products, principally for
  the European market.

AFM
  Alumiumfolie Merseburg is based in Merseburg, Germany, and also operates an
  aluminum rolling mill. It produces aluminum 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 aluminum rolling mills.

The
  following discussion and analysis of the results of operations and financial
  condition of our company for the nine and three months ended September 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  Nine Months Ended September 30, 2006

Net
  product sales for the nine months ended September 30, 2006 were $73.0 million,
  compared to $18.5 million in the same period in 2005. Cost of goods sold for
  the nine months ended September 30, 2006 were $69.5 million, compared to $17.7
  million in the same period in 2005. The results of operations from our two aluminum
  mills have been included in 2005 consolidated financial statements since June
  30, 2005.

General
  and administrative expenses for the nine months ended September 30, 2006 were
  $3.9 million, compared to $3.4 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 nine months ended
  September 30, 2006, compared to $0.7 million for the same period in 2005. This
  agreement was terminated in the last quarter because of the continuing losses
  and cost reduction measures.

We
  reported a net loss of $0.7 million, or $0.04 per common share, for the nine
  months ended September 30, 2006, compared to $0.3 million, or $0.02 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 September 30,
2006

Net
  product sales for the three months ended September 30, 2006 were $27.4 million,
  compared to $18.5 million in the same period in 2005. Cost of goods sold for
  the three months ended September 30, 2006 were $25.9 million, compared to $17.7
  million in the same period in 2005. The results of operations from our two aluminum
  mills have been included in 2005 consolidated financial statements since June
  30, 2005.

General
  and administrative expenses for the three months ended September 30, 2006 and
  2005 were $1.1 million. We paid $nil for reimbursement of expenses and administrative
  and management fees to MFC Bank for the three months ended September 30, 2006,
  compared to $0.2 million for the same period in 2005. This agreement was terminated
  in the last quarter because of the continuing losses and cost reduction measures.

11

---

We
  reported a net income of $0.3 million, or $0.02 per common share, for the three
  months ended September 30, 2006, compared to $2.1 million, or $0.11 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.

LIQUIDITY AND CAPITAL RESOURCES

At
  September 30, 2006, the Company had a working capital deficiency of $1.1 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 September 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 aluminum 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.

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 $1.7 million for the nine months ended September
  30, 2006, compared to operating activities used cash of $2.5 million in the
  same period in 2005.

Investing Activities

Investing
  activities used cash of $0.4 million for the nine months ended September 30,
  2006, compared to $8.3 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 nine months ended September 30,
  2006, compared to $nil in the same period in 2005.

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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                   |   |                        | 
|Obligations(1)                |   | Total                  | 
|Capital Lease Obligations     | $ | 82                     | 
|Operating Leases              |   | 2,760                  | 
|Total Contractual Obligations | $ | 2,842                  | 

|(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 nine months ended September 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

Our
  revenue comes from the sales of aluminium products produced and sold, and recognized
  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 September 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 September 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 Incorporation                                                                                                           |                |        |                 
|               |                                                                                                                                     |                |        |                 
|3.1.1          | Certificate of Incorporation of Cathay Merchant
      Group, Inc., a Delaware corporation                                           |                | S-1    | April 13, 1981  
|               |                                                                                                                                     |                |        |                 
|3.1.2          | Certificate of Amendment to Certificate of Incorporation
      of Cathay Merchant Group, Inc., a Delaware corporation               |                | 10-Q   | January 31, 1987
|               |                                                                                                                                     |                |        |                 
|3.1.3          | Certificate of Amendment to Certificate of Incorporation
      of Cathay Merchant Group, Inc., a Delaware corporation               |                | 10-K   | July 28, 1990   
|               |                                                                                                                                     |                |        |                 
|3.1.4          | Certificate of Amendment to Certificate of Incorporation
      of Cathay Merchant Group, Inc., a Delaware corporation               |                | 10-KSB | July 31, 1997   
|               |                                                                                                                                     |                |        |                 
|3.1.5          | Certificate of Amendment to Certificate of Incorporation
      of Cathay Merchant Group, Inc., a Delaware corporation               |                | 8-K    | June 5, 1998    
|               |                                                                                                                                     |                |        |                 
|3.1.6          | Certificate of Designations of Series A Convertible
      Preferred Stock of Cathay Merchant Group, Inc., a Delaware Corporation    |                | 8-K    | June 5, 1998    
|               |                                                                                                                                     |                |        |                 
|3.1.7          | Certificate of Designations of Series B 5% Convertible
      Preferred Stock of Cathay Merchant Group, Inc., a Delaware Corporation |                | 8-K    | February 9, 1999
|               |                                                                                                                                     |                |        |                 
|3.1.8          | Certificate of Amendment to Certificate of Incorporation
      of Cathay Merchant Group, Inc., a Delaware corporation               |                | 8-K    | January 10, 2000
|               |                                                                                                                                     |                |        |                 
|3.1.9          | Certificate of Amendment to Certificate of Incorporation
      of Cathay Merchant Group, Inc., a Delaware corporation               |                | 8-K    | October 7, 2004 

15

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|Exhibit Number | Exhibit Title                                                                                                                                                                                                  | Filed Herewith | Form   | Filing Date     
|-------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------ | ----------------
|               |                                                                                                                                                                                                                |                |        |                 
|3(ii)          | By-laws                                                                                                                                                                                                        |                |        |                 
|               |                                                                                                                                                                                                                |                |        |                 
|3.2.1          | Amended Bylaws of Cathay Merchant Group, Inc.,
      a Delaware corporation                                                                                                                                    |                | 8-K    | May 17, 2000    
|               |                                                                                                                                                                                                                |                |        |                 
|(10)           | Material contracts                                                                                                                                                                                             |                |        |                 
|               |                                                                                                                                                                                                                |                |        |                 
|10.1           | Credit Facility Agreement dated as of April 26,
      2004, between Cathay Merchant Group, Inc. and MFC Merchant Bank S.A.                                                                                     |                | 8-K    | April 30, 2004  
|               |                                                                                                                                                                                                                |                |        |                 
|10.2           | Financial Advisory Agreement dated January 1, 2004,
      between Cathay Merchant Group, Inc. and MFC Merchant Bank S.A.                                                                                       |                | 10-KSB | October 29, 2004
|               |                                                                                                                                                                                                                |                |        |                 
|10.3           | 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, 2005
|               |                                                                                                                                                                                                                |                |        |                 
|10.4           | 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, 2005
|               |                                                                                                                                                                                                                |                |        |                 
|10.5           | Share Purchase Agreement dated June 30, 2005, between
      Cathay Merchant Group Limited and Blake International Limited.                                                                                     |                | 8-K    | June 30, 2005   
|               |                                                                                                                                                                                                                |                |        |                 
|10.6           | Promissory Note dated June 30, 2005, between Cathay
      Merchant Group Limited and Cathay Merchant Group, Inc.                                                                                               |                | 8-K    | June 30, 2005   
|               |                                                                                                                                                                                                                |                |        |                 
|10.7           | Share Purchase Agreement dated June 30, 2005, between
      Cathay Merchant Group Limited and Universal Metals Limited.                                                                                        |                | 8-K    | June 30, 2005   
|               |                                                                                                                                                                                                                |                |        |                 
|10.8           | Promissory Note dated June 30, 2005, between Cathay
      Merchant Group Limited and Cathay Merchant Group, Inc.                                                                                               |                | 8-K    | June 30, 2005   

16

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|Exhibit Number | Exhibit Title                                             | Filed Herewith | Form | Filing Date
|-------------- | --------------------------------------------------------- | -------------- | ---- | -----------
|               |                                                           |                |      |            
|(31)           | Section 302 Certifications                                |                |      |            
|               |                                                           |                |      |            
|31.1           | Chief Executive Officer
      and Chief Financial Officer | X              |      |            
|               |                                                           |                |      |            
|(32)           | Section 906 Certifications                                |                |      |            
|               |                                                           |                |      |            
|32.1           | 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: November 14, 2006 | **CATHAY MERCHANT GROUP, INC.**
|------------------------ | -------------------------------
|                         |                                
|                         |                                
|                         | By:                            
|                         |                                
|                         |                                
|                         |                                
|                         |                                
|                         |                                
|                         |                                

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