---

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 **March 31, 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. [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 May 8, 2007 was 18,890,579.

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

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES QUARTERLY
REPORT - FORM 10-QSB THREE MONTHS ENDED MARCH 31, 2007

TABLE OF CONTENTS

|                                                                          |  | Page
|------------------------------------------------------------------------- |  | ----
|                                                                          |  |     
|**PART I**                                                                |  |     
|                                                                          |  |     
|Item 1. Consolidated
      Financial Statements                           |  | 3   
|Item 2. Management's Discussion and
      Analysis or Plan of Operation   |  | 10  
|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                                                    |  | 15  
|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. FINANCIAL STATEMENTS.

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

|                                                 |   | MARCH 31,   |   |   | DECEMBER 31, |  
|------------------------------------------------ | - | ----------- | - | - | ------------ | -
|                                                 |   | 2007        |   |   | 2006         |  
|                                                 |   | (UNAUDITED) |   |   |              |  
|ASSETS                                           |   |             |   |   |              |  
|Current Assets:                                  |   |             |   |   |              |  
|Cash and cash equivalents                        | $ | 4,392       |   | $ | 4,610        |  
|Restricted cash                                  |   | 73          |   |   | 73           |  
|Receivables                                      |   | 2,150       |   |   | 1,060        |  
|Due from affiliates                              |   | 899         |   |   | 632          |  
|Inventories                                      |   | 14,909      |   |   | 15,212       |  
|Prepaid expenses and other                       |   | 55          |   |   | 90           |  
|Total current assets                             |   | 22,478      |   |   | 21,677       |  
|Non-current Assets:                              |   |             |   |   |              |  
|Deferred credit facility costs                   |   | 163         |   |   | 183          |  
|Property, plant and equipment                    |   | 1,695       |   |   | 1,566        |  
|Purchase option agreements                       |   | 16,421      |   |   | 16,204       |  
|Goodwill                                         |   | 3,243       |   |   | 3,243        |  
|Deferred tax benefits                            |   | 822         |   |   | 811          |  
|Total non-current assets                         |   | 22,344      |   |   | 22,007       |  
|Total assets                                     | $ | 44,822      |   | $ | 43,684       |  
|                                                 |   |             |   |   |              |  
|LIABILITIES & STOCKHOLDERS' EQUITY               |   |             |   |   |              |  
|Current Liabilities:                             |   |             |   |   |              |  
|Accounts payable and accrued expenses            | $ | 15,990      |   | $ | 13,694       |  
|Due to affiliates                                |   | 7,475       |   |   | 9,248        |  
|Total current liabilities                        |   | 23,465      |   |   | 22,942       |  
|Long-term Liabilities:                           |   |             |   |   |              |  
|Debt                                             |   | 11,587      |   |   | 11,434       |  
|Other liabilities                                |   | 20          |   |   | 26           |  
|Total long-term
      liabilities                |   | 11,607      |   |   | 11,460       |  
|Total liabilities                                |   | 35,072      |   |   | 34,402       |  
|Stockholders' Equity:                            |   |             |   |   |              |  
|Common stock                                     |   | 2,038       |   |   | 2,038        |  
|Additional paid-in capital                       |   | 28,031      |   |   | 28,031       |  
|Accumulated deficit                              |   | (16,333     | ) |   | (16,613      | )
|Treasury stock, at cost                          |   | (5,313      | ) |   | (5,313       | )
|Cumulative translation adjustment                |   | 1,327       |   |   | 1,139        |  
|Total stockholders'
      equity                 |   | 9,750       |   |   | 9,282        |  
|Total liabilities and stockholders'
      equity | $ | 44,822      |   | $ | 43,684       |  

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, 2007           |  
|                                                            |   | (UNAUDITED)              |  
|Product sales, net                                          | $ | 27,503                   |  
|Cost of goods sold                                          |   | 26,105                   |  
|                                                            |   | 1,398                    |  
|General and administrative expenses                         |   | 1,284                    |  
|Operating income (loss)                                     |   | 114                      |  
|Other income (expense):                                     |   |                          |  
|Interest and financing charges,
      net                   |   | (84                      | )
|Miscellaneous                                               |   | 253                      |  
|                                                            |   | 169                      |  
|Income (loss) before income tax                             |   | 283                      |  
|Income tax expenses                                         |   | (3                       | )
|Net income (loss)                                           | $ | 280                      |  
|Net income (loss) per common share, basic and
      diluted | $ | 0.01                     |  

See accompanying notes.

4

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

|                                                         |   | THREE
      MONTHS ENDED | 
|-------------------------------------------------------- | - | ------------------------ | 
|                                                         |   | March 31, 2007           | 
|                                                         |   | (UNAUDITED)              | 
|                                                         |   |                          | 
|Net income (loss)                                        | $ | 280                      | 
|Other comprehensive income, foreign currency translation |   |                          | 
|adjustment                                               |   | 188                      | 
|Comprehensive income (loss)                              | $ | 468                      | 

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,    |  
|                                                          |   | 2007               |  
|                                                          |   | (UNAUDITED)        |  
|OPERATING ACTIVITIES:                                     |   |                    |  
|Net income (loss)                                         | $ | 280                |  
|Adjustments to reconcile net loss to net cash             |   |                    |  
|provided by (used in) operating activities:               |   |                    |  
|Depreciation and amortization                             |   | 116                |  
|Foreign exchange                                          |   | 119                |  
|Changes in operating assets and liabilities:              |   |                    |  
|Receivables                                               |   | (1,055             | )
|Due from affiliates                                       |   | (256               | )
|Inventories                                               |   | 497                |  
|Prepaid expenses and other
      current assets           |   | 37                 |  
|Accounts payable and accrued expenses                     |   | 2,078              |  
|Due to affiliates                                         |   | (1,847             | )
|Net cash provided by (used
      in) operating activities |   | (31                | )
|                                                          |   |                    |  
|INVESTING ACTIVITIES:                                     |   |                    |  
|Purchase of fixed assets                                  |   | (201               | )
|Net cash
      used in investing activities               |   | (201               | )
|                                                          |   |                    |  
|FINANCING ACTIVITIES:                                     |   |                    |  
|Proceeds from exercise of stock options                   |   | -                  |  
|Net cash provided by financing
      activities           |   | -                  |  
|                                                          |   |                    |  
|Effects of foreign exchange on cash and cash equivalents  |   | 14                 |  
|Changes in cash and cash equivalents                      |   | (218               | )
|Cash and cash equivalents, beginning of period            |   | 4,610              |  
|Cash and cash equivalents, end of period                  | $ | 4,392              |  
|                                                          |   |                    |  
|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 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 an aluminum 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 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 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 average number of common shares outstanding for 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 earnings (loss)
per share:

THREE MONTHS ENDEDMARCH
        31,2007
      
      
      2006(UNAUDITED)Net income (loss), basic and diluted
      $
      280
      
      $
      (544
      )Weighted-average shares, basic
      
      18,891
      
      
      18,834Effect of dilutive securities
      
      34
      
      
      -Weighted-average shares, diluted
      
      18,925
      
      
      18,834Earnings (loss) per share, basic and diluted
      $
      0.01
      
      $
      (0.03
      )


7

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

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, 2007:

Raw materials
    $
    6,046Work in progress
    
    6,644Finished goods
    
    2,219$
    14,909


4. BUSINESS SEGMENT INFORMATION

During
the three months ended March 31, 2007, the Company operated in one reportable
business segment: manufacturing of aluminum products.

The
following tables disclose the Companys sales by product types for the three
months ended March 31, 2007:

THREE MONTHS ENDEDMarch 31, 2007By product typesSheets
    $   1,297Strips
    6,783Blanks
    4,478Foils
    11,164Other
    3,781$
      27,503


As
of March 31, 2007, there was no material change in total assets from December
31, 2006.

5. RELATED PARTIES TRANSACTIONS

During
the three months ended March 31, 2007, 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).

a)     
Deposited its cash and cash equivalents with MFC Bank. Interest income on the
deposit was $21. Such deposit amounted to $3,158 as at March 31, 2007.

b)      Sold
products $21,736 (representing 79% of total sales of products) and paid
marketing fee of $617 to MFC Commodities GmbH.

c)     
Accrued or Paid interest of $121 to Mass.

6. RECENT ACCOUNTING PRONOUNCEMENTS

FASB
Interpretation ("FIN") No. 48: Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No.109, clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS No. 109, Accounting for Income Taxes. This
interpretation (1) prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return and (2) provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This interpretation is effective for fiscal
years beginning after December 15, 2006. Managements preliminary assessment
does not indicate that this new standard has a significant impact on our
financial position.

8

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

7. SUBSEQUENT EVENTS

In
April 2007, the Company entered into amendment agreements with Grundstuckfonds
Sachsen-Anhalt GmbH to extend the expiry date of both lease and purchase
agreements to 2010.

In
May 2007, the Company and MFC Merchant Bank cancelled the credit facility and
the fees for such facility were settled.

9

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**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, and we intend to utilize our
acquisitions as a trading platform for Chinese companies involved in the export
of aluminium products to 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
(€7,020,000). We paid $4.8 million (€4,000,000) 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 (€8,280,000). We paid
$4.8 million (€4,000,000) 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. Blake International
was a wholly-owned subsidiary of KHD Humboldt Wedag which, at the time of the
transaction, was an affiliate and significant shareholder of our company.

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.

Industrial
and commercial fabricators in the construction and automotive supply industry
represent the largest

10

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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 marketing 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
May 4, 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 March 31, 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  Three Months Ended March 31,
2007

Net
product sales for the three months ended March 31, 2007 were $27.5 million,
compared to $20.9 million in the same period in 2006. Cost of goods sold for the
three months ended March 31, 2007 were $26.1 million, compared to $20.0 million
in the same period in 2006.

All
of our revenues during the quarter ended March 31, 2007 were generated by our
two aluminum rolling mills.

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 were $1.3 million for the three months ended March
31, 2007 and 2006, respectively.

We
reported a net income of $0.3 million, or $0.01 per common share, for the three
months ended March 31, 2007, compared to a net loss of $0.5 million, or $0.03
per common share, in the same period in 2006.

11

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LIQUIDITY AND CAPITAL RESOURCES

At
March 31, 2007, the Company had a working capital deficiency of $0.1 million,
compared to $1.3 million at December 31, 2006.

We
entered into a five-year $20 million revolving credit facility dated April 26,
2004 with MFC Merchant Bank, 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, 2007, 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. In May 2007, our
company and MFC Merchant Bank 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 Httstedt, Germany, at a price of
$4.0 million (€3,035,000) until July 31, 2009. In April 2007, we entered into an
amendment agreement with GSA to extend the expiry date to July 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 used cash of $31,000 for the three months ended March 31, 2007, and
provided cash of $1.1 million in the same period in 2006.

Investing Activities

Investing
activities used cash of $0.2 million for the three months ended March 31, 2007,
compared to $87,000 in the same period in 2006.

Financing Activities

Financing
activities provided cash of $nil for the three months ended March 31, 2007,
compared to $32,000 in the same period in 2006.

12

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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 aluminum manufacturing and trading and our revenue primarily
comes from the sale of aluminum 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 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;

13

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- 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

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 March 31, 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 March 31, 2007.

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

None.

14

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**ITEM
3.**          **DEFAULTS
UPON SENIOR SECURITIES.**

None.

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

None.

**ITEM
5.**          **OTHER
INFORMATION.**

None.

**ITEM
6.**          **EXHIBITS.**

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 Cathay Merchant Group, Inc., a Delaware corporation
    
    S-1
    April 13, 19813.1.2
    Certificate of
      Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc.,
      a Delaware corporation
    
    10-Q
    January 31, 19873.1.3
    Certificate of
      Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc.,
      a Delaware corporation
    
    10-K
    July 28, 19903.1.4
    Certificate of
      Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc.,
      a Delaware corporation
    
    10-KSB
    July 31, 19973.1.5
    Certificate of
      Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc.,
      a Delaware corporation
    
    8-K
    June 5, 19983.1.6
    Certificate of
      Designations of Series A Convertible Preferred Stock of Cathay Merchant
      Group, Inc., a Delaware Corporation
    
    8-K
    June 5, 19983.1.7
    Certificate of
      Designations of Series B 5% Convertible Preferred Stock of Cathay Merchant
      Group, Inc., a Delaware Corporation
    
    8-K
    February 9, 1999


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Exhibit
      
      FiledNumber
      Exhibit Title
      Herewith
      Form
      Filing Date3.1.8
      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


16

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Exhibit
      
      FiledNumber
      Exhibit Title
      Herewith
      Form
      Filing Date10.7
      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 Grundstucksfonds Sachsen-Anhalt GmbH and MAW Mansfelder
        Aluminiumwerk GmbH
      
      10-KSB
      April 2, 200710.10
      Lease Agreement dated September
        26, 2002, between GSA Grundstucksfonds Sachsen-Anhalt GmbH and MFC Aluminiumfolie
        Merseburg GmbH
      
      10-KSB
      April 2, 200710.11
      Purchase Option Agreement dated
        September 26, 2002, between GSA Grundstucksfonds Sachsen-Anhalt GmbH and
        MFC Aluminiumfolie Merseburg GmbH
      
      10-KSB
      April 2, 200710.12
      Agreement dated October 26,
        2004, between GSA Grundstucksfonds 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
      X10.16*
      Amendment to Lease Agreement
        dated April 11, 2007
      X10.17*
      Amendment to Lease Agreement
        dated April 11, 2007
      X10.18*
      Amendment to Lease
        Agreement dated April 11, 2007
      X


17

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Exhibit
      
      FiledNumber
      Exhibit Title
      Herewith
      Form
      Filing Date(31)
      Section 302 Certifications31.1
      Chief Executive Officer
        and Chief Financial Officer
      X(32)
      Section 906 Certifications32.1
      Chief Executive Officer
        and Chief Financial Officer
      X


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SIGNATURES

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

|Dated: May 15, 2007 | CATHAY MERCHANT GROUP, INC.
|------------------- | ---------------------------
|                    |                            
|                    |                            
|                    | By:                        
|                    |                            
|                    |                            
|                    |                            
|                    |                            
|                    |                            
|                    |                            

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