10KSB/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 1

FORM 10-KSB

(Mark One)

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to 

Commission file number 000-16283

CATHAY MERCHANT GROUP, INC.

(Name of small business issuer in its charter)

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

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

Issuer's telephone number  (852) 2537-3613

Securities registered under Section 12(b) of the Exchange Act:

Common Shares, par value $0.10	American Stock Exchange
(Title of class)	(Name of each exchange on which registered)

Securities registered under Section 12(g) of the Exchange Act: None

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ]

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the 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.

Yes  x   No [ ]

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Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.

[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  [ ]   No x

State issuer's revenues for the fiscal year. $100,162,000

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.)

11,672,535 common shares @ $0.50⁽¹⁾ = $5,836,268

⁽¹⁾ Closing price on March 9, 2007.

State the number of shares outstanding of each of the Issuer's classes of common equity, as of the latest practicable date.

18,890,579 common shares issued and outstanding as of March 9, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

None

Transitional Small Business Disclosure Format (Check one): Yes [ ] No x

EXPLANATION OF THE AMENDED FILING: THIS FORM 10-KSB AND THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED HEREIN HAVE BEEN AMENDED. OUR COMPANY HAS AMENDED THE FILING TO INCLUDE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIVE MONTHS ENDED DECEMBER 31, 2005, THE TWELVE MONTHS ENDED JULY 31, 2005 AND UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIVE MONTHS ENDED DECEMBER 31, 2004. ADDITIONALLY, THE COMPANY HAS AMENDED THE FILING TO INCLUDE MANAGEMENT DISCUSSION AND ANALYSIS FOR THE FIVE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THE FIVE MONTHS ENDED DECEMBER 31, 2004 AND THE YEAR ENDED JULY 31, 2005.

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PART I

Item 1. Description of Business.

This annual report contains forward-looking statements as that term is defined in Section 27A of the United States Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors", that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Our financial statements are stated in United States dollars, unless otherwise specified, and are prepared in accordance with United States generally accepted accounting principles.

In this annual report, unless otherwise specified, all dollar amounts are expressed in United States dollars.

Corporate Overview

We were incorporated on January 28, 1977, as American Electromedics Corp. On December 10, 1980, we merged with Matrix Research and Development Corporation, a corporation existing under the laws of the State of New Hampshire, with our company continuing on as the surviving company. On January 5, 2000, we changed our name to Equidyne Corporation and on October 6, 2004, to Cathay Merchant Group, Inc.

Our principal business office is located at Unit 803, Dina House, Ruttonjee Centre, 11 Duddell Street, Central, Hong Kong SAR, China. Our registered office for service in the State of Delaware is located at 933 Westover Road Street, City of Wilmington, Delaware 19807.

Since our incorporation, we have been operating our business primarily through our subsidiaries. The names of our subsidiaries, their jurisdictions of organization and our percentage voting ownership of each are as follows:

Name of Subsidiary			Jurisdiction of Incorporation or Organization	Percentage Share Ownership as of December 31, 2006
Cathay Merchant Group Ltd.			Samoa	100%
MAW Mansfelder Aluminiumwerke GmbH			Germany	100%
AFM Aluminiumfolie Merseburg GmbH (1)			Germany	100%
	(1)	Wholly-owned by Cathay Merchant Group Ltd.

HISTORY OF OUR BUSINESS

Needle-Free Business

From our incorporation until December, 2003, we invested in various medical device technologies. From January, 1999, until September, 2003, we, through our wholly-owned subsidiary, Equidyne Systems, Inc., primarily focused our efforts on the development and sale of patented, needle-free drug delivery systems, principally the reusable INJEX( System. In 2002, our executive management evaluated our technologies, markets and production capabilities and concluded that a change in our strategic focus was necessary as our production capabilities were not

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cost effective, nor were sales and marketing programs generating satisfactory results. In September 2003, after our management made little progress in developing our needle-free business or pursuing diversification opportunities, our shareholders voted to replace our board of directors who, in turn, appointed a new executive management team. Pursuant to an asset purchase agreement dated December 8, 2003, between Equidyne Systems and HNS International, we sold all of our right, title and interest in and to our needle-free business to HNS International in consideration for the payment of $750,000.

Wind Farm Investments

Following the sale of our needle-free business in December 2003, we invested in the development of two wind farms located in the Hebei Province of the People's Republic of China. Following wind speed testing on the property, our management determined in December 2005 that the development of wind farms in China did not present the best opportunity for us to realize value for our shareholders. As a result, we elected not to pursue and develop our wind farm investments.

CURRENT BUSINESS

Overview

Our primary business involves the manufacturing and trading of aluminium products. Our wholly-owned subsidiary, Cathay Merchant Group Ltd., a company incorporated under the laws of Samoa ("Cathay Samoa"), 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.

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 will use our product expertise, our market know-how and our specialized technical equipment of our two mills as a platform for our aluminium trading business which will include the import of semi-finished and finished foil products.

We, through Cathay Samoa, 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 Samoa 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 Samoa 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 Samoa 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

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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 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 5,224,144, or 27.7%, of our common shares as of March 9, 2007, and all of the shares of MFC Merchant Bank S.A. MFC Merchant Bank extended funds to our company under a credit facility as described under the heading "MFC Credit Facility" on page6.

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.

MFC CREDIT FACILITY

In order to provide a possible source of funding for our activities, we entered into a five-year, $20.0 million credit facility with MFC Merchant Bank. MFC Merchant Bank is a wholly-owned subsidiary of Mass Financial. Under the terms of the credit facility, MFC Merchant Bank agreed to provide us with a revolving credit facility in the principal amount of up to $20.0 million at any time and from time to time until the maturity date of March 31, 2009. The maturity date may be extended for an additional six-month term at MFC Merchant Bank's option and sole discretion. Under the credit facility agreement, we may use all advances of the credit facility to fund: (i) operating and acquisition activities; and (ii) working capital and general corporate activities. The credit facility is secured by a pledge agreement and is evidenced by a promissory note.

At MFC Merchant Bank's option, the credit facility is convertible into shares of our common stock. The rate of exchange for the purposes of calculating the number of shares of our common stock issuable in exchange for the $20.0 million credit facility (or a portion thereof) is: (x) the amount of the credit facility to be converted; divided by (y), the ten-day average of the closing price per share of our common stock immediately prior to the conversion.

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On August 24, 2004, MFC Merchant Bank converted $1,575,000 of the credit facility into 3,150,000 shares of our common stock at the exercise price of $0.50 per share. Immediately thereafter, MFC Merchant Bank entered into a transfer agreement dated August 24, 2004, between MFC Merchant Bank and Mass Financial, whereby MFC Merchant Bank transferred its 3,150,000 shares to Mass Financial at the same price of $0.50 per share for a total price of $1,575,000.

At a special meeting held on September 16, 2004, our shareholders approved the right for MFC Merchant Bank to convert the remaining $18,425,000 of the credit facility at any time into such number of shares of our common stock in accordance with the formula mentioned above. If MFC Merchant Bank exercises its conversion rights under our credit facility, the event will result in a change of control of our company. For the consequences of this conversion, please see the section “Change of Control” located on page 49 of this annual report on Form 10-KSB.

COMPETITION

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.

RAW MATERIALS

The raw materials that we use in manufacturing include primary aluminium, recycled aluminium, sheet ingot and alloying elements. These raw materials are generally available from several sources and are not subject to supply constraints under normal market conditions. We also consume considerable amounts of energy in the operation of our facilities.

Aluminium

Both of our aluminium rolling mills obtain aluminium from a number of sources. We purchase hot rolled and cold rolled aluminium strip for rolling based on the price of aluminium as quoted on the London Metals Exchange plus an agreed upon per-ton conversion price that we negotiate with our suppliers on a yearly basis. Three of our significant suppliers of aluminium are Hydro Aluminium, Novelis and Huta Konin. MAW Mansfelder Aluminiumwerke produces foilstock which is used as raw material in the mill operated by AFM Aluminiumfolie Merseburg. For the year ended December 31, 2006, the aluminium rolling mills purchased all of their aluminium from suppliers on annual contracts.

Energy

We use several sources of energy in the manufacture and delivery of our aluminium rolled products. In the year ended December 31, 2006, natural gas and electricity represented 29% of the total cost of goods of our aluminium products and 88% of our energy consumption by cost. The majority of energy usage occurs during the rolling of aluminium strip. We purchase our natural gas on the open market, which subjects us to market pricing fluctuations. Recent natural gas pricing volatility in Germany has increased our energy costs.

CUSTOMERS

The majority of our products are sold to two subsidiaries of Mass Financial, which provide marketing services and re-sell the products to end-user customers. We provide products to a wide variety of customers in Europe, we have experienced consolidation trends among our customers. In the year ended December 31, 2006, AFM Aluminiumfolie Merseburg's seven largest end-user customers accounted for approximately 80% of its total sales

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and operating revenues. To address consolidation trends, we intend to continue to focus our efforts at developing and maintaining close working relationships with our customers and end-users. The major end-user customers of AFM Aluminiumfolie Merseburg include customers in the flexible packaging industry.

The major end-user customers of MAW Mansfelder Aluminiumwerke include manufacturers in the automotive supply industry and the construction industry. MAW Mansfelder Aluminiumwerke's customer base consists of approximately 250 small and medium sized customers.

We supply various end-use markets in approximately 10 countries through a direct sales force that operates from our offices in Merseburg and Hettstedt in Germany. Our sales department works in co-operation with IC Management Service GmbH and MFC Trade & Financial Services GmbH, both of which are indirect wholly-owned subsidiaries of Mass Financial. The direct sales channel typically involves very large and sophisticated fabricators and original equipment manufacturers. Long standing relationships are maintained with leading companies in industries that use aluminium rolled products. Supply contracts with our large customers are generally for a term of one year and historically there has been a high degree of renewal business with such customers. MAW Mansfelder Aluminiumwerke also sells products through aluminium distributors. Customers of distributors are widely dispersed, and sales through this channel are fragmented.

Distributors sell mostly commodity or less specialized products into many end-use markets, including the construction and industrial markets. We collaborate with our distributors to develop new end-use applications and improve the supply chain and order efficiencies.

ENVIRONMENTAL INFORMATION

Our two aluminium rolling mills in Germany are subject to numerous and increasingly stringent laws and regulations governing the protection of the environment, health and safety. We regularly monitor and conduct environment, health and safety assessments of our two facilities. Environment, health and safety is a key component of our management operating system. We believe we have well-developed processes and we expect to continue to focus on this component going forward.

EMPLOYEES

As of March 9, 2007, we had 126 employees. Our mill in Hettstedt, Germany owned by MAW Mansfelder Aluminiumwerke had 70 employees and our mill in Merseburg, Germany had 56 employees. Out of our 126 employees, 70 of our employees were represented by a labour union as of March 9, 2007, and their employment conditions are governed by a collective bargaining agreement. The current agreement will expire on December 31, 2007. We believe that we have good labour relations and we have not experienced a significant labour stoppage at either of our two operations during the last 16 years.

RISK FACTORS

Much of the information included in this annual report includes or is based upon estimates, projections or other "forward-looking statements". Such forward-looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions, or other future performance suggested herein. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of such statements.

Such estimates, projections or other "forward-looking statements" involve various risks and uncertainties as outlined below. We caution readers of this annual report that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other "forward-looking statements". In evaluating us, our business and any investment in our business, readers should carefully consider the following factors.

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BUSINESS RISKS

We face significant competition in the aluminium producing market from competitors with greater financial resources and established revenues which could reduce our results of operations.

The market for producing aluminium rolled products is highly competitive. We expect to face competitors and potential competitors with substantially greater product development capabilities, financial, marketing and human resources than us. In addition, our competitive position within the European aluminium rolled products industry may be affected by many factors including the recent trend toward consolidation among our competitors, exchange rate fluctuations that may make our products less competitive in relation to the products of companies based in other countries and economies of scale in purchasing, production and sales, which accrue to some of our competitors. Increased competition could cause a reduction in our product sales and profitability or increase our expenditures, any one of which could have a material adverse effect on our financial results.

The end-use markets for certain of our products are highly competitive and customers are willing to accept substitutes for our products which could reduce our results of operations.

The end-use markets for certain aluminium rolled products are highly competitive. Aluminium competes with other materials, such as steel, plastics, composite materials and glass, among others, for industrial and commercial applications. Aluminium also competes with plastics and composite materials as substitutes to aluminium foil. Customers have demonstrated a willingness to substitute other materials for aluminium. The willingness of our customers to accept substitutes for aluminium products could have a material adverse effect on our financial results.

A downturn in the economy could have a material adverse effect on our financial results.

The aluminium and metals industry in general is cyclical in nature. It tends to reflect and be amplified by general economic conditions, both domestically and abroad. Historically, in periods of recession or periods of minimal economic growth, the operations of aluminium companies have been adversely affected. Certain end-use markets for aluminium rolled products, such as the industrial and commercial sectors, experience demand cycles that are highly correlated to the general economic environment, which is sensitive to a number of factors outside our control. A recession or a slowing of the economy in Europe, where we sell our finished products, or a decrease in retail and commercial applications, could have a material adverse effect on our financial results. This may lead to significant fluctuations in demand and pricing for our products. In addition, during recessions or periods of low growth, the construction industries, which require industrial and commercial applications of aluminium products, typically experience major cutbacks in production, resulting in decreased demand for aluminium which may also lead to significant fluctuations in demand and pricing for our products and services. Because we generally have high fixed costs, our profitability is significantly affected by decreased processing volume. Reduced demand and pricing pressures will adversely affect our financial condition and results of operations. We are not able to predict the timing, extent and duration of the economic cycles in the markets in which we operate.

We are subject to a broad range of environmental, health and safety laws and regulations in Germany, and we may be exposed to substantial environmental, health and safety costs and liabilities.

Our operations are subject to numerous national, regional and local environmental requirements, which govern, among other things, the discharge of hazardous materials into the air and water, the handling, storage, and disposal of hazardous materials and the remediation of contaminated sites. These laws and regulations impose increasingly stringent environmental, health and safety protection standards and permitting requirements regarding, among other things, air emissions, wastewater storage, treatment and discharges, the use and handling of hazardous or toxic materials, waste disposal practices, and the remediation of environmental contamination and working conditions for our employees. The costs of complying with these laws and regulations, including participation in assessments and remediation of sites and installation of pollution control facilities, have been, and in the future could be, significant. In addition, these laws and regulations may also result in substantial environmental liabilities, including liabilities associated with divested assets and past activities. In certain instances, these costs and liabilities, as well as related action to be taken by us, could be accelerated or increased if we were to close or divest of or change the principal use of certain facilities with respect to which we may have environmental liabilities or remediation obligations. Such future developments could result in increased environmental costs and liabilities and could require significant capital expenditures, any of which could have a material adverse effect on our financial condition or results.

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We use a variety of hazardous materials and chemicals in our rolling processes and in connection with maintenance work on our facilities. In the event that any of these substances or related residues proves to be toxic, we may be liable for certain costs, including, among others, costs for health-related claims or removal or treatment of such substances.

Our operations also require environmental permits and approvals from governmental authorities, and any of these permits and approvals are subject to denial, revocation, or modification under various circumstances. Failure to obtain or comply with these permits and approvals, or with other environmental requirements, may subject us to civil or criminal enforcement proceedings that can lead to fines and penalties against us, orders requiring us to take certain actions, and temporary or permanent shutdown of our affected operations. We have implemented practices and procedures at our operating facilities that are intended to promote compliance with environmental laws and regulations but we cannot assure you that we are at all times in compliance with all environmental requirements.

Estimating future environmental compliance and remediation costs and other environmental liabilities is imprecise due to the continuing evolution of environmental requirements and uncertainties about their application to our operations, the availability and applicability of technology and the allocation of costs among responsible parties. New environmental requirements, enforcement policies or legal proceedings, an environmental incident at one of our properties or operations, or the discovery of an additional environmental condition or new information about existing conditions, could all have a material adverse effect on our financial condition and results of operations.

We may be exposed to significant legal proceedings or investigations which would require significant amounts of capital to defend.

From time to time, we may be involved in, or be subject to, disputes, proceedings and investigations with respect to a variety of matters, including environmental, health and safety, product liability, employee, tax, contractual and other matters as well as other disputes and proceedings that arise in the ordinary course of business. Any claims against us or any investigations involving us, whether meritorious or not, could be costly to defend or comply with and could divert management's attention as well as operational resources. Any such dispute, litigation or investigation, whether currently pending or threatened or in the future, may have a material adverse effect on our financial results.

We could be adversely affected by disruptions of our operations which would reduce our operating revenue and profitability.

Breakdown of equipment or other events, including catastrophic events such as natural disasters, leading to production interruptions in our plants could have a material adverse effect on our financial results. Further, because many of our customers are, to varying degrees, dependent on planned deliveries from our plants, customers that have to reschedule their own production due to our missed deliveries could pursue financial claims against us. We may incur costs to correct any of these problems, in addition to facing claims from customers. Further, our reputation among actual and potential customers may be harmed, potentially resulting in a loss of business. While we maintain insurance policies covering, among other things, physical damage, business interruptions and product liability, these policies may not cover all of our losses and we could incur uninsured losses and liabilities arising from such events, including damage to our reputation, loss of customers and suffer substantial losses in operational capacity, any of which could have a material adverse effect on our financial results.

Our operations have been and will continue to be exposed to various business and other risks, changes in conditions and events beyond our control in Germany as well as the markets where we sell our products.

We are, and will continue to be, subject to financial, political, economic and business risks in connection with our German operations and the countries where we sell our products. We have made investments and carry on production activities in Germany, and we market our products in Germany and certain other countries in Europe and the Middle East. While we anticipate that European countries will remain our principal customers and suppliers of our products, our suppliers also include emerging markets, namely China. Although China represents an attractive potential supplier of semi-finished aluminium products, it also has a higher degree of risk than suppliers from more developed countries. In addition to the business risks inherent in developing a supplier relationship with a newly emerging market, economic conditions may be more volatile, legal and regulatory systems less developed and predictable, and the possibility of various types of adverse governmental action more pronounced. In addition, inflation, fluctuations in currency and interest rates, competitive factors, civil unrest and labour problems could

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affect our revenues, expenses and results of operations. Our operations could also be adversely affected by acts of war, terrorism or the threat of any of these events as well as government actions such as controls on imports, exports and prices, tariffs, new forms of taxation or changes in fiscal regimes and increased government regulation in the countries in which we operate or service customers. Unexpected or uncontrollable events or circumstances in any of these markets could have a material adverse effect on our financial results.

One of our aluminium rolling mills is staffed by a unionized workforce, and union disputes and other employee relations issues could materially adversely affect our financial results.

Out of our 126 employees, 70 employees at the rolling mill owned by MAW Mansfelder Aluminiumwerke are represented by labour unions under collective bargaining agreements with varying durations and expiration dates. We may not be able to satisfactorily renegotiate our collective bargaining agreements when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at our facilities in the future, and any such work stoppage could have a material adverse effect on our financial results.

We do not have long-term contractual arrangements with a substantial number of our customers and we may be adversely affected if our customers switch suppliers.

A substantial number of our customers do not have a long-term contractual arrangement with us. These customers purchase products from us on a purchase order basis and can cease doing business with us at any time and for any reason. We cannot assure you that these customers will continue to purchase our products. The loss of these customers or a significant reduction in their purchase orders could reduce our market share and have a material adverse effect on our sales volume and our business.

Adverse changes in currency exchange rates could negatively affect our financial results.

Our businesses and operations are exposed to the effects of changes in the exchange rates of the Euro, the United States dollar and other currencies. We prepare our combined financial statements in United States dollars, but the majority of our earnings and expenditures are denominated in other currencies, primarily the Euro. Changes in exchange rates will result in increases or decreases in our reported costs and earnings, and may also affect the book value of our assets located outside the United States and the amount of our equity.

Our operations consume energy and our profitability may decline if energy costs were to rise, or if our energy supplies were interrupted.

We consume substantial amounts of energy in our rolling operations. The factors that affect our energy costs and supply reliability tend to be specific to each of our two facilities. A number of factors could materially adversely affect our energy position including:

• increases in costs of natural gas;

• significant increases in costs of supplied electricity or fuel oil related to transportation;

• interruptions in energy supply due to equipment failure or other causes; and

• the inability to extend energy supply contracts upon expiration on economical terms.

If energy costs were to rise, or if energy supplies or supply arrangements were disrupted, our profitability could decline.

We may encounter increases in the cost of raw materials and energy, which could have a material adverse effect on our financial condition and results of operations.

We require substantial amounts of raw materials in our business, consisting principally of aluminium. Any substantial increases in the cost of aluminium could adversely affect our financial condition and results of operations. The availability and price of aluminium depends on a number of factors outside our control, including general economic conditions, foreign demand for metallics and internal recycling activities by primary aluminium

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producers. Increased domestic and worldwide demand for aluminium have had and will continue to have the effect of increasing the prices that we pay for these raw materials thereby increasing our cost of sales. Generally, there is a potential time lag between changes in prices under our purchase contracts and the point when we can implement a corresponding change under our sales contracts with our customers. As a result, we can be exposed to fluctuations in the price of raw materials, since, during the time lag period, we may have to temporarily bear the additional cost of the change under our purchase contracts, which could have a material adverse effect on our profitability. If raw material prices were to increase significantly without a commensurate increase in the market value of our products, our financial condition and results of operations would be adversely affected.

Certain of our customers are significant to our revenues, and we could be adversely affected by changes in the business or financial condition of these significant customers or by the loss of their business.

The seven largest end-user customers of our aluminium products accounted for approximately 80% of the total sales and operating revenues of AFM Aluminiumfolie Merseburg in the year ended December 31, 2006. A significant downturn in the business or financial condition of its significant customers could materially adversely affect our results of operations. In addition, if its existing relationships with significant customers materially deteriorate or are terminated in the future, and we are not successful in replacing business lost from such customers, our results of operations could be adversely affected. Some of the longer term contracts under which we supply our customers are subject to renewal, renegotiation or re-pricing at periodic intervals or upon changes in competitive supply conditions. Our failure to successfully renew, renegotiate or re-price such agreements could result in a reduction or loss in customer purchase volume or revenue, and if we are not successful in replacing business lost from such customers, our results of operations could be adversely affected. The markets in which we operate are competitive and customers may seek to consolidate supplier relationships or change suppliers to achieve cost savings and other benefits.

Although we intend to regularly review our credit exposure to specific clients and counterparties and to specific countries and regions, we are subject to significant credit risk which could have a material adverse effect on our business, results of operations, financial condition and cash flow.

We attempt only to deal with creditworthy counterparties and obtain collateral where appropriate. However, although we intend to regularly review our credit exposure to specific clients and counterparties and to specific countries and regions that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to detect, such as fraud. We may also fail to receive full information with respect to the trading risks of a counterparty. In addition, in cases where we have extended credit against collateral, we may find that we are undersecured, for example, as a result of sudden declines in market values that reduce the value of collateral. If we are unsecured and a party defaults on its credit obligations to us, our business, results of operations, financial condition and cash flow could be adversely affected.

We currently incur monthly general and administrative expenses.

As a general guideline, we anticipate spending approximately $60,000 per month on our day-to-day general and administrative operations excluding the operation of our aluminium rolling mills in Germany during the fiscal year ending December 31, 2007.

We may face a lack of suitable acquisition or merger or other proprietary investment candidates which may limit our growth.

In order to grow our business, we may seek to acquire or merge with or invest in new companies or opportunities. Our failure to make acquisitions or investments may limit our growth. In pursuing acquisition and investment opportunities, we may be in competition with other companies having similar growth and investment strategies. Competition for these acquisitions or investment targets could result in increased acquisition or investment prices and a diminished pool of businesses, services or products available for acquisition or investment.

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EMPLOYMENT RISKS

Our ability to hire and retain key personnel will be an important factor in the success of our business and a failure to hire and retain key personnel may result in our inability to manage and implement our business plans.

We are highly dependent upon our management personnel because of their experience in the aluminium business. The loss of the services of one or more of these individuals could impair our ability to manage us, or to obtain contracts for our services. We have not purchased key man insurance on any of these individuals, which insurance would provide us with insurance proceeds in the event of their death. Without key man insurance, we may not have the financial resources to develop or maintain our business until we could replace the individual or to replace any business lost by the death of that person. The competition for qualified personnel in the markets in which we operate is intense. In addition, in order to manage growth effectively, we must implement management systems and recruit and train new employees. We may not be able to attract and retain the necessary qualified personnel. If we are unable to retain or to hire qualified personnel as required, we may not be able to adequately manage and implement our business.

ENFORCEMENT RISKS

All of our assets and all of our directors and officers are outside the United States, with the result that it may be difficult for investors to enforce within the United States any judgments obtained against us or any of our directors or officers.

We are organized under the laws of the State of Delaware, United States. Our principal business office is located in Hong Kong SAR, China. Outside the United States, it may be difficult for investors to enforce judgments against us obtained in the United States in any such actions, including actions predicated upon civil liability provisions of federal securities laws. In addition, all of our directors and officers reside outside the United States, and nearly all of the assets of these persons and our assets are located outside of the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce against us or such persons judgments predicated upon the liability provisions of the United States securities laws. There is substantial doubt as to the enforceability against us or any of our directors and officers located outside the United States in original actions or in actions of enforcement of judgments of United States courts or liabilities predicated on the civil liability provisions of United States federal securities laws. In addition, as the majority of our assets are located outside of the United States, it may be difficult to enforce United States bankruptcy proceedings against us. Under bankruptcy laws in the United States, courts typically have jurisdiction over a debtor's property, wherever it is located, including property situated in other countries. Courts outside of the United States may not recognize the United States bankruptcy court's jurisdiction. Accordingly, you may have trouble administering a United States bankruptcy case involving our company doing business and with most of our property located outside the United States. Any orders or judgments of a bankruptcy court obtained by you in the United States may not be enforceable.

SECURITIES RISKS

Trading of our stock may be restricted by the Securities and Exchange Commission's penny stock regulations which may limit a stockholder's ability to buy and sell our stock.

The Securities and Exchange Commission has adopted regulations which generally define "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors". The term "accredited investor" refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or

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with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of, our common stock.

The National Association of Securities Dealers, or NASD, has adopted sales practice requirements which may also limit a stockholder's ability to buy and sell our stock.

In addition to the "penny stock" rules described above, the NASD has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit investors' ability to buy and sell our stock and have an adverse effect on the market for our shares.

Our common stock is illiquid and subject to price volatility unrelated to our operations.

Our common shares are currently traded on the American Stock Exchange under the symbol "CMQ". Further announcements concerning our or our competitors' operations, changes in government regulations, conditions in our market segment or changes in earnings estimates by analysts may cause the price of our common shares to fluctuate substantially. In addition, stock prices for companies and companies that carry out a portion of their business in Europe, fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, as well as general economic, political and market conditions in Europe and worldwide, may adversely affect the trading price of our common shares.

MFC Merchant Bank may unilaterally exercise its conversion rights of the remaining balance of the credit facility, thereby substantially diluting our shareholders' holdings and resulting in a change of control of us.

MFC Merchant Bank, a bank organized under the laws of Switzerland, has the right to convert the balance amount under a credit facility agreement dated April 26, 2004 that we entered into with MFC Merchant Bank. As part of MFC Merchant Bank's compensation for services to be performed by it under the credit facility agreement, MFC Merchant Bank may at any time and from time to time during the term of the agreement, convert the balance of the credit facility or any portion thereof into shares of our common stock. The rate of exchange for the purposes of calculating the number of shares of our common stock to be exchanged for the balance, or portion thereof, of the credit facility is: (amount of credit facility to be converted) divided by (the applicable ten day average of the closing price of the shares of our common stock).

On September 16, 2004, at a special meeting of our shareholders, our shareholders approved the right of MFC Merchant Bank to convert the remaining $18,425,000 amount of the credit facility into shares of our common stock. If MFC Merchant Bank exercises its conversion rights under our credit facility, the event will result in a change of control of us. Based on our ten-day average of the closing price of our common stocks of and including February 28, 2007 of $0.474, the $18,425,000 remainder of the credit facility may be converted into 38,871,308 shares of our common stock, or 67% of our outstanding stock as of such date. As a result, Mass Financial and MFC Merchant Bank would directly and indirectly hold 44,095,452 shares of our common stock, or 76% of our outstanding common stock as of such date (assuming issuance of the 38,871,308 shares as of such date). The conversion of the remaining balance under the credit facility would significantly dilute our shareholders, result in a change of control of our company and would grant Mass Financial and MFC Merchant Bank the power to unilaterally appoint the entire board of directors of our company without the support of any of our other shareholders.

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Item 2. Description of Property.

Principal Executive Office

Our principal business office is located in Central, Hong Kong, SAR, China. We believe that our existing facilities are adequate for our needs through the end of the year ending December 31, 2007. Should we require additional space at that time, or prior thereto, we believe that such space can be secured on commercially reasonable terms.

ALUMINIUM ROLLING MILLS

In addition to our executive office, we hold property interests in certain land, buildings and capital property where our two aluminium rolling mills are located in Germany 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").

Purchase Option Agreement - AFM Aluminiumfolie Merseburg

The aluminium rolling mill held by AFM Aluminiumfolie Merseburg is located in the city of Merseburg, Germany. AFM Aluminiumfolie Merseburg holds an interest in the buildings and capital property based upon a long-term lease pursuant to an agreement dated September 26, 2002 with GSA. AFM Aluminiumfolie Merseburg pays approximately $0.3 million (€244,000) per year under its lease which expires on September 30, 2010. Thereafter the lease will be automatically renewed for one-year terms until either party provides six months notice to cancel the lease. The lease may be terminated by AFM Aluminiumfolie Merseburg at any time after September 30, 2007 with three months notice.

We have an option, under the terms of a purchase option agreement dated September 26, 2002 between AFM Aluminiumfolie Merseburg and GSA, to purchase the land, buildings and equipment at a price of $4.5 million (€3,400,000). The option expires on September 30, 2007. A copy of the lease agreement and the purchase option agreement is attached as exhibits 10.8 and 10.9 to this annual report.

Purchase Option Agreement - MAW Mansfelder Aluminiumwerke

The aluminium rolling mill held by MAW Mansfelder Aluminiumwerke is located in the city of Hettstedt, Germany. MAW Mansfelder Aluminiumwerke holds an interest in the buildings and capital property based upon a long-term lease pursuant to an agreement dated September 18, 2002 with GSA. MAW Mansfelder Aluminiumwerke pays approximately $0.3 million (€199,000) per year under its lease which expires on August 31, 2012. Thereafter, the lease will be automatically renewed for one-year terms until either party provides six months notice to cancel the lease. The lease may be terminated by MAW Mansfelder Aluminiumwerke at any time after August 31, 2009 with three months notice.

We also have an option, under the purchase option agreement dated October 26, 2004 between MAW Mansfelder Aluminiumwerk and GSA, to purchase the land, buildings and equipment at a price of $4.0 million (€3,035,000). The option expires on July 31, 2009. A copy of the lease agreement and the purchase option agreement is attached as exhibits 10.7 and 10.10 to this annual report.

We are currently negotiating amendments to purchase both option agreements with the representatives of GSA. Final option price negotiations are being refined and, if adjusted, are expected to be adjusted in our company’s favour. We intend to exercise the options in the future.

Item 3. Legal Proceedings.

As of March 9, 2007, we were not party to any pending legal proceedings and none of our directors, officers, affiliates or significant shareholders were party to any material legal proceedings which were adverse to us. In the ordinary course of conducting our business, we may become subject to litigation and claims regarding various matters.

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Item 4. Submissions of Matters to a Vote of Security Holders.

None.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

Our common stock has been listed on the American Stock Exchange since December 15, 2000. Our common stock traded under the symbol "IJX" from December 15, 2000, to October 6, 2004, and has traded under the symbol "CMQ" since October 6, 2004. Our common stock was previously traded in the over-the-counter market on the National Association of Securities Dealers Inc.'s Over-the-Counter Electronic Bulletin Board in the United States under the symbol "INJX". The following table sets forth, for the periods indicated, the high and low sale prices as reported by Yahoo Finance:

	High	Low
TRANSITION PERIOD ENDED DECEMBER 31, 2005
August 2005	$0.70	$0.57
September 2005	$0.61	$0.47
October 2005	$0.52	$0.40
November 2005	$0.43	$0.40
December 2005	$0.43	$0.36
FISCAL YEAR ENDED DECEMBER 31, 2006
First Quarter	$0.61	$0.37
Second Quarter	$0.52	$0.37
Third Quarter	$0.41	$0.23
Fourth Quarter	$0.44	$0.25

On March 9, 2007, the shareholders' list for our common stock showed 167 registered stockholders and 18,890,579 shares issued and outstanding.

Dividend Policy

During the year ended December 31, 2006, and the five month transition period ended December 31, 2005, we did not pay any cash dividends to any holders of our equity securities. We have not paid any cash dividends on our common stock and have no present intention of paying any dividends on the shares of our common stock. Our current policy is to retain earnings, if any, for use in our operations and in the development of our business. Our future dividend policy will be determined from time to time by our board of directors.

Recent Sales of Unregistered Securities

We did not issue any equity securities that were not registered under the Securities Act of 1933 during the year ended December 31, 2006.

Equity Compensation Plan Information

We established a 1996 Stock Option Plan, as amended, to provide for the issuance of stock options to acquire an aggregate of up to 1,500,000 shares of our common stock which plan was approved by our stockholders. During 2006, the 1996 Stock Option Plan automatically terminated following the expiration of its ten year term. Although the 1996 Stock Option Plan has terminated, the options issued under the plan continue to be exercisable in accordance with the terms upon which they were issued. As of March 9, 2007, there were 96,000 options outstanding that were issued under our former 1996 Stock Option Plan.

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We established a Long Term Incentive and Share Award Plan in 2002, which permits the issuance of stock options to acquire an aggregate of up to 1,000,000 shares of our common stock. Stock options granted under the 2002 Share Award Plan are either incentive stock options or non-qualified stock options which are granted to our employees, officers, directors or consultants.

The following table provides a summary of the number of stock options granted under the Long Term Incentive and Share Award Plan of 2002 and the former 1996 Stock Option Plan, the weighted average exercise price and the number of stock options remaining available for issuance under the Long Term Incentive and Share Award Plan of 2002, all as at December 31, 2006.

	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-Average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plan
Equity compensation plans approved by security holders	247,500(1)	$0.40	39,000
Equity compensation plans not approved by security holders	525,000	$0.87	Nil
Total	772,500	$0.72	39,000

 

⁽¹⁾ Of this amount, an aggregate of 96,000 stock options have been granted under our former 1996 Stock Option Plan and an aggregate of 151,500 under our Long Term Incentive and Share Award Plan of 2002.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We did not purchase any of our shares of common stock or other securities during the year ended December 31, 2006.

Item 6. Management's Discussions and Analysis or Plan of Operation.

The following is a discussion and analysis of our results of operations and financial position for the audited consolidated year ended December 31, 2006, five months ended December 31, 2005, year ended July 31, 2005 and the factors that could affect our future financial condition and results of operations. Historical results may not be indicative of future performance.

This discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this annual report on Form 10-KSB. Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles. All references to dollar amounts in this section are in United States dollars unless expressly stated otherwise. Please see the section entitled "Risk Factors" for a complete list of our risk factors.

Company Overview

Our business involves the manufacturing and trading of aluminium products. On June 30, 2005, we acquired all of the shares of AWP Aluminium Walzprodukte and AFM Aluminiumfolie Merseburg for consideration of $18.5 million (€15,300,000).

We acquired all of the outstanding shares of AWP Aluminium Walzprodukte from Blake International, then a wholly-owned subsidiary of KHD Humboldt Wedag, pursuant to a share purchase agreement dated June 30, 2005, for consideration of $10.0 million (€8,280,000). KHD Humboldt Wedag International was a former insider and significant shareholder of our company until January 31, 2005. AWP Aluminium Walzprodukte was based in Hettstedt, Germany, and operated an aluminium rolling mill through its wholly-owned subsidiary MAW Mansfelder Aluminiumwerke until the parent company and subsidiary merged in 2006 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, principally for the European market.

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We acquired all of the outstanding shares of AFM Aluminiumfolie Merseburg, pursuant to a share purchase agreement dated June 30, 2005, for consideration of $8.5 million (€7,020,000). AFM Aluminium Merseburg is based in Merseburg, Germany, and also operates an aluminium rolling mill. It produces aluminium foil for flexible (food and beverage) packaging, pharmaceutical packaging and technical applications. AFM Aluminiumfolie Merseburg's principal market is also Europe.

Results of Operations – Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Net product sales for the year ended December 31, 2006, were $100.2 million compared with $38.3 million for the comparative period ended December 31, 2005. The increase in sales was due to product sales from our two new subsidiaries which operate aluminum mills in Germany. The results of our two aluminium mills have been included in our 2005 consolidated financial statements since June 30, 2005.

Cost of sales for the year ended December 31, 2006 was $95.2 million compared to $36.6 million for the comparative period ended December 31, 2005. The increase in cost of sales was in line with the increase in sales.

General and administrative expenses were $5.4 million for the year ended December 31, 2006, compared to $4.6 million during the comparative period ended December 31, 2005. In 2005, the results of our two aluminum mills have been included in our 2005 consolidated financial statements since June 30, 2005.

There was an impairment of goodwill in the amount of $2.0 million and $Nil for the years ended December 31, 2006 and 2005, respectively.

We incurred a net loss of $2.5 million for the year ended December 31, 2006, compared to $1.0 million during the comparative period ended December 31, 2005.

Results of Operations – Five Month Transition Period Ended December 31, 2005 Compared to Five Month Comparative Period Ended December 31, 2004

Net product sales for the five month transition period ended December 31, 2005, were $32.6 million compared with $Nil for the comparative period ended December 31, 2004. The increase in sales was due to product sales from our two new subsidiaries which operate aluminum mills in Germany. The results of our two aluminum mills have been included in our 2005 consolidated financial statements.

Cost of sales for the five month transition period ended December 31, 2005 was $31.1 million compared to $Nil for the comparative period ended December 31, 2004. The increase in cost of sales was in line with the increase in sales.

General and administrative expenses were $1.4 million for the five month transition period ended December 31, 2005, compared to $0.7 million during the comparative period ended December 31, 2004. The results of our two aluminum mills have been included in our 2005 consolidated financial statements.

We incurred a net loss of $0.8 million for the five month transition period ended December 31, 2005, compared to $0.6 million during the comparative period ended December 31, 2004.

Results of Operations – Fiscal Year Ended July 31, 2005

Net product sales for the year ended July 31, 2005, were $5.7 million. The results of our two new subsidiaries have been included since June 30, 2005.

Cost of sales was $5.5 million for the fiscal year ended July 31, 2005. The results of our two new subsidiaries have been included since June 30, 2005.

General and administrative expenses were $3.3 million during fiscal 2005.

We recognized an income tax benefit of $2.4 million during fiscal 2005.

We incurred a net loss of $0.7 million in fiscal 2005.

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Liquidity and Capital Resources – Year Ended December 31, 2006

We had cash and cash equivalents of $4.6 million as of December 31, 2006, compared to $3.8 million as of December 31, 2005. We have financed our operations from cash flow acquired in prior years from debt and equity financing. We had accumulated a deficit of $16.6 million as at December 31, 2006, compared to a deficit of $14.1 million as at December 31, 2005. We had a working capital deficiency of $1.3 million as at December 31, 2006 and $0.8 million as at December 31, 2005.

We entered into a five-year $20.0 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 December 31, 2006, we have an unused portion of a credit facility of $18,425,000. We are required to pay interest on any outstanding principal amount that we have drawn down under the credit facility on the first banking day of each calendar month, at an annual rate of Libor (being the one month London Inter-Bank Offered Rate fixed daily by the British Bankers Association) plus 3.5%, based on a 360 day year. The credit facility is secured by a first fixed and specific charge and security interest on all of our property, assets and undertakings imposed under our promissory note in the aggregate principal amount of $20.0 million, and a floating charge on all of our 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 $20.0 million, pursuant to which we have pledged to MFC Merchant Bank all or our existing and future pecuniary claims against third parties.

As a result of our revenues from our aluminium rolling mills combined with the funds available for use under the MFC Merchant Bank credit facility, we believe that we have sufficient working capital to meet operating expenses during the next twelve months. Currently, we are also seeking investments in or acquisitions of companies, technologies or products. We also intend to exercise our purchase option agreements. 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 in addition to the possibility of further draws under our credit facility with MFC Merchant Bank, including the possibility of effecting private placements of our securities.

There is no assurance that management will find suitable opportunities, exercise our purchase option agreements or effect the necessary financial arrangements for such investments or provide the working capital needed for the acquired activities.

Operating Activities

Operating activities provided cash of $1.9 million for the year ended December 31, 2006, and operating activities used cash of $2.5 million for the comparative period ended December 31, 2005. The increase in cash provided by operating activities during our year ended December 31, 2006 was primarily due to an increase in due to affiliates which was partially reduced by a decrease in amounts payable and accrued expenses.

Operating activities provided cash of $0.4 million for the five months ended December 31, 2005, and operating activities provided cash of $3.6 million for the comparative period ended December 31, 2004.

Operating activities provided cash of $0.7 million for the year ended July 31, 2005.

Investing Activities

Investing activities used cash of $0.7 million during the year ended December 31, 2006, compared to $8.5 million in the comparative period ended December 31, 2005. We used cash of $8.2 million to purchase two aluminium mills in 2005.

Investing activities used cash of $0.2 million for the five months ended December 31, 2005, and investing activities used cash of $72,000 for the comparative period ended December 31, 2004.

Investing activities used cash of $8.3 million for the year ended July 31, 2005.

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Financing Activities

Financing activities used cash of $0.6 million during the year ended December 31, 2006, compared to Nil for the comparative period ended December 31, 2005. The increase in cash used in financing activities was primarily due to repayment of a promissory note and interest.

Financing activities provided cash of Nil for the five months ended December 31, 2005, and financing activities provided cash of $1.6 million for the comparative period ended December 31, 2004.

Financing activities provided cash of $1.6 million for the year ended July 31, 2005.

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 the 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. Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements commencing on page 36 of this annual report on Form 10-KSB.

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 as well keep the product and consider a reduction of the purchase price.

• The purchaser might claim compensation for the non-performance of the sale.

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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;

• 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 judgements. In addition, the time periods for estimating future cash flows is often lengthy, which increases the sensitivity of the assumptions made. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. Our management considers the likelihood of possible outcomes in determining the best estimate of future cash flows.

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS No. 157: Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management is analyzing the requirements of this new standard.

FASB Staff Position ("FSP") No. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairment. This FSP shall be applied to reporting periods beginning after December 15, 2005. Our preliminary assessment does not indicate that this FSP will have a significant impact on the financial statements.

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

CW1227945.5

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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 is analyzing the requirements of this new standard.

The Emerging Issues Task Force ("EITF") reached consensus on EITF 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty that two or more inventory purchase and sales transactions with the same counterparty that are entered into in contemplation of one another should be combined for purposes of applying Opinion 29, Accounting for Nonmonetary Transactions. The EITF also reached consensus that a nonmonetary exchange whereby an entity transfers finished goods inventory in exchange for the receipt of raw materials or WIP inventory within the same line of business is not an exchange transaction to facilitate sales to customers for the entity transferring the finished goods and, therefore, should be recognized by that entity at fair value if (a) fair value is determinable within reasonable limits and (b) the transaction has commercial substance. All other nonmonetary exchanges of inventory within the same line of business should be recognized at the carrying amount of the inventory transferred. This EITF issue should be applied to new arrangements entered into, and modifications or renewals of existing arrangements, beginning in the first interim or annual reporting period beginning after March 15, 2006. Management has analyzed the requirements of this new standard and determined that there will be no significant impact on our financial position.

FSP AUG AIR-1, Accounting for Planned Major Maintenance Activities, prohibits the use of the accrued-in-advance method and requires the application of the same method of accounting for planned major maintenance activities in annual and interim financial reporting periods. This standard is effective for fiscal years beginning after December 15, 2006. Management has analyzed the requirements of this new standard and determined that there will be no significant impact on our financial position.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants to quantify misstatements using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for fiscal years ending after November 15, 2006. Our preliminary assessment does not indicate that this SAB will have a significant impact on our financial statements.

Item 7. Financial Statements.

Financial Statements filed as part of this Annual Report on Form 10-KSB:

Report of Independent Registered Public Accounting Firm dated March 28, 2007;

Report of Independent Registered Public Accounting Firm dated March 3, 2006;

Consolidated Balance Sheet as at December 31, 2006;

Consolidated Statements of Operations for the years ended December 31, 2006, five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004;

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2006, five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004;

Consolidated Statements of Changes in Stockholders' Equity;

Consolidated Statements of Cash Flows for the years ended December 31, 2006, five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004; and

Notes to Consolidated Financial Statements dated December 31, 2006.

Our financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.

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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM RSM Hemmelrath GmbH Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft Maximilianstraße 35 80539 München Tel.  (+49-89) 2 16 36-0 Fax  (+49-89) 2 16 36-1 33 www.rsmi.de

To The Board of Directors and Shareholders

Cathay Merchant Group, Inc.

We have audited the accompanying consolidated balance sheet of Cathay Merchant Group, Inc. and Subsidiaries as of December 31, 2006 and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cathay Merchant Group, Inc. and Subsidiaries as of December 31, 2006, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

/s/RSM Hemmelrath GmbH

Munich, Germany

March 28, 2007

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Shareholders

Cathay Merchant Group, Inc.

We have audited the accompanying consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows of Cathay Merchant Group, Inc. and Subsidiaries for the year ended July 31, 2005, and the five month period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the operations and cash flows of Cathay Merchant Group, Inc. and Subsidiaries for the year ended July 31, 2005, and the five month period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

/S/ PETERSON SULLIVAN PLLC

Seattle, Washington

March 3, 2006

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

December 31, 2006

(Dollars in Thousands, Except Per Share Amounts)

		ASSETS	2006
Current Assets
	Cash and cash equivalents		$          4,610
	Restricted cash		73
	Receivables		1,060
	Due from affiliates		632
	Inventories		15,212
	Prepaid expenses and other		90
		Total current assets	21,677
Non-current Assets
	Deferred credit facility costs		183
	Property, plant and equipment		1,566
	Purchase option agreements		16,204
	Goodwill		3,243
	Deferred tax benefits		811
	Total non-current assets		22,007
	Total assets		$        43,684

See Notes to Consolidated Financial Statements

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		LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
	Accounts payable and accrued expenses		$        13,694
	Due to affiliates		9,248
		Total current liabilities	22,942
Long-term Liabilities
Debt			11,434
Other liabilities			26
Total long-term liabilities			11,460
Total liabilities			34,402

Stockholders' Equity
	Preferred stock - $0.01 par value per share; authorized - 1,000,000 shares;
		issued and outstanding – none		-
	Common stock, $0.10 par value per share; authorized - 35,000,000 shares;
		issued and outstanding – 20,387,679		2,038
Additional paid-in capital				28,031
Accumulated deficit				(16,613)
Treasury stock, at cost (1,497,100 shares)				(5,313)
Cumulative translation adjustment				1,139
			Total stockholders' equity	9,282
			Total liabilities and stockholders' equity	$        43,684

See Notes to Consolidated Financial Statements

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Loss Per Share)

	Year ended December 31, 2006		Five months ended December 31, 2005		Year ended July 31, 2005		Five Months ended December 31, 2004 (Unaudited)
Product sales, net	$	100,162	$	32,560	$	5,723	$	-
Cost of goods sold	95,170		31,092		5,513		-
	4,992		1,468		210		-
General and administrative expenses	5,563		1,376		3,334		705
Operating loss	(371)		92		(3,124)		(705)
Other income (expense)
Interest and financing charges, net	(624)		(812)		(143)		117
Impairment of goodwill	(2,000)		-		-		-
Miscellaneous	438		(11)		95		-
	(2,186)		(823)		(48)		117
Loss before income tax	(2,557)		(731)		(3,172)		(588)
Income tax benefit (expense)	42		(87)		2,436		-
Net loss	$	(2,515)	$	(818)	$	(736)	$	(588)
Weighted average common shares outstanding, basic and diluted	18,877		18,797		18,596		18,319
Loss per common share, basic and diluted	$	(0.13)	$	(0.04)	$	(0.04)	$	(0.03)

See Notes to Consolidated Financial Statements

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in Thousands)

	Year ended December 31, 2006		Five months ended December 31, 2005		Year ended July 31, 2005		Five months ended December 31, 2004 (unaudited)
Net loss	$	(2,515)	$	(818)	$	(736)	$	(588)
Other comprehensive income (loss), foreign currency translation adjustment	1,433		(330)		36		-
Comprehensive loss	$	(1,082)	$	(1,148)	$	(700)	$	(588)

See Notes to Consolidated Financial Statements

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Dollars in Thousands)

		Common stock				Treasury Stock
		Shares	Par Value	Additional Paid-in Capital	Accumulated Deficit	Shares	Cost	Cumulative Translation Adjustment	Total Stockholders' Equity
Balance at July 31, 2004		17,131,929	$          1,713	$          26,745	$        (12,544)	1,497,100	$       (5,313)	$                -	$        10,601
Exercise of stock options		12,000	1	3	-	-	-	-	4
Conversion of a credit
	facility into shares	3,150,000	315	1,260	-	-	-	-	1,575
Net loss		-	-	-	(736)	-	-	-	(736)
Unrealized translation gain for the year		-	-	-	-	-	-	36	36
Balance at July 31, 2005		20,293,929	2,029	28,008	(13,280)	1,497,100	(5,313)	36	11,480
Net loss		-	-	-	(818)	-	-	-	(818)
Unrealized translation loss for the period		-	-	-	-	-	-	(330)	(330)
Balance at December 31, 2005		20,293,929	2,029	28,008	(14,098)	1,497,100	(5,313)	(294)	10,332
Exercise of stock options		93,750	9	23	-	-	-	-	32
Net loss		-	-	-	(2,515)	-	-	-	(2,515)
Unrealized translation gain for the year		-	-	-	-	-	-	1,433	1,433
Balance at December 31, 2006		20,387,679	$          2,038	$           28,031	$        (16,613)	1,497,100	$        (5,313)	$         1,139	$          9,282

See Notes to Consolidated Financial Statements

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Year ended December 31, 2006		Five Months ended December 31, 2005		Year ended July 31, 2005		Five Months ended December 31, 2004 (unaudited)
Operating activities
Net Loss	$	(2,515)	$	(818)	$	(736)	$	(588)
Adjustments to reconcile net loss to net cash
Flows from operating activities
Depreciation and amortization	317		121		106		36
Goodwill impairment	2,000		-		-		-
Write-off of fixed assets	-		107		-		-
Foreign exchange	946		-		22		-
Accrued interest on promissory note	479		-		32		-
Income tax benefit	-		-		(2,436)		-
Changes in operating assets and liabilities
Receivables	162		(238)		(1)		-
Due from affiliates	(236)		1,382		(788)		-
Refundable income taxes	-		-		3,611		3,611
Inventories	(4,341)		(1,157)		653		-
Prepaid expenses and other current assets	(44)		143		(2)		156
Accounts payable and accrued expenses	(1,412)		(161)		(446)		50
Due to affiliates	6,537		1,060		702		310
Net cash provided by (used in) operating activities	1,893		439		717		3,575
Investing activities
Purchase of property and equipment	(655)		(237)		(110)		(72)
Purchase of subsidiaries, net of cash acquired	-		-		(8,200)		-
Net cash used in investing activities	(655)		(237)		(8,310)		(72)
Financing activities
Cash received for exercise of stock options	-		-		4		4
Increase in credit facility	-		-		1,575		1,575
Issuance of shares	32		-
Repayment of promissory note	(251)		-
Repayment of interest on promissory note	(392)		-
Net cash used in financing activities	(611)		-		1,579		1,579

See Notes to Consolidated Financial Statements

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Effects of foreign exchange on cash or cash equivalent	140		(224)		-		-
Change in cash and cash equivalents	767		(22)		(6,014)		5,082
Cash and cash equivalents, beginning of year	3,843		3,865		9,879		9,879
Cash and cash equivalents, end of year	$	4,610	$	3,843	$	3,865	$	14,961
Supplemental cash flow information
Interest paid	$	400	$	-	$	-	$	-
Income taxes paid	$	-	$	-	$	-	$	-

See Notes to Consolidated Financial Statements

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

Note 1. Business Description and Summary of Significant Accounting Policies

The notes to these consolidated financial statements are presented in United States Dollars, unless otherwise indicated. With the exception of per share amounts, amounts are presented in thousands. Effective from December 31, 2005, the Company changed its accounting year end to December 31 from July 31. Accordingly, the audited comparative numbers for the year ended July 31, 2005, five months ended December 31, 2005 and the unaudited numbers for five months ended December 31, 2004 have been presented.

Business Description

Cathay Merchant Group, Inc. is an aluminium manufacturing and trading company.

On June 30, 2005, the Company, acting through its subsidiary, Cathay Merchant Group Limited ("CMG") (a Samoan Corporation), acquired all of the shares of MAW Mansfelder Aluminiumwerk GmbH (formerly AWP Aluminium Walzprodukte GmbH "MAW") and AFM Aluminiumfolie Merseburg GmbH ("AFM") for an aggregate purchase price of $18,510 (Euro 15,300). MAW and AFM are incorporated under the laws of Germany.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions have been eliminated.

Cash and Cash Equivalents

For the purpose of the consolidated statements of cash flows, cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less. Cash balances are in excess of insured limits.

Restricted Cash

Pursuant to the lease agreement, the Company has a restricted cash amount of $73 as of December 31, 2006.

Receivables

Receivables are stated at their principal balances net of any allowance for credit losses. Receivables are considered past due on an individual basis based on the terms of the trade or the contracts. The Company's annual sales for the year ended December 31, 2006 was $100,162 of which $78,508 were sold to MFC Commodities and its subsidiaries, which are subsidiaries of Mass Financial Corp. (together with its subsidiaries – "Mass") which currently holds 27.7% of the Company's common shares. As of December 31, 2006, the Company has a receivable of $632 from Mass.

The Company makes judgements as to its ability to collect outstanding receivables from the third parties and Mass and provides an allowance for a portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not specifically reviewed, the Company analyzes historical collection experience and current economic trends. If the historical data used to calculate the allowance provided for doubtful accounts does not reflect the Company's future ability to collect outstanding receivables or if the financial condition of customers were to deteriorate, resulting in impairment of their ability to make payments, an increase in the provision for doubtful accounts may be required.

Estimates and judgments could change in the near-term, and could result in a significant change to a previously recognized allowance. An allowance for credit losses may be increased by provisions which are charged to income and reduced by write-offs net of recoveries. As of December 31, 2006, all receivables and due from affiliates are less than 90 days, no long outstanding balances were noted. No allowance for credit losses was considered necessary as at December 31, 2006.

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

Note 1. Business Description and Summary of Significant Accounting Policies (continued)

Inventories

Inventories consist of raw materials, work-in-progress, 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 December 31, 2006:

Raw materials	$          5,764
Work in progress	5,945
Finished goods	3,503
	$        15,212

Property, Plant and Equipment

Property, plant and equipment are carried at cost, net of accumulated depreciation. Property, plant and equipment are reviewed periodically for impairment in value using the estimated future undiscounted cash flows. Any resulting write-downs to fair value are charged to the results of operations. No such losses have been recorded in these consolidated financial statements.

Property, plant, and equipment are depreciated according to the following lives and methods:

	Lives	Method
Buildings	15 to 20 years	Straight-line
Manufacturing plant equipment	3 to 20 years	Straight-line
Office equipment	3 to 10 years	Straight-line

Depreciation expense of property, plant and equipment is included in cost of sales and general and administrative expenses, as applicable. Repairs and maintenance are charged to expense as incurred.

Asset Retirement Obligations

The Company accounts for obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of long-lived assets under Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." Under these rules, the fair value of the liability is initially recorded and the carrying value of the related asset is increased by the corresponding amount. The liability is accreted to its present value and the capitalized cost is amortized over the useful life of the related asset. The Company does not currently have any assets subject to asset retirement obligation accounting.

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

Note 1. Business Description and Summary of Significant Accounting Policies (continued)

Purchase Option Agreements

The Company has two purchase option agreements representing option agreements with GSA Grundstuckfonds Sachsen-Anhalt GmbH, a company wholly-owned by the State of Saxony-Anhalt, Germany to purchase certain land, building and equipment, which are currently used in the aluminium business, at predetermined prices. The first one was signed by AFM dated September 26, 2002 and will expire on September 30, 2007. The other agreement was signed by MAW dated October 26, 2004 and will expire on July 31, 2009. The Company determines the carrying value of the purchase option agreements by comparing the difference between the predetermined prices to purchase certain land, building and equipment in the agreements with the market price of those properties. The amount will be reclassified to property, plant and equipment upon exercise of the rights. In order to take ownership of the land, building and equipment, the Company need to pay Euro 6,435 as an exercise price. The Company incurred $586 as rental and other expenses under the related lease agreements in 2006. If the agreement expires unexercised, the amount will be charged to the results of operations.

The carrying value of the purchase option agreements is not amortized but is subject to fair value impairment tests, on at least an annual basis. The Company compared the carrying value of the purchase option agreements with the difference between the market value and the predetermined price to purchase the properties. Any impairment is charged to the results of operations. No impairment was charged during the years ended December 31, 2006 and 2005. Currently, the Company intends to exercise the options.

Goodwill

Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized but is subject to fair value impairment tests, on at least an annual basis. Goodwill is allocated to reporting units and any potential goodwill impairment is identified by comparing the carrying value of the reporting unit with its fair value. If any potential impairment is identified, then the amount of the impairment is quantified by comparing the carrying value of goodwill to its fair value, based on the fair value of the assets and liabilities of the reporting unit. Any impairment of goodwill is charged to the results of operations in the period in which the impairment is determined. There was an impairment charge to goodwill of $2,000 during the year ended December 31, 2006. There was no impairment charge during five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004.

Deferred Credit Facility Costs

As noted in Note 7, during the fiscal year 2004, the Company paid MFC Merchant Bank S.A. ("MFC Merchant Bank") $400 as a credit facility arrangement fee which is being amortized over the life of a credit facility. Amortization expense amounted to $81, $34, $81 and $34 for the year ended December 31, 2006, for the five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004, respectively.

Revenue Recognition

Revenues from sales of aluminium products are recognized as agreed upon activities are performed with no substantial further involvement by the Company and collectibility is reasonably assured.

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

Note 1. Business Description and Summary of Significant Accounting Policies (continued)

Stock-Based Compensation

The Company accounts for options and other stock-based compensation under the fair value method (as described in SFAS No. 123, "Accounting for Stock-Based Compensation").

There were no stock options granted during the year ended December 31, 2006, for the five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004, respectively.

Income Taxes

The Company accounts for income taxes in accordance with the asset and liability method. Under this method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. The Company establishes a valuation allowance to the extent that it is more likely than not that deferred tax assets will not be recoverable against future taxable income.

Loss Per Share

Basic loss per share is based upon the weighted average number of common shares outstanding during the period. Diluted loss per share reflects the effect of dilutive potential common shares, if any, which consist principally of stock options and warrants. Dilutive securities were not included in the calculation of diluted weighted average shares for the year ended December 31, 2006, for the five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004 due to their anti-dilutive effect.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company's management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Foreign Currency Translation

The Company translates foreign assets and liabilities of its self-sustaining foreign subsidiaries at the rate of exchange at the balance sheet date. Revenues and expenses have been translated at the average rate of exchange throughout the year. Unrealized gains or losses from these translations are included in the equity section of the consolidated balance sheets. The translation adjustments do not recognize the effect of income tax because of the Company expects to reinvest the amounts indefinitely. Transaction net gain (losses) that arise from exchange rate fluctuations on transactions denominated in a currency other than the local functional currency amounting to $(913), $166, $63 and $1 in the years ended December 31, 2006, in the five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004, respectively. The amounts have been included in general and administrative expenses in the consolidated statements of operations.

Collective Bargaining Agreements

As of December 31, 2006, approximately 56% of the Company's employees are represented by a labor organization and their employment conditions are governed by a collective bargaining agreement. The current agreement will expire on December 31, 2007.

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

Note 1. Business Description and Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements

Statement of Financial Accounting Standards ("SFAS") No. 154, Accounting Changes and Error Corrections, replaces Accounting Principles Board ("APB") Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Management is analyzing the requirements of this new standard and believes that its adoption will not have any significant impact on the Company's financial statements.

SFAS No. 157: Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management is analyzing the requirements of this new standard.

FASB Staff Position ("FSP") No. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairment. This FSP shall be applied to reporting periods beginning after December 15, 2005. The Company's preliminary assessment does not indicate that this FSP will have a significant impact on the financial statements.

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 is analyzing the requirements of this new standard.

The Emerging Issues Task Force ("EITF") reached consensus on EITF 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty that two or more inventory purchase and sales transactions with the same counterparty that are entered into in contemplation of one another should be combined for purposes of applying Opinion 29, Accounting for Nonmonetary Transactions. The EITF also reached consensus that a nonmonetary exchange whereby an entity transfers finished goods inventory in exchange for the receipt of raw materials or WIP inventory within the same line of business is not an exchange transaction to facilitate sales to customers for the entity transferring the finished goods and, therefore, should be recognized by that entity at fair value if (a) fair value is determinable within reasonable limits and (b) the transaction has commercial substance. All other nonmonetary exchanges of inventory within the same line of business should be recognized at the carrying amount of the inventory transferred. This EITF issue should be applied to new arrangements entered into, and modifications or renewals of existing arrangements, beginning in the first interim or annual reporting period beginning after March 15, 2006. Management has analyzed the requirements of this new standard and determined that there will be no significant impact on the Company's financial position.

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

Note 1. Business Description and Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements (continued)

FSP AUG AIR-1, Accounting for Planned Major Maintenance Activities, prohibits the use of the accrued-in-advance method and requires the application of the same method of accounting for planned major maintenance activities in annual and interim financial reporting periods. This standard is effective for fiscal years beginning after December 15, 2006. Management has analyzed the requirements of this new standard and determined that there will be no significant impact on the Company's financial position.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants to quantify misstatements using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company's preliminary assessment does not indicate that this SAB will have a significant impact on the financial statements.

Note 2. Property, Plant and Equipment

	Cost		Accumulated Depreciation		Net Book Value
Manufacturing plant and equipment	$	2,322	$	883	$	1,439
Office equipment		229		102		127
	$	2,551	$	985	$	1,566
Of which, assets under capital leases	$	143	$	74	$	69

Depreciation expense of property, plant and equipment amounting to $236, $14, $25 and $2 in year ended December 31, 2006, during five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004, respectively.

Note 3. Income Taxes

Significant components of the Company's deferred tax assets are as follows:

Deferred tax assets:
Net operating loss carryforward
United States	$            2,375
Germany	812
Deferred compensation	175
Other	(29)
Total deferred tax assets	3,333
Valuation allowance for deferred tax assets	(2,579)
Net deferred tax assets	$               754

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

Note 3. Income Taxes (continued)

Composed of:
Deferred tax assets	$	811
Deferred tax liabilities		(57)
		754

At December 31, 2006, the Company had the following net operating loss carryforwards:

	Amount	Expires
United States	$7,369	2008 – 2026
Germany	2,035	Never
	$9,404

A reconciliation of income taxes computed at the federal statutory rates to the income tax benefit in the consolidated financial statements is as follows:

	Year ended December 31, 2006			Five months ended December 31, 2005			Year ended July 31, 2005			Five months ended December 31, 204
	Amount		Percent	Amount		Percent	Amount		Percent	Amount		Percent
Benefit at federal statutory rates	$	895	35%	$	286	35%	$	(1,110)	35%	$	206	35%
Recovery of State income tax expense, net		-	-		-	-		(1,584)	50		-	-
Change in valuation allowance		(262)	(41)		(251)	(31)		281	(9)		(206)	(35)
Permanent differences		(591)	13		(35)	(4)		62	(2)		-	-
Provision for German taxes		-	-		(87)	(12)		(85)	2		-	-
	$	42	7%	$	(87)	(12)%	$	(2,436)	76%	$	-	-%

Composed of:
Current
Federal income tax expenses	$	(15)	$	(87)	$	-	$	-
State income tax benefit		-		-		2,436		-
		(15)		(87)		2,436		-
Deferred
Federal income tax benefit		57		-		-		-
	$	42	$	(87)	$	2,436	$	-

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

Note 4. Debt

Note payable to Mass, face value Euro 3,020, unsecured, interest at 4.2% per annum payable annually; maturing June 30, 2008	$	3,985
Note payable to Mass, face value Euro 4,280, unsecured, interest at 4.2% per annum payable annually; maturing June 30, 2008		5,648
Note payable to Mass, face value Euro 1,364, unsecured, interest at 5.00% per annum payable annually; maturing July 31, 2008; subordinated to other liabilities		1,801
	$	11,434

As of December 31, 2006, the fair value of debt was $11,434.

Note 5. Stockholders' Equity

Preferred Stock

The Company is authorized to issue up to 1,000 preferred shares, par value $0.01 per share, as designated by the Board of Directors from time to time. The Board of Directors has designated the following preferred shares:

(a) on May 5, 1998, the Series A Preferred Stock consisting of 3 shares;

(b) on February 3, 1999, the Series B Preferred Stock consisting of 2 shares; and

(c) on January 22, 2001, the Series C Preferred Stock consisting of 500 shares.

On January 22, 2001, the Board of Directors declared a dividend of one preferred share purchase right ("Right") for each share of Common Stock outstanding. Each Right entitles the holder to purchase one one-hundredth (1/100) of a share of Series C Preferred Stock at a purchase price of $40, subject to adjustment. The Rights will be exercisable only if a person or group (1) acquires beneficial ownership of 15% or more of the outstanding shares of Common Stock but not as a result of an action or transaction or series of related actions or transactions approved by the Board of Directors of the Company, or (2) commences a tender or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding shares of Common Stock (each, an "Acquisition Event"). Until that time, the Rights will be attached to the shares of Common Stock and they will expire in January 2011. The Company may redeem the Rights, at a redemption price of $0.001 per Right, at any time before an Acquisition Event. The Company may amend the Rights Agreement in any respect at any time before an Acquisition Event and thereafter, the Company may amend the Rights Agreement in any manner which will not adversely affect the holders of the Rights.

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

Note 5. Stockholders' Equity (continued)

Stock Options and Warrants

The Company established the 2002 Long Term Incentive and Share Award Plan ("the 2002 Plan") providing for the issuance of up to 1,000 shares of the Company's common stock. Options granted under the 2002 Plan would be either incentive stock options or non-qualified stock options which would be granted to employees, officers, directors or consultants of the Company. Options are exercisable as determined at the time of grant, and the exercise price of the options cannot be less than the fair market value at the date of grant. The Company also established the 1996 Stock Option Plan ("the 1996 Plan") providing for the issuance of up to 300 shares of the Company's common stock. In 1999 and 2000, an additional 400 and 800 shares, respectively, were approved by the stockholders, increasing the total number of shares to 1,500 under the 1996 Plan. Options granted under the 1996 Plan would be either incentive stock options or non-qualified stock options which would be granted to employees, officers, directors and other persons who perform services for or on behalf of the Company. Options are exercisable as determined at the time of grant, except options to officers or directors which may not vest earlier than six months from the date of grant, and the exercise price of the options cannot be less than the fair market value at the date of grant. During 2006, the 1996 Plan automatically terminated following the expiration of its ten year term. The options issued under the 1996 plan continue to be exercisable in accordance with the terms upon which they were issued.

Option activity for the year ended December 31, 2006:

	Shares		Weighted Average Exercise Price per share
Outstanding at August 1, 2004	1,371	$	1.11
Granted	-		-
Expired or cancelled	(271)		2.07
Exercised	(12)		0.47
Outstanding at July 31, 2005	1,088	$	0.87
Granted	-		-
Expired or cancelled	-		-
Exercised	-		-
Outstanding at December 31, 2005	1,088	$	0.87
Granted	-		-
Expired or cancelled	(221)		1.62
Exercised	(94)		0.34
Outstanding at December 31, 2006	773	$	0.72
Exercisable at end of period	773	$	0.72
Available for future grants	39
Weighted average fair value of options granted during year			None granted

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

Note 5. Stockholders' Equity (continued)

The following table presents weighted average price and life information about significant option grants outstanding at December 31, 2006:

Range of Exercisable Prices per share	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price per share
$0.31 - $0.50	247	6.24	$0.40
$0.78 - $1.00	526	4.99	$0.87
	773

Note 6. Fair Value of Financial Instruments

The Company's financial instruments consist of cash, restricted cash, receivables, amounts due from/to affiliates, accounts payable and accrued expenses, debt and other liabilities. It is management's opinion that the fair value of these financial instruments approximates their carrying values. The fair value of cash is based on reported market value. The fair value of receivables, amounts due from/to affiliates, accounts payable and accrued expenses and other liabilities approximates carrying value as they are subject to normal trade credit terms. The fair value of debt is determined using discounted cash flows at prevailing market rates commensurating with the terms of the debt.

Note 7. Related Party Transactions

In order to provide a source of funding for the business activities, in April 2004, the Company entered into a five-year $20 million Revolving Credit Facility (the "Facility") with MFC Merchant Bank which matures in March 2009. The Company has common directors with MFC Merchant Bank and Mass. The interest rate on all outstanding amounts under the Facility is the one-month London Inter-Bank Offered Rate plus 3.5%. Additionally, the Company is required to pay an unused Facility fee of 0.75% per year on the daily average of the unused amount of the commitment during the term which was $138, $58, $139 and $58 for the year ended December 31, 2006, for five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004, respectively. The Company had a payable of $104 unused Facility Fee as of December 31, 2006. The Company also agreed to pay MFC Merchant Bank an arrangement fee of $400, which was paid in full in May 2004 and is amortized over the useful life of the Facility. The Facility is secured by receivables and any current or future property assets. As at December 31, 2006, there is no amount outstanding under the Facility. The Company may need additional funding in the future depending on the ultimate scope of the merchant banking activities.

Under the term of the Facility, MFC Merchant Bank may convert all amounts borrowed into shares of the Company's common stock at a price equal to the ten-day trailing average of the closing price per share of the Company's common stock immediately prior to conversion, subject to any regulation imposed by an exchange where the Company's shares are listed. The Company reserved sufficient shares of common stock for this potential conversion. In August 2004, the Company borrowed $1,575 under the Facility, which was converted into 3,150 shares of the Company's common stock in the same month.

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

Note 7. Related Party Transactions (continued)

During the year ended December 31, 2006, the Company deposited its cash and cash equivalents with MFC Merchant Bank. Interest income on the deposit was $44, $3, $23 and $7 for the year ended December 31, 2006, five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004, respectively. Such deposit amounted to $3,066 as at December 31, 2006. The Company also has a management agreement with MFC Merchant Bank whereby the Company pays $75 per month as a management fee. The expense recognized in these consolidated financial statements was $300, $375, $900 and $375 for the year ended December 31, 2006, five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004, respectively. The agreement was terminated in 2006.

In the normal course of commodities trading transactions, the Company sold $78,508, representing 78% of total sales, $24,260, representing 75% of total sales, $5,234, representing 91% of total sales and $Nil for the year ended December 31, 2006, five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004, respectively, and paid a net marketing charge of $1,820, $505, $106 and $Nil to Mass for the year ended December 31, 2006, five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004, respectively. During the year ended July 31, 2005, the Company also paid a success fee of $1,331 to Mass for certain successful projects. Our products are highly homogeneous and are demanded globally. The Company believes the customer base can be diversified easily without affecting our gross margin.

Note 8. Business Segment Information

The Company operates in one reportable business segment: manufacturing and trading of aluminium products. All revenues were derived from this single business segment in 2006.

During the year ended December 31, 2006, all revenues were derived from Europe.

The following tables disclose the Company's sales by product types:

		Year Ended December 31,		Five Months Ended December 31,		Year Ended July 31,		Five Months Ended December 31,
By product types		2006		2005		2005		2004
Sheets	$	6,485	$	3,288	$	743	$	-
Strips		25,971		6,904		1,152		-
Blanks		15,479		5,063		982		-
Foils		44,005		16,817		2,816		-
Other		8,222		488		30		-
	$	100,162	$	32,560	$	5,723	$	-

As of December 31, 2006, the long-lived assets, including property, plant and equipment, purchase option agreements and goodwill, aggregated $21,013 and were located in Europe.

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CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

Note 9. Commitments and Contingencies

Leases

Future minimum commitments under long-term non-cancellable leases are as follows for the next five years:

Capital leases

Year		Amount
2007	$	26
2008		25
2009		3
2010		-
2011		-
		54
Less: imputed interest		4
Present value	$	50

Operating leases

Year		Amount
2007	$	645
2008		325
2009		325
2010		325
2011		309
	$	1,929

Rent expense was $612, $253, $43 and $14 for the year ended December 31, 2006, for the five months ended December 31, 2005, year ended July 31, 2005 and five months ended December 31, 2004, respectively.

Litigation

The Company and its subsidiaries are subject to litigation in the normal course of business. There was no litigation as at December 31, 2006.

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Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 8A. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, 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 (who is also our 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 December 31, 2006, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (who is also our 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 (who is also our Chief Financial Officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

There have been no significant changes in our internal controls over financial reporting that occurred during the year ended December 31, 2006 that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.

Item 8B. Other Information.

None.

PART III

Item 9.Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act.

Our articles provide for a board of directors of no fewer than four and no greater than ten directors with the number of directors to be set from time to time by a resolution of our board of directors or by resolution of our stockholders. Our board of directors has adopted consent resolutions fixing the number of directors, within the minimum and maximum number of directors permitted by our articles, at four. Each director is elected by a plurality of votes voted at each annual meeting, continuing in office until the next annual meeting and until such director's successor is elected and has been qualified, or until such director's earlier death, resignation or removal. Our board of directors elects officers and their terms of office are at the discretion of our board of directors.

The following table sets forth the names, positions and ages of our executive officers and directors.

Name	Position Held with the Company	Age	Date First Elected or Appointed
Michael J. Smith	Chairman of the Board of Directors, President, Chief Executive Officer, Chief Financial Officer and Secretary	58	May 10, 2004
Dr. Stefan Feuerstein	Chief Operating Officer	54	November 10, 2005

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Mirjana Lausevic-Zdravkovic(1)(2)(3)			Director	40	April 20, 2004
Andrew Hung(1)(2)(3)			Director	44	December 4, 2006
Jelena Djordjevic-Lausevic(1)(2)(3)			Director	62	April 20, 2004
	(1)	Members of our Audit Committee
	(2)	Members of our Compensation Committee
	(3)	Members of our Nominating and Corporate Governance Committee

Michael J. Smith

Mr. Smith has been a member of our board of directors since May 10, 2004, and has been our President, Chief Executive Officer, Chief Financial Officer, Secretary and Chairman of our Board of directors since October 6, 2004. Mr. Smith previously served as a member of our board of directors from September 9, 2003, to April 20, 2004, and as our President, Chief Executive Officer, Chief Financial Officer and Secretary from September 16, 2003, to April 20, 2004. Mr. Smith is the Chairman of the Board, Chief Financial Officer and Secretary and a director of KHD Humboldt Wedag, a publicly traded industrial and engineering services company listed on the Nasdaq National Market. Mr. Smith also served as the President, Secretary and a director of Blue Earth Refineries Inc., a non-traded foreign private issuer whose ordinary shares are registered under section 12(g) of the Securities Exchange Act of 1934, as amended, since July 7, 2004.

Dr. Stefan Feuerstein

Dr. Feuerstein was the Vice-President and a director of KHD Humboldt Wedag International from 2000 to September 2005. He has been the Managing Director of MFC Capital Partners AG since 2001 and the Managing Director of the Industrial Investment Council of the New German States since 1997. From 1992 to 1996, he was the President of the Thuringian Economic Development Corporation (Germany).

Jelena Djordjevic-Lausevic

Ms. Djordjevic-Lausevic has been a member of our board of directors since April 20, 2004. Ms. Djordjevic-Lausevic is currently the general manager of the Bureau of Urban Planning and Municipal Activities of Serbia, a state-owned company. The Bureau of Urban Planning was recently employed by the Government of Serbia and Montenegro to perform urban planning in southern Serbia. Ms. Djordjevic-Lausevic is the mother of Mirjana Lausevic-Zdravkovic, a member of our board of directors.

Mirjana Lausevic-Zdravkovic

Ms. Lausevic-Zdravkovic has been a member of our board of directors since April 20, 2004. Since 1997, Ms. Lausevic-Zdravkovic has served as marketing manager of Garden Center, a representative company of Blumex BV, a Dutch importer/exporter of flowers and plants. Ms. Lausevic-Zdravkovic was responsible for organizing Garden Center's marketing campaign and strategy and promoting the company throughout Serbia and Montenegro. Ms. Lausevic-Zdravkovic has a bachelor's degree in forestry from the University of Belgrade. Ms. Lausevic-Zdravkovic is the daughter of Jelena Djordjevic-Lausevic, a member of our board of directors.

Andrew Hung

Mr. Hung has been a member of our board of directors since December 4, 2006. Mr. Hung is qualified as a Chartered Accountant and Chartered Secretary in the United Kingdom and has worked as an accountant with Charles Chan, Ip & Fung CPA Limited from September 1998 to January 2002. From February 2002 until present, Mr. Hung has operated his own accounting firm based out of Hong Kong, China. Mr. Hung has been a member of the Institute of Chartered Accountants in England and Wales since 1988, a member of the Hong Kong Institute of Certified Public Accountants since 1992, a member of the Institute of Chartered Secretaries and Administrators (United Kingdom) since 1991, and a Certified Public Accountant since 1994. Mr. Hung obtained his Master of

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Business Administration (Finance) on December 21, 1999 from Huron University, South Dakota, U.S.A. and a Bachelor of Arts degree (Economics and Accounting) on July 7, 1984 from University of Reading, United Kingdom.

Family Relationships

There are no family relations among any of our directors or officers other than the relationship between Ms. Djordjevic-Lausevic and Ms. Mirjana Lausevic-Zdravkovic, both of whom are directors. Jelena Djordjevic-Lausevic is the mother of Mirjana Lausevic-Zdravkovic.

Involvement In Certain Legal Proceedings.

Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:

• any bankruptcy petition filed by or against any business of which such person was an executive officer either at the time of the bankruptcy or within two years prior to that time;

• any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

• being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and

• being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% shareholders are required by the Securities and Exchange Commission regulation to furnish us with copies of all Section 16(a) forms they file.

Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons that no Form 5s were required for those persons, we believe that, during the year ended December 31, 2006, all filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with.

Code of Ethics

Effective February 11, 2004, our board of directors adopted a Code of Ethics and Business Conduct that applies to, among other persons, our Chief Executive Officer (being our principal executive officer, principal financial officer and principal accounting officer), as well as persons performing similar functions. As adopted, our Code of Ethics and Business Conduct sets forth written standards that are designed to deter wrongdoing and to promote:

• honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

• full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;

• compliance with applicable governmental laws, rules and regulations;

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• the prompt internal reporting of violations of the Code of Ethics and Business Conduct to an appropriate person or persons identified in the Code of Ethics and Business Conduct; and

• accountability for adherence to the Code of Ethics and Business Conduct.

We will provide a copy of the Code of Ethics and Business Conduct to any person without charge, upon request. Requests can be sent to: Cathay Merchant Group, Inc., Unit 803, Dina House, Ruttonjee Centre, 11 Duddell Street, Central, Hong Kong SAR, China.

Nomination Process

As of March 9, 2007, we did not effect any material changes to the procedures by which our shareholders may recommend nominees to our board of directors. Our nominating and corporate governance committee does not have a policy with regards to the consideration of any director candidates recommended by our shareholders. Our nominating and corporate governance committee has determined that each of the independent directors who comprise the committee are in the best position to evaluate our company's requirements as well as the qualifications of each candidate when the committee considers a nominee for a position on our board of directors. If shareholders wish to recommend candidates directly to the nominating and corporate governance committee, they may do so by sending communications to the President of our company at the address on the cover of this annual report.

Audit Committee

We have a standing audit committee which currently consists of Mirjana Lausevic-Zdravkovic, Andrew Hung and Jelena Djordjevic-Lausevic, all of whom are non-employee directors of our company. All of the members of the audit committee are independent as defined by section 803 of the Amex Company Guide. The audit committee was established in accordance with Section 3(a)(58)(A) of the Securities and Exchange Act of 1934 and is directed to review the scope, cost and results of the independent audit of our books and records, the results of the annual audit with management and the adequacy of our accounting, financial and operating controls; to recommend annually to the board of directors the selection of the independent registered accountants; to consider proposals made by the independent registered accountants for consulting work; and to report to the board of directors, when so requested, on any accounting or financial matters.

Audit Committee Financial Expert

Our board of directors has determined that we have one audit committee financial expert serving on the audit committee, which person is Andrew Hung. Andrew Hung is qualified as a Chartered Accountant and Chartered Secretary in the United Kingdom and has worked as an accountant with Charles Chan, Ip & Fung CPA Limited from September 1998 to January 2002. From February 2002 until present, Mr. Hung has operated his own accounting firm based out of Hong Kong, China. Mr. Hung has been a member of the Institute of Chartered Accountants in England and Wales since 1988, a member of the Hong Kong Institute of Certified Public Accountants since 1992, a member of the Institute of Chartered Secretaries and Administrators (United Kingdom) since 1991, and a Certified Public Accountant since 1994. Mr. Hung obtained his Master of Business Administration (Finance) on December 21, 1999 from Huron University, South Dakota, U.S.A. and a Bachelor of Arts degree (Economics and Accounting) on July 7, 1984 from University of Reading, United Kingdom. Our board of directors has also determined that Andrew Hung is "independent", as defined by section 803 of the Amex Company Guide.

Item 10. Executive Compensation.

The particulars of compensation paid to the following persons:

(a) our principal executive officer;

(b) each of our two most highly compensated executive officers who were serving as executive officers at the end of the year ended December 31, 2006; and

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(c) up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as our executive officer at the end of the year ended December 31, 2006,

who we will collectively refer to as our named executive officers, of our company for the years ended December 31, 2006 and 2005, are set out in the following summary compensation table, except that no disclosure is provided for any named executive officer, other than our principal executive officer, whose total compensation does not exceed $100,000 for the respective fiscal year:

SUMMARY COMPENSATION TABLE
Name and Principal Position			Year	Salary ($)	Bonus ($)	Stock Awards ($)	Option Awards ($)	Non-Equity Incentive Plan Compensa-tion ($)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)	All Other Compensa-tion ($)	Total ($)
Michael J. Smith President, Chief Executive Officer, Chief Financial Officer and Secretary			2006 2005(1)	Nil Nil	Nil Nil	Nil Nil	Nil Nil	Nil Nil	Nil Nil	Nil Nil	Nil Nil
Dr. Stefan Feuerstein(2) Chief Operating Officer			2006	$240,773	Nil	Nil	Nil	Nil	Nil	Nil	$240,773
	(1)	Five month transition period ended December 31, 2005.
	(2)	Dr. Stefan Feuerstein was appointed Chief Operating Officer in November 2005.

Employment of Named Executive Officers

We have not entered into an employment agreement with Michael Smith, and there are no compensatory plans or arrangements with respect to the employment of Michael Smith resulting from his resignation, retirement or other termination of employment or from a change of control.

We have entered into an employment agreement, as amended, with Dr. Stefan Feuerstein as Chief Operating Officer of our company. Pursuant to agreement, as amended, we currently pay Mr. Feuerstein a sum of €850 per day in addition to all reasonable expenses incurred in connection with carrying out the duties of Chief Operating Officer of our company. During the year ended December 31, 2006, we paid Mr. Feuerstein $240,773 for his services. There are no compensatory plans or arrangements with respect to the employment of Dr. Stefan Feuerstein resulting from his resignation, retirement or other termination of employment or from a change of control.

Our management functions are performed by our directors and executive officers and not, to any substantial degree, by any other person with whom we have contracted. During our year ended December 31, 2006, we retained advisory services, in addition to other services, from MFC Merchant Bank in exchange for $75,000 per month for an initial term of twelve months, which was terminated on April 30, 2006. Details regarding the advisory services are set out under the heading "Certain Relationships and Related Transactions and Director Independence" commencing on page 66 of this annual report.

Outstanding Equity Awards at Fiscal Year-End

As at December 31, 2006, there were no unexercised options or stock that had not vested in regards to our named executive officers, and there was no equity incentive plan awards for our named executive officers during the year ended December 31, 2006.

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Stock Options

We established a 1996 Stock Option Plan, as amended, to provide for the issuance of stock options to acquire an aggregate of up to 1,500,000 shares of our common stock which plan was approved by our stockholders. During 2006, the 1996 Stock Option Plan automatically terminated following the expiration of its ten year term. Although the 1996 Stock Option Plan has terminated, the options issued under the plan continue to be exercisable in accordance with the terms upon which they were issued. As of March 9, 2007, there were 96,000 options outstanding that were issued under our former 1996 Stock Option Plan.

We established a Long Term Incentive and Share Award Plan in 2002, which permits the issuance of stock options to acquire an aggregate of up to 1,000,000 shares of our common stock. Stock options granted under the 2002 Share Award Plan are either incentive stock options or non-qualified stock options which are granted to our employees, officers, directors or consultants.

As at December 31, 2006, we had 772,500 options outstanding (96,000 granted under our former 1996 Stock Option Plan, 151,500 granted under our 2002 Share Award Plan and 525,000 options granted outside these plans) and 39,000 options available for future grants. During the year ended December 31, 2006, we did not grant any options to purchase shares of our common stock.

Options Grants in the Year Ended December 31, 2006

During the year ended December 31, 2006, no stock options were granted to the named executive officers.

Aggregated Options Exercised in the Year Ended December 31, 2006 and Year End OptionValues

There were no stock options exercised during the year ended December 31, 2006 and no stock options held by the named executive officers at the end of the year ended December 31, 2006.

Repricing of Options/SARS

We did not reprice any options previously granted to any named executive officers during the year ended December 31, 2006.

Director Compensation

The following table summarizes compensation paid to all of our directors during the year ended December 31, 2006:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	Non-Qualified Deferred Compensation Earnings ($)	Non-Equity Incentive Plan Compensation ($)	All Other Compensation ($)	Total ($)
Mirjana Lausevic-Zdravkovic	$30,081	Nil	Nil	N/A	N/A	Nil	$30,081
Andrew Hung	$6,250(1)	Nil	Nil	N/A	N/A	Nil	$6,250(1)
Jelena Djordjevic-Lausevic	$30,081	Nil	Nil	N/A	N/A	Nil	$30,081
Michael J. Smith	Nil	Nil	Nil	N/A	N/A	Nil	Nil

 

⁽¹⁾ Andrew Hung was appointed as a director of our company on December 4, 2006. All of our other directors served in such a capacity for the year ended December 31, 2006.

 

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Item 11.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

We have set forth in the following table certain information regarding our shares of common stock beneficially owned as of March 9, 2007 for: (i) each shareholder we know to be the beneficial owner of 5% or more of shares of our common stock; (ii) each of our executive officers and directors; and (iii) all executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person, we have included shares for which the named person has sole or shared power over voting or investment decisions. Except as otherwise noted below, the number of shares beneficially owned includes common stock which the named person has the right to acquire, through conversion or option exercise, or otherwise, within 60 days after March 9, 2007. Beneficial ownership calculations for 5% stockholders are based solely on publicly filed Schedule 13Ds or 13Gs, which 5% stockholders are required to file with the Securities and Exchange Commission. As of March 9, 2007, we had 18,890,579 common shares issued and outstanding.

To the best of our knowledge, there are no voting arrangements with any of our other shareholders.

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership	Percentage of Class (1)
Mass Financial Corp. Palm Court, 28 Pine Road Belleville, St. Michael Barbados	5,224,144(2)	27.7%(2)
MFC Merchant Bank S.A. Kasernenstrasse 1 CH – 9100 Herisau Switzerland	Nil(2)	Nil(2)
Michael J. Smith 8th Floor, Dina House Ruttanjee Centre 11 Duddell Street Central, Hong Kong SAR China	5,224,144(2)(3)	27.7%(2)
Dr. Stefan Feuerstein Berlin Charlotten Str 59 Germany, D-1017	Nil	Nil%
Jelena Djordjevic-Lausevic III Bulevar 124, Beograd, Serbia, 11070	Nil	Nil%
Mirjana Lausevic-Zdravkovic Cara Lazara 7, Belgrade, Serbia, 11000	Nil	Nil%
Andrew Hung c/o Unit 803, Dina House Ruttonjee Centre 11 Duddell Street Central, Hong Kong SAR China	Nil	Nil%
Lloyd Miller III 4550 Gordon Drive Naples, Florida 34012	1,993,900(4)	10.6%(4)

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⁽¹⁾ Based on 18,890,579 shares of our common stock outstanding on March 9, 2007.

   

⁽²⁾ This number does not include the number of shares that can be acquired by MFC Merchant Bank upon conversion of the balance amount under a credit facility agreement dated April 26, 2004 with MFC Merchant Bank. As part of MFC Merchant Bank's compensation for services to be performed by it under the credit facility agreement, MFC Merchant Bank may at any time and from time to time during the term of the agreement, convert the balance of the credit facility or any portion thereof into shares of our common stock. The rate of exchange for the purposes of calculating the number of shares of our common stock to be exchanged for the balance, or portion thereof, of the credit facility is: (amount of credit facility to be converted) divided by (the applicable ten day average of the closing price of the shares of our common stock). See the section "Change of Control", below, for further details regarding the conversion rights of our shares held by MFC Merchant Bank.

   

⁽³⁾ Michael J. Smith is the President, Secretary and a director of Mass Financial. Michael J. Smith is also the Chairman of the Board of MFC Merchant Bank.

   

⁽⁴⁾ Lloyd Miller III disclaims beneficial ownership in 1,765,900 common shares.

 

Change of Control

At a special meeting of our shareholders on September 16, 2004, our shareholders granted MFC Merchant Bank the right to convert the remaining $18,425,000 of the credit facility into shares of our common stock. The rate of exchange for the purposes of calculating the number of shares of our common stock to be issued in regards to the conversion of the credit facility is determined by the following calculation: the amount of the credit facility to be converted divided by the ten day average of the closing price of our shares of common stock. If MFC Merchant Bank exercises its conversion rights under our credit facility, the event will result in a change of control of our company. Based on our ten-day average of the closing price of our common stocks of and including February 28, 2007, of $0.474, the $18,425,000 remainder of the credit facility may be converted into 38,871,308 shares of our common stock, or 67% of our outstanding stock as of such date. As a result, Mass Financial, who has contracted to own all of the shares of MFC Merchant Bank, would be the indirect beneficial owner of 44,095,452 shares of our common stock, or 76% of our outstanding common stock as of such date (assuming issuance of the 38,871,308 shares as of such date). The conversion of the remaining balance under the credit facility would significantly dilute our shareholders, result in a change of control of our company and would grant Mass Financial the power to unilaterally appoint the entire board of directors of our company without the support of any of our other shareholders.

Equity Plan Compensation Information

This information can be found under Item 5 - Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.

Item 12. Certain Relationships and Related Transactions and Director Independence.

Except as otherwise disclosed herein, no director, executive officer, principal shareholder holding at least 5% of our common shares, or any family member thereof, had any material interest, direct or indirect, in any transaction, or proposed transactions, during the year ended December 31, 2006, in which the amount involved in the transaction exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last three completed fiscal years.

In order to provide a source of funding for the business activities, in April 2004, we entered into a five-year $20 million Revolving Credit Facility with MFC Merchant Bank which matures in March 2009. We have common directors with MFC Merchant Bank and its parent company, Mass Financial. The interest rate on all outstanding amounts under the facility is the one-month London Inter-Bank Offered Rate plus 3.5%. Additionally, we are required to pay an unused facility fee of 0.75% per year on the daily average of the unused amount of the commitment during the term which was $138,000 for the year ended December 31, 2006, of which $104,000 was payable as at December 31, 2006. We also agreed to pay MFC Merchant Bank an arrangement fee of $400,000, which was paid in full in May 2004 and is amortized over the useful life of the facility. The facility is secured by

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receivables and any current or future property assets. As at December 31, 2006, there is no amount outstanding under the facility. We may need additional funding in the future depending on the ultimate scope of the merchant banking activities

Under the term of the facility, MFC Merchant Bank may convert all amounts borrowed into shares of our common stock at a price equal to the ten-day trailing average of the closing price per share of our common stock immediately prior to conversion, subject to any regulation imposed by an exchange where our shares are listed. We reserved sufficient shares of common stock for this potential conversion.

During the year ended December 31, 2006, we deposited our cash and cash equivalents with MFC Merchant Bank. Interest income on the deposit was $44,000 for the year ended December 31, 2006. Such deposit amounted to $3.1 million as at December 31, 2006. We also had a management agreement with MFC Merchant Bank whereby we paid $75,000 per month as a management fee. We paid a total of $300,000 to MFC Merchant Bank under the management agreement until the agreement was terminated in 2006.

We sold $78.5 million, representing 78% of total sales, and paid a net marketing charge of $1.8 million to Mass Financial for the year ended December 31, 2006.

CORPORATE GOVERNANCE

We currently act with 4 directors, consisting of Michael J. Smith, Mirjana Lausevic-Zdravkovic, Andrew Hung and Jelena Djordjevic-Lausevic. We have determined that Mirjana Lausevic-Zdravkovic, Andrew Hung and Jelena Djordjevic-Lausevic are independent as defined by section 803 of the Amex Company Guide.

Audit Committee

Our audit committee consists of Mirjana Lausevic-Zdravkovic, Andrew Hung and Jelena Djordjevic-Lausevic, all of whom are non-employee directors of our company. All of the members of the audit committee are independent as defined by section 803 of the Amex Company Guide. The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Securities and Exchange Act of 1934 and operates under a formal charter adopted by our board of directors that governs our audit committee's duties and conduct. Our audit committee assists our board of directors in fulfilling its responsibilities relating to the quality and integrity of our financial statements, the financial reporting process, internal controls, risk management, as well as our accounting, legal and regulatory compliance. Our audit committee also has the responsibility and authority for the appointment, compensation, retention, evaluation, termination and oversight of our independent accountant, and pre-approval of audit and permissible non-audit services provided by our independent accountant.

Compensation Committee

The compensation committee consists of Mirjana Lausevic-Zdravkovic, Andrew Hung and Jelena Djordjevic-Lausevic, all of whom are non-employee directors of our company. All of the members of our compensation committee are independent as defined by section 803 of the Amex Company Guide. The purpose of our compensation committee is to oversee our company's compensation and benefit plans, including our incentive-compensation and equity-based plans. Our compensation committee also monitors and evaluates matters relating to the compensation and benefits structure of our company and takes other such actions within the scope of the compensation committee charter as our board of directors may assign to the compensation committee from time to time.

Nominating and Corporate Governance Committee

The nominating and corporate governance committee consists of Mirjana Lausevic-Zdravkovic, Andrew Hung and Jelena Djordjevic-Lausevic, all of whom are non-employee directors of our company. All of the members of our nominating and corporate governance committee are independent as defined by section 803 of the Amex Company Guide. The nominating and corporate governance committee is responsible for, among other things, identifying individuals qualified to become directors of our board of directors or any of our committees, and to select, or to

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recommend that our board of directors select, such individuals as nominees for election to our board of directors. In addition, our nominating and corporate governance committee periodically evaluates the qualifications and independence of each director on our board of directors and our various committees. Finally, our nominating and corporate governance committee annually assesses the performance of our board of directors.

Currently, our nominating and corporate governance committee does not have any specific or minimum qualifications that our nominating and corporate governance committee believes must be met by a nominee for a position on our company's board of directors. Instead, our nominating and corporate governance charter empowers our committee to use their discretion on a case by case basis in considering a potential nominee based on the nominee's individual merits and the needs of our company at that particular time.

Our committee does not have a policy with regards to the consideration of any director candidates recommended by our shareholders. Our nominating and corporate governance committee has determined that each of the independent directors who comprise the committee are in the best position to evaluate our company's requirements as well as the qualifications of each candidate when the committee considers a nominee for a position on our board of directors.

Transactions with Independent Directors

Other than as set out below, none of our independent directors entered into any transaction, relationship or arrangement during the year ended December 31, 2006 that was considered by our board of directors in determining whether the director maintained his or her independence in accordance with section 803 of the Amex Company Guide.

During the year ended December 31, 2006, we paid $30,081 to each of Mirjana Lausevic-Zdravkovic and Jelena Djordjevic-Lausevic, and $6,250 to Andrew Hung in consideration for their services as directors of our company.

Item 13. Exhibits.

Exhibits Required by Item 601 of Regulation S-B

Exhibit Number	Exhibit Title	Filed Herewith	Form	Filing Date
(3)(i)	Articles of Incorporation
3.1.1	Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation		S-1	April 13, 1981
3.1.2	Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation		10-Q	January 31, 1987
3.1.3	Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation		10-K	July 28, 1990
3.1.4	Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation		10-KSB	July 31, 1997

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3.1.5	Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation	8-K	June 5, 1998
3.1.6	Certificate of Designations of Series A Convertible Preferred Stock of Cathay Merchant Group, Inc., a Delaware Corporation	8-K	June 5, 1998
3.1.7	Certificate of Designations of Series B 5% Convertible Preferred Stock of Cathay Merchant Group, Inc., a Delaware Corporation	8-K	February 9, 1999
3.1.8	Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation	8-K	January 10, 2000
3.1.9	Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation	8-K	October 7, 2004
3(ii)	By-laws
3.2.1	Amended Bylaws of Cathay Merchant Group, Inc., a Delaware corporation	8-K	May 17, 2000
(10)	Material contracts
10.1	Credit Facility Agreement dated as of April 26, 2004, between Cathay Merchant Group, Inc. and MFC Merchant Bank S.A.	8-K	April 30, 2004
10.2	Financial Advisory Agreement dated January 1, 2004, between Cathay Merchant Group, Inc. and MFC Merchant Bank S.A.	10-KSB	October 29, 2004
10.3	Share Purchase Agreement dated June 30, 2005, between Cathay Merchant Group Limited and Blake International Limited.	8-K	June 30, 2005
10.4	Promissory Note dated June 30, 2005, between Cathay Merchant Group Limited and Cathay Merchant Group, Inc.	8-K	June 30, 2005

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10.5	Share Purchase Agreement dated June 30, 2005, between Cathay Merchant Group Limited and Universal Metals Limited.		8-K	June 30, 2005
10.6	Promissory Note dated June 30, 2005, between Cathay Merchant Group Limited and Cathay Merchant Group, Inc.		8-K	June 30, 2005
10.7	Lease Agreement dated September 18, 2002, between GSA Grundstücksfonds Sachsen-Anhalt GmbH and MAW Mansfelder Aluminiumwerk GmbH		Form 10-KSB	April 2, 2007
10.8	Lease Agreement dated September 26, 2002, between GSA Grundstücksfonds Sachsen-Anhalt GmbH and MFC Aluminiumfolie Merseburg GmbH		Form 10-KSB	April 2, 2007
10.9	Purchase Option Agreement dated September 26, 2002, between GSA Grundstücksfonds Sachsen-Anhalt GmbH and MFC Aluminiumfolie Merseburg GmbH		Form 10-KSB	April 2, 2007
10.10	Agreement dated October 26, 2004, between GSA Grundstücksfonds Sachsen-Anhalt GmbH and MAW Mansfelder Aluminiumwerk GmbH		Form 10-KSB	April 2, 2007
10.11	Service Agreement dated August 22, 2005, between our company and Stefan Feuerstein		Form 10-KSB	April 2, 2007
10.12	Amendment to Service Agreement effective August 1, 2006, between our company and Stefan Feuerstein		Form 10-KSB	April 2, 2007
(21)	Subsidiaries of registrant
21.1	Subsidiaries	X
(23)	Consents
23.1	Consent of RSM Hemmelrath GmbH	X
23.2	Consent of Peterson Sullivan PLLC	X
(31)	Section 302 Certifications

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31.1			Chief Executive Officer and Chief Financial Officer	X
(32)			Section 906 Certifications
32.1			Chief Executive Officer and Chief Financial Officer	X
	Item 14.	Principal Accountant Fees and Services.

Fees Paid to Independent Accountant

We retained RSM Hemmelrath GmbH to provide audit services during the year ended December 31, 2006. We formerly retained Peterson Sullivan PLLC to provide audit services and tax advice and planning during the five month transition period ended December 31, 2005.

Audit Fees: This category includes the fees for the examination of our consolidated financial statements and our quarterly reviews of interim financial statements. This category also includes advice on audit and accounting matters that arose during or as a result of the audit or the review of our interim financial statements, and the preparation of an annual "management letter" on internal control matters.

The aggregate fees billed by RSM Hemmelrath GmbH for professional services rendered for the audit of our financial statements for the year ended December 31, 2006 were $21,536. The aggregate fees billed by Peterson Sullivan PLLC for professional services rendered for the audit of our financial statements for the five month transition period ended December 31, 2005 were $47,159.

Audit Related Fees: We did not incur any audit related services during the year ended December 31, 2006 or for the five month transition period ended December 31, 2005.

Tax Fees: This consists largely of tax services provided in the United States. For the year ended December 31, 2006, we incurred and paid Peterson Sullivan PLLC $51,632 for tax compliance, tax advice and tax planning regarding United States tax matters. For the five month transition period ended December 31, 2005, we incurred and paid Peterson Sullivan PLLC an aggregate of $55,562 for tax compliance, tax advice and tax planning regarding United States tax matters.

All Other Fees: We did not incur any other fees, other than described above, during the year ended December 31, 2006, or the five month transition period ended December 31, 2005.

Our audit committee has adopted a policy governing the pre-approval by the audit committee of all services, audit and non-audit, to be provided to the corporation by our independent auditors. Under the policy, the audit committee has pre-approved the provision by our independent auditors of specific audit, audit related, tax and other non-audit services as being consistent with auditor independence. Requests or applications to provide services that require the specific pre-approval of the audit committee must be submitted to the audit committee by the independent auditors, and the independent auditors must advise the audit committee as to whether, in the independent auditor's view, the request or application is consistent with the Securities and Exchange Commission's rules on auditor independence. The audit committee may delegate either type of pre-approval authority to one or more of its members.

The audit committee has considered the nature and amount of the fees billed by RSM Hemmelrath GmbH and believes that the provision of the services for activities unrelated to the audit is compatible with maintaining the independence of RSM Hemmelrath GmbH.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CATHAY MERCHANT GROUP, INC.

By: /s/ Michael J. Smith

Michael J. Smith

Chairman of the Board of Directors,

President, Chief Executive Officer,

Chief Financial Officer and Secretary

(Principal Executive Officer,

Principal Financial Officer and

Principal Accounting Officer)

Date: June 25, 2007

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Michael J. Smith
Michael J. Smith	Chairman of the Board of Directors, President, Chief Executive Officer, Chief Financial Officer and Secretary (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)	June 25, 2007
/s/ Jelena Djordjevic-Lausevic
Jelena Djordjevic-Lausevic	Director	June 25, 2007
/s/ Mirjana Lausevic-Zdravkovic
Mirjana Lausevic-Zdravkovic	Director	June 25, 2007
/s/ Andrew Hung
Andrew Hung	Director	June 25, 2007

EX-23

EX-23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-108624) pertaining to the 1996 Stock Option Plan and the 2002 Long Term Incentive and Share Award Plan of Cathay Merchant Group, Inc. and Subsidiaries of our report dated March 3, 2006, with respect to the consolidated financial statements of Cathay Merchant Group, Inc. and Subsidiaries included in this Annual Report (Form 10-KSB/A) for the year ended July 31, 2005, and the five month period ended December 31, 2005.

/S/ PETERSON SULLIVAN PLLC

Seattle, Washington

June 25, 2007

EX-21

Exhibit 21.1

List of Subsidiaries

Name of Subsidiary	Jurisdiction of Incorporation or Organization	Percentage Share Ownership as of December 31, 2006
Cathay Merchant Group Ltd.	Samoa	100%
MAW Mansfelder Aluminiumwerke GmbH	Germany	100%
AFM Aluminiumfolie Merseburg GmbH (1)	Germany	100%

⁽¹⁾    Wholly-owned by Cathay Merchant Group Ltd.

EX-31

EXHIBIT 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael J. Smith, certify that:

1. I have reviewed this annual report on Form 10-KSB/A of Cathay Merchant Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: June 25, 2007

By: /s/ Michael J. Smith

Michael J. Smith

Chief Executive Officer and Chief Financial Officer

EX-32

EXHIBIT 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Cathay Merchant Group, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:

(1) the Annual Report on Form 10-KSB/A of the Company for year ended December 31, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: June 25, 2007 By: /s/ Michael J. Smith
Michael J. Smith
Principal Executive Officer, Principal Financial and Principal Accounting Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Cathay Merchant Group, Inc. and will be retained by Cathay Merchant Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

COVER

Reply Attention of	Cam McTavish
Direct Tel.	604.891.7731
EMail Address	czm@cwilson.com
Our File No.	28340-1 / CW1211666.2

June 25, 2007

VIA EDGAR AND COURIER

Securities and Exchange Commission

Division of Corporate Finance

100F Street North East

Washington, DC 20549-7010

United States of America

Attention: Lisa Haynes

Senior Staff Accountant

Dear Ms. Haynes:

Re:        Cathay Merchant Group, Inc.
Form 10-KSB for the period ended July 31, 2005
Form 10-KSB for the period ended December 31, 2006
File No. 001-16283

We refer to your letter of May 15, 2007 with respect to the Form 10-KSB for the period ended July 31, 2005 and the Form 10-KSB for the period ended December 31, 2006 filed by our client, Cathay Merchant Group, Inc. (the “Company”). We have keyed our responses to your comments in your letter dated May 15, 2007.

Form 10-KSB for the period ended July 31, 2005

Notes to Consolidated Financial Statements

Note 1. Business Description and Summary of Significant Accounting Policies

Purchase Option Agreements, page 32

1.We note your response to comment 3 from our letter dated February 16, 2007 in which you state that the purchase option agreements have a finite life but do not lose value over the life. We also note your response to comment two from our letter dated January 23, 2007 in which you stated that the option agreements cannot be sold to third parties, licensed or transferred without the consent of the seller. Therefore, if you did not exercise the purchase option agreements prior to their expiration date, it appears that the residual value associated with the agreements would be zero. Please tell us how you

HSBC Building 800 – 885 West Georgia Street Vancouver BC V6C 3H1 Canada Tel.: 604.687.5700 Fax: 604.687.6314 www.cwilson.com

Some lawyers at Clark Wilson LLP practice through law corporations.

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considered this fact pattern in your determination that amortization of the purchase option agreements (finite lived intangibles) was not necessary.

Paragraph 13 of SFAS 142 states, “The amount of an intangible asset to be amortized shall be the amount initially assigned to that asset less any residual value.” The Company, based on current market information, strongly believes the residual value of the two Purchase Option Agreements would be at least the same as their carrying value up to the day before the expiration dates and the Company is almost certain that it will exercise the options in the future. In fact, based on the latest independent valuation report, the value of the optioned properties in MAW and GSA Grundstuckfonds Sachsen-Anhalt GmbH’s agreement has increased by Euro 2.0 million whereas the value of the optioned properties in AFM and GSA Grundstuckfonds Sachsen-Anhalt GmbH’s agreement remained the same since the Company purchased its two subsidiaries. Therefore, the residual value of the option agreements is at least equal to the carrying value. The Purchase Option Agreements have a finite life, but do not lose value over the life. Considering these factors, the Company concluded that the amount that it needed to amortize was zero. The Company will continue to perform the impairment test to ensure the value of the two Purchase Option Agreements holds up. Upon the exercise of the options, the option value will form part of the cost of the fixed assets and will be amortized over the life of the fixed assets.

Revenue Recognition, page 33

2.We note your response to comment 6 from our letter dated February 16, 2007. It appears that sales returns had a significant impact on your opening income for the five month period ended December 31, 2005 and that you experienced a significant increase in the number and dollar amount of returns during the year ended December 31, 2006. Please amend your financial statements and MD&A (as appropriate) included within your Form 10-KSB for the year ended December 31, 2006 to fully disclose the following:

• Your accounting policies as they pertain to sales returns and warranties;

• The extent to which sales returns impacted your opening results; and

• The reasons for the increase in sales returns, whether this is a trend that is expected to continue, and if so, how management intends to address this trend.

The Company concluded that its disclosure regarding the sales returns in the Form 10-KSB for the year ended December 31, 2006, including the management discussion and analysis section, is adequate. The reason for the increase in the number of credit notes was due to an increase in the number of small orders. The Company’s sales return represents less than 1% of the total sales and the net effect of the sales returns (after scrap sale) does not have material impact to the Company’s gross margin which is between 4% to 5% for all periods. Both the sales return and gross margin are within the industry’s standard. The Company will continue to monitor the sales return situation and will provide additional disclosure in future filings if it is material to the financial statements.

3.We note your responses to comments 7 and 8 from our comment letter dated February 16, 2007 and your responses to comments 8 and 9 from our comment letter dated March 16, 2006. Since KHD did not add any substantial value or make any substantial changes to the product you sell and the ultimate end users of your products have the same rights and obligations (including right of return) as KHD, it appears that revenue recognition would only be appropriate upon final delivery and acceptance of your product to the ultimate end user. Please tell us whether your financial statements for the periods ended July 31, 2005, December 31, 2005 and December 31, 2006 reflect revenue recognition upon shipment to KHD, shipment to the ultimate end user, receipt by the ultimate end user or at some other point. Please tell us the specific criteria you use to evaluate the point in time when the product is considered accepted by the ultimate end user. We may have further comment upon receipt and review of your response.

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For the periods indicated, the Company recognized revenue when its products were shipped. The title of the products changed at the moment the Company shipped the products to the customers which is a normal practice in trading. The title changed to MFC Commodities and from MFC Commodities to the ultimate customers simultaneously. MFC Commodities assigned the rights for remedy of any defects to the ultimate end customers such that they have the right to address any claims and complaints directly to the Company for a period of 14 days after change of ownership in accordance with German business law.

Note 2. Business Combinations, page 36

4.We note your disclosure on page 36 in which you state that you acquired all of the share of AFM for a purchase price of $8.5 million from an unrelated third party. However, the Purchase Option Agreement dated September 26, 2002 which was acquired as part of the AFM purchase indicates that MFC Aluminiumfolie Merseburg GmbH was the buyer of the purchase option agreement, not AFM. Please tell us whether MFC Aluminiumfolie Merseburg GmbH is in any way associated with MFC Bancorp Ltd. Please also fully explain how the Purchase Option Agreement dated September 26, 2002 was transferred from MFC Aluminiumfolie Merseburg GmbH to AFM.

AFM was formerly known as MFC Aluminiumfolie Merseberg GmbH. When the Company purchased AFM, KHD Humboldt Wedag International Ltd. (formerly MFC Bancorp Ltd.) was a significant shareholder of the Company.

Form 10-KSB for the period ended December 31, 2006

5.Please tell us how you and your auditors determined that you have sufficient ability to continue as a going concern for at least twelve months from the date of your financial statements. Specifically, please tell us how you considered your history of negative working capital, operating losses, and negative cash flows, including those which would have occurred during the year ended December 31, 2006 absent a $6.5 million increase in borrowings from your affiliates.

The Company assessed the general market condition and prepared the projected cash flow for the next six years. The Company’s auditors reviewed the Company’s projection and determined that the Company has the ability to realize its assets and extinguish its liabilities in the normal course of business according to SAS 59. In particular, both the Company and its auditors believe that revenue from the Company’s aluminium mills is sufficient to meet its operating expenses for at least the next twelve months. The Company believes that AFM will operate on full capacity in 2007 as it has a “full order book”. MAW also benefits from the growing construction industry starting from late 2006.

The $6.5 million increase was related to trade payables with affiliates which were incurred in the normal course of business, not borrowings.

6.Please amend your filing to provide audited and unaudited financial statements (and associated independent auditors reports) covering the following periods:

• Audited consolidated statements of operations, comprehensive loss, changes in stockholders equity and cash flows for the twelve months ended December 31, 2006, the five months ended December 31, 2005, and twelve months ended July 31, 2005; and

• Unaudited consolidated statements of operations, comprehensive loss, changes in stockholders equity and cash flows for the five months ended December 31, 2004.

As requested, the Company has amended the filing to include the financial statements set out above.

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7.Please amend your filing to provide management discussion and analysis, in accordance with Item 303 of Regulation S-K, covering the following periods:

• Year ended December 31, 2006 compared with the year ended December 31, 2005;

• Five months ended December 31, 2005 compared to the five months ended December 31, 2004; and

• Year ended July 31, 2005.

As requested, the Company has amended the filing to include management discussion and analysis for the periods set out above.

We trust that the foregoing will resolve all outstanding comments with respect to the Form 10-KSB for the period ended July 31, 2005 and the Form 10-KSB for the period ended December 31, 2006. Should you have any questions, please do not hesitate to contact the writer directly at 604.891.7731.

Yours truly,

CLARK WILSON LLP

Per: /s/ Cam McTavish

Cam McTavish

CZM/czm

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