UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2007 [   ]      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.(Exact name of small business issuer as specified in its charter)  DELAWARE
        
        04-2608713(State or other jurisdiction of incorporation or organization)
        
        (I.R.S. Employer Identification No.)  Unit 803, Dina House, Ruttonjee Centre, 11 Duddell Street, Central,Hong Kong SAR, China(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.xYES   o NO Indicate by check mark whether the registrant is a shell company (as defined in Role 12b-2 of the Exchange Act). [      ]    YES
        xNO APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares outstanding of the issuer's common stock as at August 6, 2007 was 18,890,579. Transitional Small Business Disclosure Format (check one): o YESxNO         CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES QUARTERLY REPORT - FORM 10-QSB THREE MONTHS ENDED JUNE 30, 2007 TABLE OF CONTENTS PART I
        
        PageItem 1.  Financial Statements
        
        3Item 2.  Management's Discussion and Analysis or Plan of Operation
        
        12Item 3.  Controls and Procedures
        
        16PART IIItem 1.  Legal Proceedings
        
        16Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
        
        17Item 3.  Defaults Upon Senior Securities
        
        17Item 4.  Submission of Matters to a Vote of Security Holders
        
        17Item 5.  Other Information
        
        18Item 6.  Exhibits
        
        18Signatures 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 their experiences and their 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        PART I  -  FINANCIAL INFORMATION ITEM 1.
        FINANCIAL STATEMENTS.  CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)  JUNE 30,
2007
        
        DECEMBER 31,
2006(UNAUDITED)ASSETSCurrent Assets:Cash and cash equivalents
        $              1,998
        
        $              4,610Restricted cash
        71
        
        73Marketable securities
        3,188
        
        -Receivables
        1,904
        
        1,060Due from affiliates
        1,509
        
        632Inventories
        12,834
        
        15,212Prepaid expenses and other
        49
        
        90Total current assets
        21,553
        
        21,677Non-current Assets:Deferred credit facility costs
        -
        
        183Property, plant and equipment
        1,619
        
        1,566Purchase option agreements
        16,601
        
        16,204Goodwill
        3,243
        
        3,243Deferred tax benefits
        623
        
        811Total non-current assets
        22,086
        
        22,007Total assets
        $            43,639
        
        $            43,684LIABILITIES & STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable and accrued expenses
        $            19,969
        
        $           13,694Due to affiliates
        2,130
        
        9,248Total current liabilities
        22,099
        
        22,942Long-term Liabilities:Debt
        11,713
        
        11,434Other liabilities
        14
        
        26Total long-term liabilities
        11,727
        
        11,460Total liabilities
        33,826
        
        34,402Stockholders' Equity:Common stock
        2,038
        
        2,038Additional paid-in capital
        28,031
        
        28,031Accumulated deficit
        (16,426)
        
        (16,613)Treasury stock, at cost
        (5,313)
        
        (5,313)Accumulated other comprehensive income
        1,483
        
        1,139Total stockholders' equity
        9,813
        
        9,282Total liabilities and stockholders' equity
        $            43,639
        
        $            43,684 See accompanying notes.   3         CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  SIX MONTHS ENDEDJUNE 30,2007
        
        2006(UNAUDITED)Product sales, net
        $               56,951
        
        $                45,590Cost of goods sold
        53,671
        
        43,5543,280
        
        2,036General and administrative expenses
        2,909
        
        2,792Depreciation and amortization
        16
        
        13Operating income (loss)
        355
        
        (769)Other income (expense):Interest and financing charges, net
        (366)
        
        (317)Miscellaneous
        407
        
        9841
        
        (219)Income (loss) before income tax
        396
        
        (988)Income tax - current
        (3)
        
        (10)Income tax  deferred
        (206)
        
        -Net income (loss)
        $                    187
        
        $                  (998)Earning (loss) per common share, basic and diluted
        $                   0.01
        
        $                 (0.05)   See accompanying notes.    4         CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  THREE MONTHS ENDEDJUNE 30,2007
        
        2006(UNAUDITED)Product sales, net
        $              29,448
        
        $                24,678Cost of goods sold
        27,566
        
        23,5411,882
        
        1,137General and administrative expenses
        1,633
        
        1,372Depreciation and amortization
        8
        
        7Operating income (loss)
        241
        
        (242)Other income (expense):Interest and financing charges, net
        (282)
        
        (263)Miscellaneous
        154
        
        57(128)
        
        (206)Income (loss) before income tax
        113
        
        (448)Income tax  current
        -
        
        (6)Income tax  deferred
        (206)
        
        -Net loss
        $                   (93)
        
        $                  (454)Net loss per common share, basic and diluted
        $                   0.00
        
        $                 (0.02)   See accompanying notes.   5         CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)   SIX MONTHS ENDEDJUNE 30,2007
        
        2006(UNAUDITED)Net income (loss)
        $              187
        
        $           (998)Other comprehensive income,foreign currency translation adjustment
        344
        
        1,077Comprehensive income
        $              531
        
        $              79  See accompanying notes.   6         CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)   THREE MONTHS ENDEDJUNE 30,2007
        
        2006(UNAUDITED)Net loss
        $                 (93)
        
        $             (454)Other comprehensive income,foreign currency translation adjustment
        156
        
        733Comprehensive income
        $                  63
        
        $              279  See accompanying notes.   7         CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)  SIX MONTHS ENDED
JUNE 30,2007
        
        2006(UNAUDITED)OPERATING ACTIVITIES:Net income (loss)
        $
        187
        
        $
        (998)Adjustments to reconcile net loss to net cashprovided by (used in) operating activities:Depreciation and amortization
        
        382
        
        
        170Unrealized gain on marketable securities
        
        (31)
        
        
        -Foreign exchange
        
        225
        
        
        669Changes in operating assets and liabilities:Restricted cash
        
        2
        
        
        -Receivables
        
        (805)
        
        
        (841)Due from affiliates
        
        (860)
        
        
        (855)Inventories
        
        2,705
        
        
        (367)Prepaid expenses and other current assets
        
        43
        
        
        (2)Deferred tax
        
        208
        
        
        -Accounts payable and accrued expenses
        
        5,682
        
        
        (2,861)Due to affiliates
        
        (7,189)
        
        
        5,766Net cash provided by operating activities
        
        549
        
        
        681INVESTING ACTIVITIES:Purchase of marketable securities
        
        (3,157)
        
        
        -Purchase of fixed assets
        
        (211)
        
        
        (175)Net cash used in investing activities
        
        (3,368)
        
        
        (175)FINANCING ACTIVITIES:Proceeds from exercise of stock options
        
        -
        
        
        32Investment subsidies and grants
        
        170
        
        
        3Net cash provided by financing activities
        
        170
        
        
        35Effects of foreign exchange on cash and cash equivalents
        
        37
        
        
        88Changes in cash and cash equivalents
        
        (2,612)
        
        
        629Cash and cash equivalents, beginning of period
        
        4,610
        
        
        3,843Cash and cash equivalents, end of period
        $
        1,998
        
        $
        4,472SUPPLEMENTAL CASH FLOW INFORMATION:Income taxes paid
        $
        --
        
        $
        --Interest expenses paid
        $
        --
        
        $
        --  See accompanying notes.   8        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), as rounded to the nearest thousands (except per share amounts).  Description of Business  Cathay Merchant Group, Inc. (the Company or Cathay) is primarily an aluminium manufacturing company.  On June 30, 2005, the Company, acting through its wholly-owned subsidiary, Cathay Merchant Group Limited (CMG), acquired all of the shares of AWP Aluminium Walzprodukte GmbH (AWP) and AFM Aluminiumfolie Merseburg GmbH (AFM).  AWP and AFM are incorporated under the laws of Germany.  Basis of Presentation  The unaudited interim period consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such SEC rules and regulations. The interim period consolidated financial statements should be read together with the audited consolidated financial statements and accompanying notes included in the Company's latest annual report on Form 10-KSB for the year ended December 31, 2006. 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 determined by dividing net income applicable to common shares by the weighted average number of common shares outstanding during the period.  Diluted earnings (loss) per share is determined using the same method as basic earnings per share except that the weighted average number of common shares outstanding includes potential dilutive effect of stock options.  The following table sets forth the computation of basic and diluted loss per share:  SIX MONTHS ENDEDJUNE 30,
        THREE MONTHS ENDEDJUNE 30,2007
        2006
        2007
        2006(UNAUDITED)
        (UNAUDITED)Net income (loss)
        $187
        $(998)
        $(93)
        $(454)Weighted-average shares
        18,954
        18,862
        18,920
        18,891Earnings (loss) per share, basic and diluted
        $0.01
        $(0.05)
        $0.00
        $(0.02)    9       CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  3. MARKETABLE SECURITIES  Marketable Securities consists of highly liquid investment funds.  4. INVENTORIES  Inventories consist of raw materials, work-in-process, and finished goods. Inventories are recorded at the lower of cost (specific identification and first-in first out methods) or market and consist of the following at June 30, 2007:  Raw materials
        $
        3,867Work in progress
        
        7,060Finished goods
        
        1,907$
        12,834  5. BUSINESS SEGMENT INFORMATION  During the six and three months ended June 30, 2007, the Company operated in one reportable business segment: manufacturing and trading of aluminium products, and all sales revenues were derived from Europe.  The following tables disclose the Companys sales by product types for the six and three months ended June 30, 2007 and 2006:  As of June 30, 2007, there was no material change in total assets from December 31, 2006.  6. RELATED PARTIES TRANSACTIONS  During the six months ended June 30, 2007, the Company had the following transactions with MFC Corporate Services AG, formerly MFC Merchant Bank S.A., (MFC Bank), MFC Commodities GmbH and its parent company Mass Financial Corp. (Mass).  a)
        Interest income from MFC Bank on the deposit was $25. b)
        Sold $45,037 (representing 79% of total sales of products) and paid a fee of $1,323 to MFC Commodities GmbH. c)
        Accrued or paid interest of $246 to Mass.  7. RECENT ACCOUNTING PRONOUNCEMENTS  In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109(FIN 48).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken an a tax return.  Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority.  An uncertain
income tax position will not be recognized if it has less than a 50% likelihood of being sustained.  Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.   10       CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  7. RECENT ACCOUNTING PRONOUNCEMENTS (continued...)  The Company adopted the provisions of FIN 48 on January 1, 2007 and the implementation of FIN 48 does not have any impact on the Companys financial statements.  The Company recognizes interest and penalties related to an underpayment of income taxes, if any, in interest expense.  During the six months ended June 30, 2007, the Company did not recognize any penalties and interest.  The Company and/or one or more of its subsidiaries file income tax returns in the United States and Germany.   11        ITEM 2.
        MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. Overview  Our primary business involves the manufacturing of aluminium products. Our wholly-owned subsidiary, Cathay Merchant Group Ltd., a company incorporated under the laws of Samoa ("Cathay Ltd."), acquired all of the shares of AWP Aluminium Walzprodukte GmbH and AFM Aluminiumfolie Merseburg GmbH on June 30, 2005.  The companies were acquired for a combined purchase price of $18.5 million (15,300,000).  AWP Aluminium Walzprodukte was based in Berlin, Germany, and operated an aluminium rolling mill through its wholly-owned subsidiary, MAW Mansfelder Aluminiumwerke GmbH.  In 2006, AWP Aluminium Walzprodukte merged with and into MAW Mansfelder Aluminiumwerke, with MAW Mansfelder Aluminiumwerke continuing on as the surviving corporation.  Its products include aluminium sheets, foils, strips and blanks for use by industrial and commercial fabricators of aluminium products.  On the same date, we
also acquired AFM Aluminiumfolie Merseburg, which operates an aluminium rolling mill factory in Merseburg, Germany and produces aluminium foil for flexible (food and beverage) packaging, pharmaceutical packaging and other technical applications.  We hold property interests in certain land, buildings and capital property where the two aluminium mills are located pursuant to the terms of two lease agreements with Grundstuckfonds Sachsen-Anhalt GmbH, a company wholly-owned by the State of Saxony-Anhalt, Germany ("GSA").  Total combined production from the two mills during the year ended December 31, 2006 was 28,892 metric tonnes of finished products.  The maximum total combined annual production from the two mills is 40,000 metric tonnes.  The principal market for all of our aluminium products is primarily Europe.  We, through Cathay Ltd., acquired all of the outstanding shares of AFM Aluminiumfolie Merseburg, pursuant to a share purchase agreement dated June 30, 2005, from an unrelated third party for a purchase price of $8.5 million.  We paid $4.8 million in cash at closing on June 30, 2005 and the balance of the purchase price is evidenced by an unsecured promissory note in the principal amount of $3.7 million (3,020,000), maturing on June 30, 2008.  The note bears interest at the rate of 4.2% per annum, payable annually, and calculated on the basis of the actual number of days elapsed and on the basis of a 365-day year.  The note was issued by Cathay Ltd. and is guaranteed by us.  We acquired all of the outstanding shares of AWP Aluminium Walzprodukte pursuant to a share purchase agreement dated June 30, 2005, between Cathay Ltd. and Blake International, a former wholly-owned subsidiary of KHD Humboldt Wedag International Ltd., for a purchase price of $10.0 million.  We paid $4.8 million in cash at closing on June 30, 2005 and the balance of the purchase price is evidenced by an unsecured promissory note in the principal amount of $5.2 million (4,280,000), maturing on June 30, 2008.  The note bears interest at the rate of 4.2% per annum, payable annually, and calculated on the basis of the actual number of days elapsed and on the basis of a 365-day year.  The note was issued by Cathay Ltd. and is guaranteed by us.  KHD Humboldt Wedag was an affiliate and significant shareholder of our company at the time of the transaction.  Our aluminium rolled products are semi-finished products including sheets, foils, strips and blanks that constitute the raw materials for the manufacture of finished goods which are completed by our customers.  Our aluminium rolling mills produce products for industrial and commercial purposes.  The process of producing semi-finished aluminium products requires subsequent rolling, or cold rolling, and finishing steps such as annealing, coating, leveling or slitting to achieve the desired thicknesses and metal properties.  Aluminium has several characteristics that provide value for diverse applications.  Compared to substitute metals, aluminium is light-weight, has a high strength-to-weight ratio and is resistant to corrosion.  Aluminium's greatest advantage, however, is that it can be recycled repeatedly without any material decline in performance or quality.  Recycling of aluminium provides significant energy savings compared to the production of aluminium from other primary sources with significantly lower capital equipment costs.  We generally purchase primary aluminium at prices set on the London Metal Exchange plus a premium that varies by geographic region of delivery, form and alloy.   12       Industrial and commercial fabricators in the construction and automotive supply industry represent the largest customers for MAW Mansfelder Aluminiumwerke's products.  Aluminium rolled products developed for this market segment are often decorative, offer insulating properties, are durable and corrosion resistant, and have a high strength-to-weight ratio.  Aluminium siding, gutters, and downspouts comprise a significant amount of construction volume.  Other applications include doors, windows, awnings, canopies, façades, roofing and ceilings.  Most of the customers of MAW Mansfelder Aluminiumwerke receive shipments in the form of aluminium sheets, foils, strips and blanks which are later fabricated according to our customers' specifications.  Demand for most of MAW Mansfelder Aluminiumwerke's products is seasonal, with higher demand occurring in the spring, summer and fall months and
lower demand in the winter months.  Accordingly, our aluminium mills typically generate higher revenues in the spring, summer and fall months.  The majority of our products are sold to two subsidiaries of Mass Financial Corp., which provide services and re-sell the products to end-user customers.  Mass Financial currently holds 5,256,844, or 27.8%, of our common shares as of August 6, 2007.  The aluminium rolled products market is highly competitive.  We face competition from a number of companies in Germany and from European companies selling their products to our markets.  Our primary competitors in Europe are Norsk Hydro A.S.A., Alcan, Alcoa, Novelis and Corus.  We compete based on our price, product quality, the ability to meet customers' specifications, short delivery times and range of products offered.  We also use sophisticated technical equipment and focus on high-end niche markets in order to maintain our competitive advantage.  In addition to competition from within the aluminium rolled products industry, we face competition from non-aluminium materials, as fabricators and end-users have, in the past, demonstrated a willingness to substitute other materials for aluminium.  Aluminium competes with plastic and steel in building products applications.  Factors affecting competition with substitute materials include price, ease of manufacture, consumer preference and performance characteristics.  The following discussion and analysis of the results of operations and financial condition of our company for the three months ended June 30, 2007 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 year ended December 31, 2006 filed with the United States Securities and Exchange Commission.  Results Of Operations  Six Months Ended June 30, 2007  Net product sales for the six months ended June 30, 2007 were $57.0 million, compared to $45.6 million in the same period in 2006. The product sales were from our two aluminium mills which were acquired on June 30, 2005. Cost of goods for the six months ended June 30, 2007 were $53.7 million, compared to $43.6 million in the same period in 2006.  AFM Aluminiumfolie Merseburg's products include those that utilize aluminium foil because of its light weight, recyclability and formability and because it has a wide variety of uses in packaging.  Aluminium foil can be processed to create a very thin foil that can be plain or printed and is typically laminated to plastic or paper to form an internal seal for a variety of packaging applications including flexible (food and beverage) packaging, pharmaceutical packaging and other technical applications.  Customers typically order coils of such foil in a range of thicknesses from 6 microns to 50 microns.  AFM Aluminiumfolie Merseburg enters into annual supply agreements with a majority of its larger customers that are typically concluded during the fall and winter months to cover the customers' requirements for the following year.  This makes AFM Aluminiumfolie Merseburg's revenues relatively
predictable at an early time in the year.  The aluminium products of MAW Mansfelder Aluminiumwerke are sold to distributors, as well as end-users, principally for use by industrial and commercial fabricators of aluminium products whereas the aluminium products of AFM Aluminiumfolie Merseburg are sold exclusively to industrial fabricators.  General and administrative expenses for the six months ended June 30, 2007 were $2.9 million, compared to $2.8 million in the same period in 2006.  In July 2007, the German tax authority announced a change of the Corporation tax rate, effective January 1, 2008, whereby the tax rate will be reduced from 25% to 15%.  As a result, we have reduced our deferred tax assets by $206,000 to reflect this change.   13       We reported a net income of $0.2 million, or $0.01 per common share, for the six months ended June 30, 2007, compared to a net loss of $1.0 million, or $0.05 per common share, in the same period in 2006.  Results of Operations  Three Months Ended June 30, 2007  Net product sales for the three months ended June 30, 2007 were $29.4 million, compared to $24.7 million in the same period in 2006. Cost of goods sold for the three months ended June 30, 2007 were $27.6 million, compared to $23.5 million in the same period in 2006.  All of our revenues during the quarter ended June 30, 2007 were generated by our two aluminium rolling mills.  General and administrative expenses were $1.6 million for the three months ended June 30, 2007, compared to $1.4 million in the same period ended June 30, 2006.  In July 2007, the German tax authority announced a change of the Corporation tax rate, effective January 1, 2008, whereby the tax rate will be reduced from 25% to 15%.  As a result, we have reduced our deferred tax assets by $206,000 to reflect this change.  We reported a net loss of $93,000, or $0.00 per common share, for the three months ended June 30, 2007, compared to a net loss of $0.5 million, or $0.02 per common share, in the same period in 2006.  LIQUIDITY AND CAPITAL RESOURCES  At June 30, 2007, we had a working capital deficiency of $0.5 million, compared to a working capital deficiency of $1.3 million at December 31, 2006.  In 2004, we entered into a five-year $20 million revolving credit facility with MFC Corporate Services AG, formerly known as MFC Merchant Bank S.A., which was to mature in March 2009. In August 2004, MFC Corporate Services converted $1,575,000 of the principal that we had drawn under the credit facility into 3,150,000 shares of our common stock at the exercise price of $0.50 per share.  In May 2007, our company and MFC Corporate Services cancelled the credit facility.  As a result of our revenues from our aluminium rolling mills, 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 also intend to exercise our two purchase option agreements.  The first option agreement is dated September 26, 2002 between AFM Aluminiumfolie Merseburg and GSA.  Pursuant to the terms of the option agreement, we have the right to purchase certain lands, buildings and capital property located in the city of Merseburg, Germany at a price of $4.5 million (3,400,000) until September 30, 2007.  In April 2007, we entered into an amendment agreement with GSA to extend the expiry date to December 31, 2010.  The second option agreement is dated October 26, 2004 between MAW Mansfelder Aluminiumwerk and GSA, whereby we
have the right to purchase certain land, buildings and equipment located in the city of Hettstedt, Germany, at a price of $4.0 million (3,035,000) until July 31, 2009.  In June 2007, we entered into an amendment agreement with GSA to extend the expiry date to December 31, 2010 and reduced the purchase price to $3.8 million (2,844,000).  We may need additional capital if we pursue such opportunities that we may identify through such activities.  Should the need arise, we will consider financing alternatives, including the possibility of effecting private placements of our securities.  There is no assurance that management will find suitable opportunities or effect the necessary financial arrangements for such investments, or provide the capital needed for the acquired activities.  Operating Activities  Operating activities provided cash of $0.7 million for the six months ended June 30, 2007 and 2006.  Investing Activities  Investing activities used cash of $3.4 million for the six months ended June 30, 2007, compared to $0.2 million in the same period ended 2006.  We used cash of $3.2 million to purchase marketable securities for the six months ended June 30, 2007.   14       Financing Activities  Financing activities provided cash of $nil for the six months ended June 30, 2007, compared to $32,000 in the same period ended 2006.  Off-Balance Sheet Arrangements  Our company has no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts.  Our company does not engage in trading activities involving non-exchange traded contracts. 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 primary business is aluminium manufacturing and trading and our revenue primarily comes from the sale of aluminium products produced and sold. We receive orders from customers, process and convert the raw materials into finished goods, and ship the finished goods at the instructions of our customers. It is a simple manufacturing and trading process. The revenue is recognized when the finished goods are delivered, the terms of the sales are known and complied with and no significant obligations remain. Management believes that the risk of misstating the revenue is very remote and the only major misstatement, if any, comes from the period-end cut-off.  Our return policy is governed by the provisions of the German Civil Code and the German Commercial Code.  It stipulates that the seller has to transfer the product free from defects in materials and workmanship to the purchaser.  To be deemed free from defects, the product has to be of the quality the two parties agreed on in their contract, when being transferred.  If the product is not free from defects during the warranty period of two years, German law offers four possible claims to the purchaser: 
        Subsequent improvements or subsequent delivery to the choice of the purchaser.  Other options for the purchaser only arise if the seller subsequently fails to perform his contractual duty. 
        After unsuccessfully requesting improvements of the product, the purchaser may withdraw from the contract, in which case a full cash refund is mandatory and the product has to be returned to the seller. 
        Instead of withdrawing, the purchaser may keep the product and consider a reduction of the purchase price. 
        The purchaser might claim compensation for the non-performance of the sale. Once an order has been placed by the purchaser and accepted by the seller the purchaser has no legal right to withdraw from the contract, unless the seller fails to perform his duties.  A mutual cancellation is subject to the acceptance of the seller and depends on the individual situation.  Goodwill Impairment  A goodwill impairment loss should be recognized when the carrying amount of the goodwill exceeds the fair value  15      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:  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 judgments. In addition, the time periods for estimating future cash flows is often lengthy, which increases the sensitivity of the assumptions made. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. Our management considers the likelihood of possible outcomes in determining the best estimate of future cash flows. ITEM 3.
        CONTROLS AND PROCEDURES. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of June 30, 2007, the end of the quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no significant changes in our internal controls over financial reporting that occurred during our most recent quarter that have materially or are reasonably likely to materially affect, our internal controls over financial reporting. PART II - OTHER INFORMATION ITEM 1.
        LEGAL PROCEEDINGS. In the ordinary course of conducting our business, we may become subject to litigation and claims regarding various matters.  There was no outstanding litigation as of June 30, 2007.   16       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. We held our annual general meeting of shareholders on May 25, 2007. There were 18,890,579 common shares of our company entitled to vote at the meeting, of which a total of 6,928,386 (34.0%) were represented at the meeting either in person or by proxy.  1.
        Proposal to ratify the appointment of Michael Smith, Jelena Djordjevic-Lausevic, Mirjana Lausevic-Zdravkovic and Silke Brossmann as directors for the five month transition year ended December 31, 2005.  DIRECTORS
        VOTES FOR
        VOTES WITHHELDMichael Smith
        6,847,186
        81,200Jelena Djordjevic-Lausevic
        6,846,436
        81,950Mirjana Lausevic-Zdravkovic
        6,846,436
        81,950Silke Brossmann
        6,846,436
        81,950  2.
        Proposal to ratify the appointment of Michael Smith, Jelena Djordjevic-Lausevic, Mirjana Lausevic-Zdravkovic and Silke Brossmann as directors for the year ended December 31, 2006.  DIRECTORS
        VOTES FOR
        VOTES WITHHELDMichael Smith
        6,847,186
        81,200Jelena Djordjevic-Lausevic
        6,846,436
        81,950Mirjana Lausevic-Zdravkovic
        6,846,436
        81,950Silke Brossmann
        6,846,436
        81,950  3.
        Proposal to elect Michael Smith, Jelena Djordjevic-Lausevic, Mirjana Lausevic-Zdravkovic and Andrew Hung as directors for the year ending December 31, 2007.  DIRECTORS
        VOTES FOR
        VOTES WITHHELDMichael Smith
        6,847,186
        81,200Jelena Djordjevic-Lausevic
        6,846,436
        81,950Mirjana Lausevic-Zdravkovic
        6,846,436
        81,950Andrew Hung
        6,846,436
        81,950  4.
        Proposal to ratify the appointment of Peterson Sullivan PLLC as independent accountants for the five month transition year ended December 31, 2005.  VOTES FOR
        VOTES AGAINST
        ABSTENTIONS4,856,736
        77,750
        1,993,900  5.
        Proposal to ratify the appointment of RSM Hemmelrath GmbH as independent accountants for the year ended December 31, 2006.     17        VOTES FOR
        VOTES AGAINST
        ABSTENTIONS4,857,486
        77,000
        1,993,900  6.
        Proposal to ratify the appointment of RSM Hemmelrath GmbH as independent accountants for the year ending December 31, 2007 and to authorize the board of directors of our company to fix the remuneration payable to the independent accountants.  VOTES FOR
        VOTES AGAINST
        ABSTENTIONS4,857,486
        77,000
        1,993,900 None. ITEM 5.
        OTHER INFORMATION. ITEM 6.
        EXHIBITS. Exhibits Required by Item 601 of Regulation SB ExhibitNumber
        Exhibit Title
        FiledHerewith
        Form
        Filing Date(3)(i)
        Articles of Incorporation3.1.1
        Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation
        
        S-1
        April 13, 19813.1.2
        Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation
        
        10-Q
        January 31, 19873.1.3
        Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation
        
        10-K
        July 28, 19903.1.4
        Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation
        
        10-KSB
        July 31, 19973.1.5
        Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation
        
        8-K
        June 5, 19983.1.6
        Certificate of Designations of Series A Convertible Preferred Stock of Cathay Merchant Group, Inc., a Delaware Corporation
        
        8-K
        June 5, 1998    18        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, 19993.1.8
        Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation
        
        8-K
        January 10, 20003.1.9
        Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation
        
        8-K
        October 7, 20043(ii)
        By-laws3.2.1
        Amended Bylaws of Cathay Merchant Group, Inc., a Delaware corporation
        
        8-K
        May 17, 2000(10)
        Material contracts10.1
        Credit Facility Agreement dated as of April 26, 2004, between Cathay Merchant Group, Inc. and MFC Merchant Bank S.A.
        
        8-K
        April 30, 200410.2
        Financial Advisory Agreement dated January 1, 2004, between Cathay Merchant Group, Inc. and MFC Merchant Bank S.A.
        
        10-KSB
        October 29, 200410.3
        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, 200510.4
        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, 200510.5
        Share Purchase Agreement dated June 30, 2005, between Cathay Merchant Group Limited and Blake International Limited.
        
        8-K
        June 30, 200510.6
        Promissory Note dated June 30, 2005, between Cathay Merchant Group Limited and Cathay Merchant Group, Inc.
        
        8-K
        June 30, 2005    19        10.7
        Share Purchase Agreement dated June 30, 2005, between Cathay Merchant Group Limited and Universal Metals Limited.
        
        8-K
        June 30, 200510.8
        Promissory Note dated June 30, 2005, between Cathay Merchant Group Limited and Cathay Merchant Group, Inc.
        
        8-K
        June 30, 200510.9
        Lease Agreement dated September 18, 2002, between GSA Grundstűcksfonds Sachsen-Anhalt GmbH and MAW Mansfelder Aluminiumwerk GmbH
        
        10-KSB
        April 2, 200710.10
        Lease Agreement dated September 26, 2002, between GSA Grundstűcksfonds Sachsen-Anhalt GmbH and MFC Aluminiumfolie Merseburg GmbH
        
        10-KSB
        April 2, 200710.11
        Purchase Option Agreement dated September 26, 2002, between GSA Grundstűcksfonds Sachsen-Anhalt GmbH and MFC Aluminiumfolie Merseburg GmbH
        
        10-KSB
        April 2, 200710.12
        Agreement dated October 26, 2004, between GSA Grundstűcksfonds Sachsen-Anhalt GmbH and MAW Mansfelder Aluminiumwerk GmbH
        
        10-KSB
        April 2, 200710.13
        Service Agreement dated August 22, 2005, between our company and Stefan Feuerstein
        
        10-KSB
        April 2, 200710.14
        Amendment to Service Agreement effective August 1, 2006, between our company and Stefan Feuerstein
        
        10-KSB
        April 2, 200710.15
        Document of Notary dated March 19, 2007
        
        10-QSB
        May 15, 200710.16
        Amendment to Lease Agreement dated April 11, 2007
        
        10-QSB
        May 15, 200710.17
        Amendment to Lease Agreement dated April 11, 2007
        
        10-QSB
        May 15, 200710.18
        Amendment to Lease Agreement dated April 11, 2007
        
        10-QSB
        May 15, 2007    20        10.19
        Amendment to Lease Agreement dated July 17, 2007
        X(31)
        Section 302 Certifications31.1
        Chief Executive Officer andChief Financial Officer
        X(32)
        Section 906 Certifications32.1
        Chief Executive Officer andChief Financial Officer
        X    21       SIGNATURES  In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  Dated:      August 14, 2007
        CATHAY MERCHANT GROUP, INC.


By:  /s/ Michael J. SmithMichael J. SmithChief Executive Officer, President andChief Financial Officer(Principal Executive Officer,Principal Accounting Officer andPrincipal Financial Officer)    22  CW1342607.6