---

**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 **March 31, 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.)
|                                                                     |                                     
|3604 Tower 1,                                                        |                                     
|Kerry Everbright City,                                               |                                     
|218 Tian Mu Road West,                                               |                                     
|Shanghai, P.R. China                                                 | 200070                              
|(Address of principal executive offices)                             | (Zip Code)                          

Issuer's telephone number, including area code:(86)
21-6353-0012

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

The number of shares outstanding of the issuer's common stock
  as at May 9, 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 THREE MONTHS ENDED MARCH 31, 2006

TABLE OF CONTENTS

|        | PART I                                                            | Page 
|------- | ----------------------------------------------------------------- | -----
|        |                                                                   |      
|Item 1. | Consolidated Financial Statements                                 | 3-8  
|Item 2. | Management's Discussion and Analysis or Plan
      of Operation   | 9-11 
|Item 3. | Controls and Procedures                                           | 12   
|        |                                                                   |      
|        | **PART II**                                                       |      
|        |                                                                   |      
|Item 1. | Legal Proceedings                                                 | 12   
|Item 2. | Unregistered Sales of Equity Securities
      and Use of Proceeds | 12   
|Item 3. | Defaults Upon Senior Securities                                   | 12   
|Item 4. | Submission of Matters to a Vote of Security
      Holders         | 12   
|Item 5. | Other Information                                                 | 12   
|Item 6. | Exhibits and Reports on Form 8-K                                  | 12-16
|        | Signatures                                                        | 17   

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.**          **CONSOLIDATED
FINANCIAL STATEMENTS.**

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

|                                                 |   | MARCH 31,   |   |   | DECEMBER 31, |  
|------------------------------------------------ | - | ----------- | - | - | ------------ | -
|                                                 |   | 2006        |   |   | 2005         |  
|                                                 |   | (UNAUDITED) |   |   |              |  
|ASSETS                                           |   |             |   |   |              |  
|Current Assets:                                  |   |             |   |   |              |  
|Cash and cash
      equivalents                  | $ | 4,943       |   | $ | 3,843        |  
|Restricted cash                                  |   | 66          |   |   | 65           |  
|Receivables                                      |   | 1,171       |   |   | 1,391        |  
|Due from affiliates                              |   | 597         |   |   | 67           |  
|Inventories                                      |   | 9,637       |   |   | 9,554        |  
|Prepaid expenses and other                       |   | 81          |   |   | 41           |  
|Deferred tax benefits                            |   | 572         |   |   | 558          |  
|Total current assets                             |   | 17,067      |   |   | 15,519       |  
|Non-current Assets:                              |   |             |   |   |              |  
|Deferred credit facility costs                   |   | 244         |   |   | 264          |  
|Property, plant and
      equipment              |   | 1,063       |   |   | 1,011        |  
|Purchase option agreements                       |   | 14,907      |   |   | 14,540       |  
|Goodwill                                         |   | 5,274       |   |   | 5,244        |  
|Deferred tax benefits                            |   | 59          |   |   | 58           |  
|Total non-current assets                         |   | 21,547      |   |   | 21,117       |  
|Total
      assets                               | $ | 38,614      |   | $ | 36,636       |  
|                                                 |   |             |   |   |              |  
|LIABILITIES & STOCKHOLDERS' EQUITY               |   |             |   |   |              |  
|Current Liabilities:                             |   |             |   |   |              |  
|Accounts payable and accrued expenses            | $ | 14,197      |   | $ | 13,672       |  
|Due to affiliates                                |   | 3.923       |   |   | 2,453        |  
|Debt                                             |   | 121         |   |   | 237          |  
|Total
      current liabilities                  |   | 18,241      |   |   | 16,362       |  
|Long-term Liabilities:                           |   |             |   |   |              |  
|Debt                                             |   | 10,154      |   |   | 9,904        |  
|Other liabilities                                |   | 54          |   |   | 38           |  
|Total long-term liabilities                      |   | 10,208      |   |   | 9,942        |  
|Total liabilities                                |   | 28,449      |   |   | 26,304       |  
|Stockholders' Equity:                            |   |             |   |   |              |  
|Common stock                                     |   | 2,039       |   |   | 2,029        |  
|Additional paid-in
      capital                 |   | 28,031      |   |   | 28,008       |  
|Accumulated deficit                              |   | (14,642     | ) |   | (14,098      | )
|Treasury stock, at cost                          |   | (5,313      | ) |   | (5,313       | )
|Cumulative translation adjustment                |   | 50          |   |   | (294         | )
|Total stockholders' equity                       |   | 10,165      |   |   | 10,332       |  
|Total
      liabilities and stockholders' equity | $ | 38,614      |   | $ | 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)

|                                                   |   | THREE MONTHS ENDED |  
|-------------------------------------------------- | - | ------------------ | -
|                                                   |   | MARCH 31,          |  
|                                                   |   | 2006               |  
|                                                   |   | (UNAUDITED)        |  
|Product sales, net                                 | $ | 20,912             |  
|Cost of goods sold                                 |   | 20,013             |  
|                                                   |   | 899                |  
|General and administrative expenses                |   | 965                |  
|Operating loss                                     |   | (66                | )
|Other income (expense):                            |   |                    |  
|Interest and financing charges, net                |   | (515               | )
|Miscellaneous                                      |   | 41                 |  
|                                                   |   | (474               | )
|Loss before income tax                             |   | (540               | )
|Income tax                                         |   | 4                  |  
|Net loss                                           | $ | (544               | )
|Net loss per common share, basic and
      diluted | $ | (0.03              | )

See accompanying notes.

4

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

|                                                                        |   | **THREE MONTHS
      ENDED** |  
|----------------------------------------------------------------------- | - | ---------------------------- | -
|                                                                        |   | MARCH 31,                    |  
|                                                                        |   | 2006                         |  
|                                                                        |   | (UNAUDITED)                  |  
|                                                                        |   |                              |  
|Net loss                                                                |   | (544                         | )
|                                                                        |   |                              |  
|Other comprehensive gain,
      foreign currency translation adjustment |   | 344                          |  
|                                                                        |   |                              |  
|Comprehensive loss                                                      | $ | (200                         | )

See accompanying notes.

5

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

|                                                          |   | THREE MONTHS ENDED |  
|--------------------------------------------------------- | - | ------------------ | -
|                                                          |   | MARCH 31,          |  
|                                                          |   | 2006               |  
|                                                          |   | (UNAUDITED)        |  
|OPERATING ACTIVITIES:                                     |   |                    |  
|Net loss                                                  | $ | (544               | )
|Adjustments to reconcile net loss to net
      cash       |   |                    |  
|provided by (used in) operating activities:               |   |                    |  
|Depreciation and amortization                             |   | 81                 |  
|Foreign exchange                                          |   | 221                |  
|Changes in operating assets
      and liabilities:        |   |                    |  
|Receivables                                               |   | (38                | )
|Due from affiliates                                       |   | (204               | )
|Inventories                                               |   | 157                |  
|Prepaid expenses and
      other current assets           |   | (39                | )
|Accounts payable and accrued expenses                     |   | (255               | )
|Due to affiliates                                         |   | 1,733              |  
|Net cash provided by
      (used in) operating activities |   | 1,112              |  
|                                                          |   |                    |  
|INVESTING ACTIVITIES:                                     |   |                    |  
|Purchase of fixed assets                                  |   | (87                | )
|Net cash used in investing
      activities               |   | (87                | )
|                                                          |   |                    |  
|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  |   | 43                 |  
|Changes in cash and cash equivalents                      |   | 1,100              |  
|Cash and cash equivalents, beginning of period            |   | 3,843              |  
|Cash and cash equivalents, end of period                  | $ | 4,943              |  
|                                                          |   |                    |  
|SUPPLEMENTAL CASH FLOW INFORMATION:                       |   |                    |  
|Income taxes paid                                         | $ | --                 |  
|Interest expenses paid                                    | $ | --                 |  

See accompanying notes.

6

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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") 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) (a Samoan Corporation), acquired all of the
shares of AWP Aluminium Walzprodukte GmbH (AWP) and AFM Aluminiumfolie
Merseburg GmbH (AFM) for an aggregate purchase price of $18,500 (Euro 15,300).
AWP and AFM are incorporated under the laws of Germany. We expect that AWP and
AFM will serve as a trading platform for Chinese companies involved in the
export of aluminium products to Europe.

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 three months ended March 31, 2006 and 2005, due to their
anti-dilutive effect.

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

THREE MONTHS ENDEDMARCH 31,2006
    
    
    2005(UNAUDITED)Net loss
    $
    (544
    )
    $
    (592
    )Weighted-average shares
    
    18,834
    
    
    18,797Net loss per share, basic and diluted
    $
    (0.03
    )
    $
    (0.03
    )


7

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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 March 31, 2006:

Raw Materials
    $
    2,960Work in progress
    
    4,737Finished goods
    
    1,940$
    9,637


4. BUSINESS SEGMENT INFORMATION

During
the three months ended March 31, 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 three
months ended March 31, 2006:

By product types
    
    AmountSheets
    $
    2,454Strips
    
    5,491Blanks
    
    2,958Foils
    
    9,605Other
    
    404$
    20,912


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

5. RELATED PARTIES TRANSACTIONS

During the three months ended March 31, 2006, the Company has the following
transactions with KHD Humboldt Wedag International Ltd. (collectively with its
subsidiaries, KHD), which was a former significant shareholder of the Company
until January 31, 2006. KHD transferred all its shareholdings of the Company to
Mass Financial Corporation (collectively with its subsidiaries, Mass) on
January 31, 2006:

| | a) | Accrued or paid an unused facility fee of $35 to
    KHD.                                                                                                 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                           
| | b) | Deposited its cash and cash equivalents with KHD.
      Interest income on the deposit was $1. Such deposit amounted to $2,623 as
      at March 31, 2006.
| |    |                                                                                                                                                           
| | c) | Paid a management fee of $225 to KHD.                                                                                                                     
| |    |                                                                                                                                                           
| | d) | Sold $4,855 (representing 23% of total sales of products)
      and paid a net financing charge of $165 to KHD.                                           
| |    |                                                                                                                                                           
| | e) | Sold $11,357 (representing 54% of total sales of
      products) and paid a net financing charge of $296 to
  Mass.                                       

6. RECENT ACCOUNTING PRONOUNCEMENTS

Management
analyzes the recent accounting pronouncements and believes that its adoption
will not have any significant impact on the Companys financial statements.

8

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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 Aluminiumfolie Merseburg GmbH, for consideration of $18.5 million (Euro
15.3 million).

We
acquired all of the outstanding shares of AWP Aluminium Walzprodukte from Blake
International Ltd., a wholly-owned subsidiary of KHD Humboldt Wedag
International Ltd., pursuant to a share purchase agreement dated June 30, 2005,
for consideration of $10.0 million (€ 8.3 million). 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.

We
acquired all of the outstanding shares of AFM Aluminiumfolie Merseburg, pursuant
to a share purchase agreement dated June 30, 2005, for consideration of $8.5
million (€ 7.0 million). AFM Aluminiumfolie 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 Aluminiumfolie Merseburg's principal market is also
Europe.

All
of our revenues to date have been generated by our two aluminium rolling mills,
which were acquired on June 30, 2005.

The
following discussion and analysis of the results of operations and financial
condition of our company for the three months ended March 31, 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
Securities and Exchange Commission.

Results of Operations - Three Months Ended March 31, 2006
compared to Three Months Ended March 31, 2005

Net
product sales for the three months ended March 31, 2006 were $20.9 million,
compared to $19.8 million for the three months ended December 31, 2005, an
increase of 5.6%, and $nil for three months ended March 31, 2005. The product
sales were from our two new subsidiaries which operate the aluminium mills.

Cost
of sales was $20.0 million for the three months ended March 31, 2006, compared
to $nil in the same period in 2005. The increase was in line with the increase
in sales.

General
and administrative expenses for the three months ended March 31, 2006 were $1.0
million, compared to $0.5 million for the same period in 2005. We paid $0.2
million for reimbursement of expenses and administrative and management fees to
KHD Humboldt Wedag International for the three months ended March 31, 2006 and
2005, respectively. This agreement was terminated effectively from after March
31, 2006.

We
reported a net loss of $0.5 million, or $0.03 per common share, for the three
months ended March 31, 2006, compared to $0.6 million, or $0.03 per common
share, in the same period in 2005.

The
primary driver of our profit margin is the price of aluminum. We are unable to
effectively hedge this price in a rising 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 increase.

Liquidity and Capital Resources

At
March 31, 2006, we had working capital deficiency of $1.2 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 Merchant Bank S.A., a

9

---

wholly-owned subsidiary of KHD Humboldt Wedag International,
which is to mature in March 2009. In August 2004, MFC Merchant 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 March 31, 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 Merchant 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 Merchant Bank credit facility, we believe
that we have sufficient working capital to meet operating expenses during the
next twelve months. Currently, we are also seeking investments in or
acquisitions of companies, technologies or products. We may need additional
capital if we pursue other opportunities that we may identify through such
activities. Should the need arise, we will consider financing alternatives in
addition to the possibility of further draws under our credit facility with MFC
Merchant Bank, including the possibility of effecting private placements of our
securities.

We
are moving to reduce all expenses during this period of eroding earnings and
have an agreement with KHD Humboldt Wedag International to cancel the management
fees payable to KHD Humboldt Wedag International 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 working
capital needed for the acquired activities.

Operating Activities

Operating
activities provided cash of $1.1 million for the three months ended March 31,
2006, compared to used cash of $0.4 million in the same period in 2005.

Investing Activities

Investing
activities used cash of $87,000 for the three months ended March 31, 2006,
compared to $nil in the same period in 2005, primarily due to purchase of fixed
assets in 2006.

Financing Activities

Financing
activities provided cash of $32,000 for the three months ended March 31, 2006,
compared to $nil in the same period in 2005.

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. As of December 31, 2005, our principal business
office is located in Shanghai, People's Republic of China. We occupy
approximately 113-square-meters of leased office space, under an informal,
month-to-month lease arrangement and payment under this arrangement is not
included in the following table. We paid $4,027 during the five months ended
December 31, 2005, under this arrangement. 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:

10

---

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 three months ended March 31, 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;
- an adverse action or assessment by a regulator;
- 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
- 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

11

---

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
SEC'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 March 31, 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 March 31, 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.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.

*(a)*     *Exhibits
Required by Item 601 of Regulation SB*

Exhibit
      
      FiledNumber
      Exhibit Title
      Herewith
      Form
      Filing Date(3)(i)
      Articles of Incorporation3.1.1
      Certificate of Incorporation of
      
      S-1
      April 13, 1981Cathay Merchant Group, Inc., aDelaware corporation3.1.2
      Certificate of Amendment to
      
      10-Q
      January 31, 1987Certificate of Incorporation ofCathay Merchant Group, Inc., aDelaware corporation3.1.3
      Certificate of Amendment to
      
      10-K
      July 28, 1990Certificate of Incorporation ofCathay Merchant Group, Inc., aDelaware corporation3.1.4
      Certificate of Amendment to
      
      10-KSB
      July 31, 1997Certificate of Incorporation ofCathay Merchant Group, Inc., aDelaware corporation3.1.5
      Certificate of Amendment to
      
      8-K
      June 5, 1998Certificate of Incorporation ofCathay Merchant Group, Inc., aDelaware corporation3.1.6
      Certificate of Designations of Series
      
      8-K
      June 5, 1998A Convertible Preferred Stock ofCathay Merchant Group, Inc., aDelaware Corporation3.1.7
      Certificate of Designations of Series
      
      8-K
      February 9, 1999B 5% Convertible Preferred Stockof Cathay Merchant Group, Inc., aDelaware Corporation3.1.8
      Certificate of Amendment to
      
      8-K
      January 10, 2000Certificate of Incorporation ofCathay Merchant Group, Inc., aDelaware corporation3.1.9
      Certificate of Amendment to
      
      8-K
      October 7, 2004Certificate of Incorporation ofCathay Merchant Group, Inc., aDelaware corporation


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Exhibit
      
    FiledNumber
      Exhibit Title
    Herewith
    Form
    Filing Date3(ii)
      By-laws3.2.1
      Amended Bylaws of Cathay
      
      8-K
      May 17, 2000Merchant Group, Inc., a Delawarecorporation(10)
      Material contracts10.1
      Asset Purchase Agreement dated
      
      8-K
      December 19, 2003December 8, 2003, betweenEquidyne Systems, Inc. and HNSInternational Inc.10.2
      Amendment Agreement dated
      
      8-K
      December 19, 2003December 12, 2003, betweenEquidyne Systems, Inc. and HNSInternational Inc.10.3
      Patent Purchase Agreement dated
      
      8-K
      December 19, 2003December 8, 2003, betweenEquidyne Systems, Inc. and HNSInternational Inc.10.4
      Stock Purchase Agreement dated
      
      8-K
      April 30, 2004April 26, 2004, between CathayMerchant Group, Inc. and RajKumar.10.5
      Credit Facility Agreement dated as
      
      8-K
      April 30, 2004of April 26, 2004, between CathayMerchant Group, Inc. and MFCMerchant Bank S.A.10.6
      Financial Advisory Agreement
      
      10-KSB
      October 29, 2004dated January 1, 2004, betweenCathay Merchant Group, Inc. andMFC Merchant Bank S.A.10.7
      Memorandum of Understanding
      
      10-QSB
      December 15, 2004dated September 16, 2004, amongKHD Humboldt WedagInternational Ltd., WeichangManchu Mongolia AutonomousCounty Government of HebeiProvince, Yudaokou CountyGovernment and Laowopu CountyGovernment.


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Exhibit
      
      FiledNumber
      Exhibit Title
      Herewith
      Form
      Filing Date10.8
      Addendum of Memorandum of
      
      10-QSB
      December 15, 2004Understanding dated September 26,2004, among KHD HumboldtWedag International Ltd., WeichangManchu Mongolia AutonomousCounty Government of HebeiProvince, Yudaokou CountyGovernment and Laowopu CountyGovernment.10.11
      Memorandum of Understanding
      
      10-KSB
      October 31, 2005dated January 28, 2005, betweenCathay Merchant Group (Shanghai)Wind Energy Co., Ltd. andKangbao County Government ofHebei Province and ChuzhangdiTown Government.10.12
      Wind Park Project Land Use Rights
      
      10-KSB
      October 31, 2005Agreement dated February 23,2005, between Cathay MerchantGroup (Shanghai) Wind EnergyCo., Ltd. and Kangbao CountyGovernment.10.13
      Share Purchase Agreement dated
      
      8-K
      June 30, 2005June 30, 2005, between CathayMerchant Group Limited and BlakeInternational Limited.10.14
      Promissory Note dated June 30,
      
      8-K
      June 30, 20052005, between Cathay MerchantGroup Limited and CathayMerchant Group, Inc.10.15
      Share Purchase Agreement dated
      
      8-K
      June 30, 2005June 30, 2005, between CathayMerchant Group Limited andUniversal Metals Limited.10.16
      Promissory Note dated June 30,
      
      8-K
      June 30, 20052005, between Cathay MerchantGroup Limited and CathayMerchant Group, Inc.(31)
      Section 302 Certifications31.1
      Chief Executive Officer and
      XChief Financial Officer(32)
      Section 906 Certifications


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Exhibit
      
      FiledNumber
      Exhibit Title
      Herewith
      Form
      Filing Date32.1
      Chief Executive Officer and
      XChief Financial Officer


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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:   May 15, 2006 | **CATHAY MERCHANT GROUP, INC.**
|--------------------- | -------------------------------
|                      |                                
|                      |                                
|                      | By:                            
|                      |                                
|                      |                                
|                      |                                

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